Plenary five: Cross subsidy of core activity

1. Plenary five: Cross subsidy of core activity • Speakers: Kurt Mueller • Director of Corporate Affairs • Grainger • Mark Jones • Head of Treasury • Derwent Living

2. Opportunities in the market rented sector October 2013 Kurt Mueller, Director of Corporate Affairs

3. Introduction to Grainger plc Our view of the housing market Investing in the private rented sector Agenda

4. Introduction to Grainger • A trader, investor and manager of residential properties. • The UK’s largest listed residential property owner and manager, with over £3bn of residential assets under management across the UK and Germany.

5. Our For Profit Registered Provider • Takes advantage of the increasingly blurred lines between private renting and social housing • Grainger Trust is a ring fenced subsidiary that provides access to new markets • Initial acquisition of social housing stock at our own development in Hampshire, Berewood • Additional value to Grainger through fee income at asset and property management level • Value enhancing to strategic sites and development land in our ownership or control • Closes the circle of Grainger = Residential

6. The market

7. A positive environment underpinning Grainger’s strategy 30% % of homes owner occupied 70% % of homes privately rented 10% …and owner occupation has been in decline since 2005. PRS is the only growing tenure… 50% 1999 2005 2012 1999 2005 2012 • Total value of residential sector valued at £5 trillion • £2 trillion of that in London and the SE English housing survey for 2011 to 2012

8. Index of Private Housing Rental Prices • Rents in all regions of the UK have increased in the last 8 years • London has had the most dramatic increase in rental values England average 8.4 Increase in IPHRP from May 2005 – May 2013 Source: ONS - Index of Private Housing Rental Prices - Historical Series

9. Rents have increased against volatile, but rising, house prices Index of Private Housing Rental Prices Halifax House price index 2012 2011 2008 2009 2010 2013 Both house prices and rents are trending upwards Rents have continued to rise despite houseprice volatility • Source: Halifax House Price Index July 2013; and Index of Private Housing Rental Prices - Historical Series

10. Rent levels in the PRS - Index of Private Housing Rental Prices, ONS Average earnings increased by 1.4% in the year to Apr ‘13

11. Return profiles for property investment Source: Investment Property Databank 2013

12. Why is the demand for PRS growing? • Structural changes • Migration flows • Strong young professional mobility • Different work/life patterns • Household size • Economic changes – affordability issues • Decline of the ‘Bank of Mum and Dad’ • University fees – increased student debt • Mortgage illiquidity, particularly for first time buyers • Lower available LTV and higher prices are resulting in increasing deposits as % of salary • Limited social housing stock increase pool of PRS tenants at the low-income end Source: Savills Research 12

13. Market opportunity Historically has depended upon capital appreciation and trading: now an opportunity for a yield driven model Growing market with attractive rental performance prospects Long term out performance: total returns Fundamental supply and demand imbalance in the UK, particularly London Very limited number of specialists: requirement/opportunity for a large scale professional operator Diversification opportunity with a new institutional asset class

14. Investing in PRS

15. Appetite For Risk Reward Risk

16. What are we looking for? • Net yields ~5+% • Rental growth • Scale • Blocks/ concentrations • Good quality • Capital value growth

17. Rental covenant – Build to rent with local authority partnership • Redevelopment of two Council-owned sites • New, high quality homes, mixed tenure (for sale, for rent, private and affordable) • Grainger is granted a long lease and will manage and let the properties on the Council’s behalf The project outline • Grainger as development management partner • 84 new homes • (53% PRS, 31% Private sale, 11% Affordable Rent, 5% Intermediate) • Mix of homes for sale, for private rent and for affordable rent • Including six affordable, four bedroom homes • Public sector land “Grainger has impressed [with] their professionalism, understanding of the brief, level of detail and innovation of public and private partnership structure. We look forward to continuing this partnership for the next 125 years.” – Simon Rose, Senior Development Manager, RBKC

18. Design–Build to Rent, Barking A forward purchase of a bespoke design build-to-rent block from contractor, Bouygues UK • Investment outline • 100 units • Investment value: £13.7m • Wholly owned • Gross yield: circa 9% • Cost of management: c.25% • Net yield: circa 7% • Geared IRR: circa 12.5% Product • Well connected location • Designed with the customer and management efficiencies in mind • Equal bedroom sizes • Durable finishes • Wifi enabled, concierge • Possibility of longer term tenancies Customer profile • City workers • Young professionals • Young families • £25k to £60k+ income Olympic Park – 20 min • Timeline • Start on site – Jan 13 • Completion – Q2 2015 • Fully rented in 6 months Canary Wharf –20 min

19. Land – Berewood, Hampshire Using build-to-rent to increase speed of housing delivery A large, greenfield residential development Berewood was master planned by Robert Adam based on the principles of Garden Suburbs 2,550 new homes • Phase 1: 194 new homes, under construction with Bloor Homes • Phase 2: 248 new homes is due to begin in early 2014 with Redrow 40% affordable housing, including Grainger Lets, shared ownership and affordable rents First Grainger Build to Rent product of c.120 units Demonstrates accretive delivery as Montague outlined Approved loan in principle from HCA Next stage planning and on site in 2014

20. Design will play increasing important role • CLG have asked ULI to form a panel to explore possibility of producing a ‘Design Guide’ for PRS • Focus on difference between PRS and ‘for sale’ market • Developers, architects, public bodies, engineers, RPs, property companies and advisers involved • Output planners for Q1 2014 • Impacts on cost of build and on-going operational cost are main drivers

21. Opportunities in the market rented sector October 2013 Kurt Mueller, Director of Corporate Affairs

22. The Derwent Approach to Market Renting Mark Jones – Derwent Living 23th October 2013

23. Southgate Court, Derby - Market Rental 102 Apartments

24. Trinity Square, Nottingham - Student Accommodation 699 furnished bedspaces

25. Derwent Living – structure • Integrated management within DHA • Creation of independent income streams - Market Rental - Students - Facilities Management • Restriction on guarantees/equity to subsidiaries

26. Fundability Higher risk factors mean it is more difficult to fund conventionally Stand-alone, supported or combined ? Higher margins and lower LTV than on conventional funding Banks v Investors

27. Returns • Look for risk premium returns versus Social Housing developments • Returns will vary depending upon geographical area and certainty of income • Mixture of capital and income growth • Meeting investor requirements

28. Risk & Flexibility Security of income over ability to sell Flexibility to change tenure Short-term or Long-term investment Clear exit strategy

29. Future Issues & Regulation Ability to do more within Derwent restricted by regulation. Pressure from regulator to switch existing assets out (and new assets) away from main RP Keeping product fresh Where will market rental be in 10 – 20 years time. Embedded as a choice of tenure (like in continental Europe) or a bit part (with the return to owner occupation)?

30. Working Together? Work by Resolution Foundation (with 5 other RPs) to develop joint investment model Next stage?? Investor appetite good Other private investors

31. Questions and Discussion Mark Jones – Derwent Living Markj@derwentliving.com