Business overview

Grainger owns £2.4bn of residential property of which 82% is located in the UK and the balance in Germany. In the year ended 30 September 2011 this portfolio generated £86m of gross rents and total asset sales amounted to £223m. A further £8m of fees and other income was produced.

Residential Portfolio

Our UK residential portfolio comprises 13,564 tenanted houses and flats, together with other associated interests such as ground rents and garage blocks. Most of the properties are, or have been, subject to regulated tenancies or home reversions plans.

Under a regulated tenancy the tenant pays us a rent set by a local rent officer which is usually below the prevailing market rent. The tenant also has right of tenure but, when the property is vacated, it reverts back to Grainger and can be sold on the open market with vacant possession. We buy these tenanted properties at a discount ('the reversion') to the vacant possession value. This means our returns consist of rents received during occupation and the value of the reversion crystallised when the property is vacated and sold together, with any growth in value from house price inflation during the period of ownership.

It is a key characteristic of the residential market that properties are more valuable vacant than tenanted. The properties are usually owned for ten years or more and this helps smooth out price volatility arising from economic cycles.

Retirement Solutions Assets

Our retirement solutions assets consist primarily of ownership stakes in properties occupied by elderly people (home reversion plans). A lump sum is paid to the owner occupier for some or all of their residential property reflecting an appropriate discount, and they are entitled to remain in their house for the rest of their lives without paying any rent. When they vacate the property it reverts back to Grainger and we are then able to sell it with vacant possession. The returns therefore consist of the reversion enhanced by house price inflation.

These two reversionary portfolios account for about 77%, by value, of our total business and offer a blend of trading and rental returns. The majority of our regulated tenants receive financial support through housing benefit and, because of their rights of tenure, have a vested interest in ensuring the rent is paid. Consequently our rental returns are long term, stable and secure with very low levels of arrears.
Both of our reversionary portfolios provide a steady stream of predictable vacancies giving us the opportunity to sell and crystallise value. The reversionary surplus in our UK business (the difference between vacant possession value and tenanted or market value) now stands at £571m (2010: £604m). The low average value (c£197K), often un-refurbished nature of the properties and high level of cash purchasers they attract mean that these vacant properties sell well and quickly.

Development activities

Our development activities are much smaller in scale (book value £80m at 30 September 2011) but offer opportunities for significant returns and cash flow. We often work in joint venture arrangements (for example with Development Securities in Birmingham and Helical Bar in Hammersmith) to leverage the respective skills and resources of ourselves and our partners.

Our major development activity at present is at our site West Waterlooville in Hampshire. We will bring some 2,550 residential units through the planning process, install infrastructure and then sell fully serviced plots to housebuilders under common standards of quality and sustainability. This activity follows the core Grainger principles of long term residential expertise and the creation of returns through a change in value and subsequent sale. In the UK residential and home reversions portfolios this comes from a change in tenure and in development, these largely derives from a change in use or planning permission.

German Residential Portfolio

Our German residential portfolio consists of some 6,718 units with a value at the year-end of €490m. The returns from these assets are more heavily biased towards rental income than those in the UK, and so provide a good balance of risk through stable asset values and higher gross yields.

Expansion activities

In total we own 20,282 residential properties. This has enabled us to invest in the systems, processes and people required to run such a large portfolio. Together with the breadth of our residential expertise this has placed us in a good position to offer these skills to third parties, often on a co-investing basis (for example, G:res and our Sovereign Reversions Joint Venture with Moorfield). This is a growing part of the business as demonstrated clearly this year by the success of our expanding these activities through arrangements with Defence Infrastructure Organisation (the Aldershot Urban Extension) and with Lloyds Banking Group (the Grainger Residential Asset Management Platform G:RAMP).

Subsequent to the year end we also announced our framework agreement with Bouygues Development to co-invest in a residential Build-to-Let fund which, on creation, will provide institutional investors with the opportunity to invest in scale in the private rented sector.