With house prices unaffordable and social housing unavailable, seven million households are expected to be renting their homes privately by the middle of the next decade. That’s both a housing crisis and a business opportunity.
Right now the vast majority of private landlords are small scale, ‘buy to let’ operators. But there’s a new game in town: ‘build to rent’, which sees corporations construct housing to let out rather than sell, attracted by the rent they can charge tenants.
Leading the way is Grainger, one of the UK’s biggest private landlords. Right now it rents out over 8,000 homes but plans to at least double that number. Just this week Grainger was chosen by Transport for London to build 3,000 homes around eight tube stations in a lucrative joint venture.
As Grainger grows, its developments have provoked resistance from housing groups fighting gentrification. Local residents and traders in the London borough of Haringey, for example, are currently trying to stop its controversial scheme to demolish the Latin American market in Seven Sisters, to make way for private flats and a new “redeveloped” market.
So far such campaigns have focused on the councils allowing Grainger’s schemes to go ahead. Here we’re looking at the company itself: how is it trying to make money, how much is it making, who’s running it and who’s profiting? In brief:
- Grainger is run by CEO Helen Gordon, a key player in one of the biggest banking scandals since the financial crash. From 2011, Gordon was head of the ‘West Register’ division of RBS, accused of buying up properties on the cheap from businesses the bank itself had run down.
- Grainger’s biggest shareholders are hugely wealthy financial institutions, with Blackrock – the world’s biggest investment firm – the top shareholder.
- Record profits have helped Grainger pay out huge sums to its bosses and owners. Gordon made £1.5 million last year, while the company has paid shareholders £55 million in dividends in the last three years.
- Grainger has received substantial state backing for its new strategy. The government has changed planning regulations and spent £4.5 billion to support the build to rent sector. Local authorities have given Grainger grants, loans and legal support, while bodies such as Transport for London and Lewisham council have set up joint ventures with the company.
Click here to find out more about the campaign to save the Latin American market. And click here to read our case study of Grainger’s Besson Street development with Lewisham council.
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‘A vast market opportunity’
Grainger is the UK’s biggest “listed” landlord – meaning it is the biggest one that lists its shares on the stock market. The company currently rents out 8,000 homes, with another 5,000 currently being built.
Based in Newcastle, the company has historically had a number of different business areas but since 2016 has changed its focus to concentrate on the private-rented sector. The company sold off its German residential venture, plus its ‘equity release’ division for older homeowners, and is gradually selling off the ‘regulated tenancies’ that have historically been the main part of its business (see below).
Until very recently, the UK’s “private rental sector” was smaller than in many other European countries. But this is now changing rapidly, with private renting becoming the fastest growing part of the housing market. A whole generation can’t afford to get on “the housing ladder”, while affordable social housing is being consigned to history. Millions of people now have no choice but to rent from private landlords.
So, although Grainger has been around since 1912, this is its big moment. In what it calls a “vast market opportunity”, Grainger expects the private rental market to jump from 4.7 million households now to 7.2 million in 2025.
To take advantage, the company is set for a rapid expansion, planning massive new “Build to Rent” tower block developments in cities from Leeds to London. Grainger is hoping its developments will add to already record profits (£87 million in 2018). Described by the Daily Mail as “American-style complexes” Grainger developments contain services from “concierges, cinema rooms and gardens to broadband and gyms”.
Gym in a Grainger development, graingerplc.co.uk
Like other major housing companies, Grainger shows little concern for affordable, much less social, housing. Flagship developments like Clippers Quays in Manchester and the Seven Sisters Regeneration (‘Wards Corner’) in London contain no affordable housing whatsoever. Those that do, like the Besson Street development in Lewisham, mainly offer homes at “intermediate” or “affordable” rent – which is up to 80% of the market rate – rather than social housing. As such, they are aimed at “middle income households” rather than those on council waiting lists.
Yet Grainger management are doing their best to present their company as a solution to the housing crisis. Chief Finance Officer Vanessa Simms says private renting “can be a real catalyst to address the housing crisis”. Her company has also championed calls and sponsored reports from the charity Shelter for a more responsible private rental sector, arguing action should be taken against “rogue landlords”.
Management have made great play in the media of their long tenancies – signing a pledge to offer three year terms – and their tenants not needing to pay a deposit.
But there’s a financial incentive to all this. In the words of Vanessa Simms, the company’s whole strategy is “to be the UK’s leading landlord, by professionalising the private rented sector”. All of the measures involved in this “professionalisation” help to bring Grainger steady returns and price smaller operators out of the market.
Longer tenancies, for example, give renters more security, no doubt, but they also give the company the steady returns its investors find so attractive. And as Simms says, they are beyond the reach of most smaller, buy-to-let landlords, who “can’t usually do more than 12 months because of banking requirements”.
Above all, Grainger’s ideal market is one in which rents keep going up. As CEO Helen Gordon told the BBC:
“We have in the UK a housing shortage. We know that more people will be renting for longer periods of their lives, and unlike shops and offices we will have a constant demand for occupation.” Plus rents usually rise with inflation and wages, so for an investor, it’s quite a good hedge against inflation.”
Grainger has significant government backing for its new policy. An announcement to the stock market by the company described how “recent changes to the tax system and by the Bank of England on buy-to-let lending requirements” have been “disadvantageous to the small, buy-to-let landlord sector” but have encouraged investment by “large-scale investors and operators”.
According to Grainger, since 2012 the government has put down £4.5 billion to support the Build to Rent sector and “changes have been made in the planning system to enable greater number of Build to Rent developments to take place”.
This is a key moment for Grainger. Its future plans are all about its swanky new build to rent developments but the majority of its profits still come from the far more dour, somewhat morbid, “regulated tenancies” that it owns (see below). They are slowly reducing and Grainger needs its new strategy to be a success, so its investors can get the returns they demand.
Who’s in charge?
At the very top, Grainger is led by property industry veteran Helen Gordon, CEO since 2016.
Her work is overseen by chairman Mark Clare, former chief executive of giant housebuilder Barratt. He also currently serves as a director of bookies Ladbrokes Coral and privatised water company United Utilities. Other board members come from across the corporate world (for more information you can read their profiles on the Grainger website here).
Gordon has led the transformation of Grainger to become a leading player in the ‘build to rent’ boom. She also faced down the challenge from hedge fund Crystal Amber, which unsuccessfully tried to force a takeover of the company.
Company accounts show Gordon earns a tidy sum for her work at Grainger: she made £1.5 million in 2018, up from £1 million the year before. Almost half a million of this came as a bonus, plus over £300,000 in share awards. Gordon’s pay packet was given almost unanimous approval at the 2019 Grainger Annual General Meeting, as was her re-election as CEO. Shareholders also stumped up £347 million last year to back her plan to expand the company (more details below).
Grainger CEO Helen Gordon, graingerplc.co.uk
So Gordon seems to be very much in charge. Her public profile is one of a savvy, yet caring, manager, who genuinely takes an interest in the lives of her tenants. She told the Sunday Times when she joined Grainger that she saw the company’s properties “as people’s homes, not pieces of real estate, and that makes it very important.”
Helen Gordon and the West Register controversy
Dig a little deeper though, and Helen Gordon has been involved in some pretty sharp corporate manoeuvrings. She joined Grainger after five years at RBS where worked as head of the bank’s ‘West Register’ property division from July 2011.
In the wake of the 2008 financial crisis until it was shut down amid controversy in 2014, West Register played a key role in one of the biggest banking scandals since the crisis.
RBS is accused of deliberately running down businesses it was lending to, then buying up their assets on the cheap. Businesses identified by the bank as in need of “restructuring” were sent to the now-notorious Global Restructuring Group (GRG), to be hit with huge fines, fees and hiked up interest rates. Finding themselves in more trouble than before – some were made insolvent – the businesses then had to sell property and other assets.
This was where West Register came in, often buying up that property at a knock down price. A 2013 report by the government’s “entrepreneur in residence” Lawrence Tomlinson described businesses who:
“believe their property was purposefully undervalued in order for the business to be distressed, enabling West Register to buy assets at a discount price. A number of businesses complained about West Register’s interest in their property and felt they had been forced into a corner where they had to accept conditions they otherwise would not.”
RBS has denied West Register profited by buying assets cheap and selling them on for an inflated price. But internal audit documents from June 2011 state the division aimed to “extract maximum economic value” from selling the properties it had bought from “distressed situations”. And that these sales could “often result in a capital gain in relation to the original property acquisition and may represent upside return to the bank”.
Gordon joined the next month, with the scheme in full flow. West Register appears to have grown under her. Internal documents show the division owned properties worth £2.3 billion at the end of 2010. By the end of Gordon’s first year in charge that had increased to £3.2 billion.
Gordon’s role has not been examined in any detail. Media reporting has focused on the operation’s founder and overall head Derek Sach, as well as RBS’ top management and the government regulators overseeing the running of the state-owned bank.
But she appears to have been an important player from the time she joined. She is named as a “senior leader” in an internal document that sets out the GRG’s governance structures.
One of a number of files leaked to the BBC and Buzzfeed in 2016, the “High Level Controls Document”, names Gordon as one of only three members of the GRG’s Asset Purchase Committee. Gordon also held the position of the committee’s “alternate chair”. There, together with GRG supremo Derek Sach and overall head of property Aubrey Adams, Gordon signed off RBS bids to buy properties from the bank’s “distressed” borrowers.
Collaboration between the GRG’s restructuring and property divisions has been one of the key allegations levelled at the scheme. RBS always claimed the divisions were separate and that West Register was buying properties from troubled businesses independent of the restructuring processes the GRG had put them in.
But Gordon, Sach and Adams were also involved in GRG’s management committee. This body had authority over the day to day management of the whole operation, and over which businesses were transferred into the restructuring unit. Derek Sach and Aubrey Adams were permanent members of the management committee. Gordon is named as one of the “senior leaders” who “from time to time” also attended.
Among the leaked documents was West Register’s own Policy & Procedures Manual, dated April 2011, just before Gordon joined. It shows that West Register could be given information by GRG that was not available to other companies bidding for the properties. And that properties could be sold to West Register without being advertised on the open market.
Though it denied the worst of the allegations, RBS wound down West Register in 2014, acknowledging there was a “damaging perception” surrounding the way the division operated. The top bosses left but Gordon stayed on at the bank as the global head of real estate asset management.
And then she got the call from Grainger.
Grainger is a ‘publicly-listed’ company, meaning you can buy and sell its shares on the stock market. As is common with companies of its size, most of Grainger’s shares are owned by large investment funds, none of which individually own anything close to a majority that would allow them to control the direction of the company’s business by themselves.
At the time of writing, the top ten shareholders are:
- Blackrock (9% of shares held)
- Aberdeen Standard Investments (6%)
- Schroder Investment Management (5%)
- Vanguard Group (4%)
- Columbia Threadneedle Asset Management (4%)
- Norges Bank Investment Management (4%)
- M&G Investment Management (3%)
- Legal & General (3%)
- Aberforth Partners (3%)
- Highclere International Investment (3%)
Top shareholder Blackrock is the world’s biggest investment fund, managing more than $6 trillion of clients’ money. It has made a lot of people very rich – most notably its CEO Larry Fink who last year was proudly crowned a billionaire.
Blackrock CEO Larry Fink at the New York Stock Exchange in 2017
These firms own shares in most of the companies that trade on the London Stock Exchange, for the most part playing no more than a passive role in their affairs. They are motivated by financial returns above all else and are unlikely to be bothered by local residents’ concerns over the impact of Grainger’s developments. One possible exception is Norges Bank – the central bank of Norway – which has previously divested from companies it decided did not meet its ethical standards, though these have mainly been involved in fossil fuel extraction, repression or the arms trade.
Grainger’s shareholders appear to be fully supportive of the company’s direction under CEO Helen Gordon. Last year they stumped up £347 million to help the company buy up the ‘GRIP Reit’ property investment trust. Grainger previously owned just a quarter of the trust – which contains 1,700 UK homes worth £696 million – with the rest held by Dutch pension fund APG.
What do they get in return? Annual dividends (the jargon for cash payouts to shareholders) of course. Historically these have not been particularly big by housing industry standards. Grainger paid out between £3 million and £8 million to shareholders each year between 2003 and 2013. But under Helen Gordon’s reign, and since the shift to ‘build-to-rent’ they have been getting bigger: £55 million in the last three years, with £21 million paid out in 2018.
But such returns do not compare to what shareholders would be making in dividends from property industry leaders such as Bovis or Barratt (which pay out more dividends in relation to their share price). The attraction to Grainger for shareholders instead may be the hope that the price of their shares will rise if the ‘build-to-rent’ strategy succeeds as intended.
Where’s the money?
Grainger is one of the 350 biggest companies in the UK that list their shares on the London Stock Excahange (where Grainger is part of the FTSE 250 index). The stock market values Grainger’s shares together (its ‘market capitalisation’) to be worth £1.5 billion at the time of writing. That’s around the same size as property industry rival Bovis Homes, but far below industry giants Barratt (£6 billion) or Persimmon (£7 billion).
Grainger’s business brought in revenues of £270 million in 2018, the date of the last published financial statements. The majority of this – £148 million – was from sales of their regulated tenancies (see below). Another £62 million came from housing development, mainly through a scheme in the London borough of Kensington and Chelsea, where Grainger managed and constructed a scheme for the council. Then there was rent: £59 million coming from rent paid by the company’s tenants, split roughly equally between money received from regulated tenancies and the ‘private-rented sector’ (see below).
Its rental division is proportionally the most profitable part of its business: netting the company £44 million in 2018, compared to the £80 million profit made from selling properties. No surprise then, that Grainger is looking to increase this part of the business so quickly.
After all costs and tax were taken off, the company made an overall profit of £87 million in 2018, the biggest in its history.
As of September 2018, the date of the last accounts, Grainger owned properties worth over £1.5 billion. This did not include the properties brought into its portfolio with the acquisition of the GRIP Reit, described below.
On the other side of its balance sheet, it owes £961 million to creditors it has borrowed from. The majority of this – £533 million – is from unnamed banks, with another £346 million from unnamed investors in the bond markets. Another £75 million came from the insurance company Rothesay Life Plc. All these lenders receive interest from Grainger of between 1.5 to 3% a year, totalling £27 million in 2018.
Take off everything it owns from everything it owes and Grainger ‘net worth’ in its accounts is £816 million. Residents campaigning against Grainger’s schemes should not expect the company to go bust anytime soon.
As Helen Gordon says, Grainger’s “access to future opportunities is increasingly coming through partnerships with local and central government”.
Much of its lobbying at the national level is done by trade association body the British Property Federation. But Grainger does some by itself too. The company buys politicians nice lunches,* sponsors Ministry of Housing events and councillors’ trips to swanky Cannes property conferences. To be fair, Grainger also made homes available to Kensington and Chelsea council after Grenfell “at fair value”, according to Helen Gordon.
No doubt its powerpoint proposals to win developments are excellent too. As well as being granted permission to build, often with little requirement for affordable housing, Grainger also benefits from councils’ support, such as Haringey council pushing on with a Compulsory Purchase Order to acquire the Wards Corner site for the company.
Wards Corner Community Plan for alternative to proposed Grainger development, savelatinvillage.org.uk
Grainger also receives direct financial support from the state. Three examples: a £6 million grant from the Greater London Authority when Boris Johnson was Mayor; an £8 million loan from the Homes England agency; and a £1.5 million loan from the New Deal for Communities programme.
Build to rent: how to profit from a nation of renters
Until very recently, private renting in the UK was only a small part of the housing market, well behind other European countries. In 2001, out of 21 million homes in England, only 2.1 million were rented from private landlords.i This compares with just under 15 million “owner occupied” – or, more precisely, occupied by people paying mortgages. 4.2 million households lived in “social housing”: 2.8 million council homes, and 1.4 million rented from “private registered providers” such as housing associations.
The picture is changing fast. Looking at 2017, the number of “owner occupiers” has hardly changed – just a little over 15 million. Social housing stock has dropped to just 4 million, and now only 1.2 million of those are council homes. But the biggest change is the rapid growth of private renting: there are now 4.8 million households paying rent to private landlords.
There are two obvious big factors here. On the one hand, massive house price inflation means new generations can no longer afford to get mortgages and get “on the housing ladder”. On the other, there is nowhere near enough “social housing” to meet the need. Although some is being built, the numbers are still small. Meanwhile, council homes are still being lost to “right to buy” sales and estate demolitions, as councils sell off valuable land for private developments.
The result is that millions of people who might once have either found a secure council home or bought into the Thatcherite dream of a “property owning democracy” are now forced into renting from private landlords.
In what it calls a “vast market opportunity”, Grainger’s management expect the private rental market to grow even faster in the next few years – reaching 7.2 million by 2025.ii And with the vast majority of the UK’s landlords being small, owning just a few properties, Grainger believes it can use its “economies of scale” to grow rapidly, designing well-facilitated apartments with gyms and concierges, and giving tenants longer tenancies than the norm.
As CEO Helen Gordon told the Sunday Times: “The majority of people today rent from a landlord who has under four properties, so you are at the whim of that person’s need to get their property back.” Grainger, on the other hand, will let on up to three year leases.
According to the Financial Times, the acquisition of the ‘GRIP Reit’ portfolio, described above, means that the value of Grainger’s homes rented out at market-rate now exceed those on regulated tenancies. Even before that Grainger was the UK’s biggest ‘private rented sector’ landlord, with 4,548 homes. The company’s annual report boasted its nine biggest competitors had just 10,500 homes between them. Now, its focus is bulking up fast with a rash of big new-build developments.
Grainger presents its current plans to investors in a presentation released in November 2018, called “Accelerating our Growth Strategy”. Here Grainger says that it has a “development pipeline” of schemes worth £1.37 billion, with 5,266 new “units” (homes) planned between now and 2022.
The key strategy is to build big new “build to rent” developments focusing in “key cities” – which it identifies as having both “strong demand” and “growth prospects”. London is clearly top of the list on both counts, but there are other target cities including Birmingham, Manchester, Bristol, Southampton, Leeds, Brighton, Milton Keynes, Sheffield and Liverpool.
Grainger’s planned Apex House development in Tottenham, London, graingerplc.co.uk
The investor presentation lists what it calls 19 new “high quality PRS” schemes “in the pipeline”. Together these schemes, which come with free wifi and on-site gyms as standard, many with relatively long tenancies, represent over 4,000 homes, and will be completed between 2019 and 2022. Scroll down to the bottom for a list.
Grainger is particularly proud of its Clippers Quay development in Salford. This is the biggest “build to rent” development so far to be built outside London. The first phase was recently finished at the start of 2019, but even before this flats were available to view using “virtual reality”.
Some of these projects will have the first flats to let in “early 2019”, with others not expected until 2021. Only one, Besson Street in Lewisham, is expected to take longer – it is listed as “late 2022”.
Many of the schemes are built on a “forward funded” model – i.e., Grainger buys the land and raises the finance for the scheme, but then pays another development company to be in charge of the work. Grainger takes over and manages the properties once the development is complete.
However, the current run of deals have been dwarfed by Grainger being selected as Transport for London’s preferred joint venture partner in “Build to Rent” schemes on land around eight tube stations. In this first phase of of TfL development plans, Grainger will build 3,000 flats on the sites, with 40% for “affordable rent”.
The headlines, and Grainger’s own publications too, focus on big shiny new “Build to Rent” developments. But the core of the business for the moment remains a less glamorous, even somewhat morbid, line of work: renting thousands of flats scattered around the UK to mainly old people on “regulated tenancies” – then waiting to sell off these homes when they die.
Regulated tenancies were once the norm in the private rental market, but are now largely forgotten. They are private market tenancies, not “social” or so-called “affordable” ones. Yet they offer lifetime tenancies, and rents are regulated as “fair” by the government’s Valuation Office Agency. Abolished by the Thatcher government in 1989, they seem now like remnants of a vanished era before the dogma of unregulated markets took complete hold.
Although no new regulated tenancies have been issued since 1989, there are still 100,000 or more in existence. The holders are now largely elderly: Grainger’s regulated tenants have an average age of 76.
While the tenancies may last a lifetime, landlords can buy and sell on these homes with “sitting tenants”. Grainger is one of the biggest players in this market, having accumulated a portfolio of several thousand properties with regulated tenancies, many from state industries such as the National Coal Board and British Rail.
There are three crucial points about investing in this market:
First, rental income is very stable – secure long term tenancies mean there are no “voids” between tenants, and rents will often be covered by housing benefit. So the landlord is guaranteed a constant income stream.
Second, because there are sitting tenants, these homes sell for some way below the normal market price.
Third, because the tenants are largely elderly, after a few years many die (“41% of vacancies arising from mortality”) or move into old people’s homes (25%). The houses are then free to sell at the normal price.
So, to sum up, Grainger buys up the houses cheap and gets several years of reliable rent coming in. Then, when the tenants “vacate”, it can sell on the houses at the full market rate, making for a tidy profit.
In the language of Grainger’s annual report, this strategy is called “selling properties on vacancy, crystallising the reversionary surplus”. The company says that “Sales of properties on vacancy [are] expected to continue at between 6-7% per year of the portfolio, with average tenant age of 76.” The reliable income stream this generates is liked by Grainger’s investors, and “provides funds for reinvestment in the PRS portfolio” of profitable new developments. (Annual Report p2).
Moving into “affordable” housing
Once, the large bulk of “social” or “affordable” housing in the UK was provided by local councils. A first big shift came in the 1980s and 1990s, when the Thatcher and then Blair governments stopped councils from building, and pushed them to sell off their housing stock to the growing Housing Associations.
Now, another big step is taking place in the privatisation of public housing. The Housing and Regeneration Act 2008 for the first time allowed profit-seeking companies to become “registered providers” of affordable housing. Companies like Grainger can now compete with councils and “non-profit” charities to build social housing schemes.
The new law came into force in 2010. In 2012, Grainger became one of the first dozen or so entrants into the market, registering its new “affordable landlord” under the name Grainger Trust.
As of its 2018 Annual Report, Grainger says that its “affordable homes portfolio has 289 homes in operation and 623 in the pipeline.”
So this is only a small part of the business – and affordable homes will generally be less profitable than renting at full market rate. But having a “registered landlord” subsidiary can bring some important advantages. It can bid for government grants to build new affordable housing; and can also try to grab “planning gain” (Section 106) money which for-profit developers are meant to give to support affordable housing and other local resources.
In addition, although “affordable housing” brings in less absolute profit than private rent, it has some advantages. Like the regulated tenancies discussed above, affordable rents are generally very stable income sources. Tenancies are long, and the rents are often covered by housing benefit. As regulated tenancies (literally) die out, an affordable portfolio helps keep up a stable income flow. This reassures investors and keeps interest rates low when Grainger borrows to fund new developments.
Upcoming Grainger developments (numbers of “units” planned in brackets):
London: Besson Street, Lewisham (c.300, 50/50 joint venture with Lewisham Council); Waterloo Estate, Lambeth; Pontoon Dock; Hale Wharf, Tottenham, Haringey (108); Apex House, Haringey (163); Seven Sisters, Haringey (196).
Southern England: Finzels Reach, Bristol (194); Market Street, Newbury (232); East Street, Southampton (132); Berewood, Hampshire (104); Gunhill, Welleseley, Hampshire (107 – on former Aldershot military barracks, part of a long term plan for more than 3,000 homes on the site); Silbury Boulevard, Milton Keynes (139); YMCA, Milton Keynes (261).
Midlands: Gilders Yard, Birmingham (156). (Plus in December 2018 Grainger announced another Birmingham scheme, Exchange Square with 373 homes.)
North West: Gore Street, Manchester (375); Clippers Quay, Salford (614).
Yorkshire: Eccy Village, Sheffield (237); Yorkshire Post building, Leeds (242); another unnamed development in Leeds (200+).
i Source: “Dwelling stock estimates” from the Ministry of Housing, Communities and Local Government – latest issue May 2018
ii Grainger Annual Report 2018 p4
* See 2016