Proportunities: where upcoming prospects lie in the development finance sector

I joined OakNorth in September 2019, so am approaching my four-year anniversary with the business.

Looking back, it’s been a pretty incredible ride — supporting customers through Covid, becoming a Chartered Surveyor, and leading on a range of property transactions from residential developments in London, to driving ranges and surf parks in Scotland, as well as special educational needs (SEN) schools, retirement living communities, and even a football stadium. That’s in addition to the traditional core real estate markets!

As the summer draws to a close, I’ve spent some of the downtime thinking about where the opportunities may be over the next 12 months. Having dealt with all real estate sectors and indeed subsectors within each, I think there are several key areas within the industry which present significant growth opportunities, even in more challenging environments.

Luxury later living

I imagine most of the industry would agree that later living has been an area of huge growth in recent decades. An ageing population means demand for these types of accommodation has increased significantly and nowhere is this more prominent than in London and the South East.

The main reason for this is that elderly Londoners are some of the wealthiest people in the country — some would have bought a three- or four-bedroom house in Zone 3 in London or a surrounding commuter town in the 70s for a few thousand pounds at most, and it’s now worth several million with no debt on it.

So, when they get older and want to downsize, they suddenly find they have a very significant nest egg and can afford to live out their final decades in luxury.

Buying another house or flat would be too much maintenance and space they don’t need, and it may not be future proofed for them as they get older. As a result, they go in search of luxury later living, where they have their own home within the community, as well as a range of communal areas such as restaurants, cinemas, hair salons, and fitness centres.

The provision of care can vary but is nearby in case of a medical emergency. They also benefit from 24/7 security (handy if they’re planning to be abroad or travelling for an extended period of time), housekeeping, concierge services, and much more.

The other core benefit comes from being part of a community where they can make new friends of a similar age thanks to the range of private events arranged for residents throughout the year.

Whilst now relatively prevalent in London, when you go outside of the South East, the provision of luxury later living accommodation is lower. This feels like an opportunity to me, as in places such as the Cotswolds, Bath, Edinburgh, and Cheshire, there is a wealthy elderly population who would no doubt be keen to spend their later years in luxury accommodation.

If they’ve spent the last several years or decades living there, they’re not likely to re-locate to London, so will seek accommodation that’s near to where they call home. However, what tends to be available is a more generic product as opposed to luxury living.

At OakNorth, we’ve supported a handful of providers that are tapping into this trend, such as Springfield Healthcare — a family-owned business providing care in the heart of communities across Yorkshire.

We provided the business with a £7.5m loan for the development of the new luxury later living community, Chapter House, in Beverley, East Yorkshire.

Another example is Park Lane Healthcare which we provided a £20.2m loan to for a new luxurious sustainable care village near Pocklington, East Yorkshire.

Open storage

Open storage is another very interesting area. For the uninitiated, open storage is empty space which typically compliments adjacent industrial sites such as self-storage, distribution centres, and urban warehousing.

Over the last decade, we’ve seen more industrial sites popping up across the South East and in the ‘golden logistics triangle’ (of the Midlands between Manchester, Birmingham, and Leeds) in recent years, driven by several factors.

The first is the growth of online shopping — all this stock needs to be stored somewhere and it’s not going to be on the shelves of the local high street which is expensive and limited.

As a result, online retailers such as Amazon use warehouses and distribution centres in strategic locations such as those mentioned above, where they can get orders out quickly.

In more recent years, the growth of online food delivery companies such as Deliveroo and Just Eat, as well as grocery delivery businesses like Gorillas and Getir, means the demand for prefabricated containers known as ‘dark kitchens’ has increased.

The combination of Brexit and Covid has disrupted international trade flows meaning we need to hold more stock in the UK than we had to previously and again, all this stock needs to be stored somewhere.

It’s relatively straightforward to get the consent to build a structure to cater to the above needs as it’s cheap to build, and with the supply constraints, the reversionary rents are very attractive to investors looking at longevity of resilient income.

It’s a complimentary sector to industrial logistics, which has historically been a very attractive sector.

Given the scarcity of land and the fact that it’s incredibly cheap to run an open storage site (you might need to re-tarmac and get some security) it’s a very attractive asset class to both private and institutional investors.

In fact, findings from Carter Jonas show there were more than 400 enquiries for open storage locations during 2022, compared with 248 in the previous year and below 100 in 2019. So, I see this as a very exciting sector and one where there’s significant opportunity for growth in the future.

Deal structuring

Beyond specific asset classes, one of the areas where I’m seeing a lot of opportunity in the property sector is in deal structuring, particularly with accordion facilities.

A debt accordion is a provision that allows a borrower to expand the maximum amount allowed on a line of credit or working capital facility, or to add a term loan to an existing credit agreement.

Say a property developer or investor has assets worth £10m, they could apply for a working capital facility of c.£5m which they can then drawdown from in the future should a good opportunity arise. This limit would be sized against both ICRs and LTVs.

The benefit it provides to them is that they can make a competitive bid as a cash buyer and draw down the capital from this facility in a week or two. This gives them purchasing power that they simply wouldn’t have if applying for a loan from scratch, and in this economy, could be the determining factor in winning a bid over another buyer.

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