Just took a modeling test - Must be missing something
Hi everyone,
Just took a modeling test, forward funding build to rent building London.
Given assumptions:
- £105m Forward Fund Price (Land £12m. Please make own assumptions for hard costs and developer fees paid during build & completion payment paid at PC)
- 228 units / average rent = £45 psf
Classic debt and operations assumptions (no refi, no exit date...)
If you take the given SoA + average sizes in London for BTR, 45 psf rent will give you ~£6m ERV -> ~£4.5m NOI (spot)
£105m payment = £112 with const. interests & fees
Isn't it already dead? Even from an acquisition perspective it does not make sense to enter at 4% for an area that should trade at 4.5% / 4.75%
I must be missing something here... as the pdf clearly stated: "Produce 1-page Exec Sum - what is the opportunity and why is it compelling"
Finger crossed it was a big trap and I made it but I doubt it
Where are you getting 4% from?
And London resi is not trading at 4.5-4.75
Trades in Manchester of sub c4.25% and Nine Elms sub 4
112m at 4,5m noi = ~4,0%
Given this 45 psf, I can’t return more than 10% LIRR despite playing around with assumptions
What do you think about the described above?
Correct for the ones you mentioned, a few schemes in London are trading around 4,75% (talking income generating prs / btr)
228 x 750 sq ft avg x 45 x 75% = 5.8m
5.8m / 117 = c5%
(105 + 12*1.018) assume spv on land
Plus rental growth
Exit at 4
It'll work for a core/core+ buyer
Those 4.75% trades aren't comparable to new build, dual stair core, 2nd gen btr (which is what you are developing)
I assume you mean the north west London trades? Those were highly reversionary, with staple debt and single stair core, gen 1 fring estate assets
I've just run a classic CF acquisition model (4.25% exit (so aggressive), no compression, 4y hold, 60% senior loan at 6.5% all-in, 25% leakage, no capex, couple of below the lines items such as corporate costs & am fee).
£4.5m NOI at £105m (keep in mind we're talking £112m levered costs) returns a 2% LIRR
Another way of seeing the weird aspect of these assumptions is to take a look at the famous case study modeled by the A.CRE guy following a post on this forum it's roughly the same costs basis ~£105m unl. dev with 60% LTC loan - at stabilization he's showing ~£10m Rent vs. ~£6.5m for my test. Can't see how that deal is supposed to be compelling...
I really hope that's a coarse trap I've just faced!
Another point:
The exercise assumes you keep development debt until exit with base +3.5% margin not hedged, call it ~8% all-in.
Isn't it again a non sense to have your debt yield = ~6% vs. ~8% interest?
Welcome to real estate for the past 2 years and the nonsensical pricing of btr with non-existent repricing (+25bps vs +200bps elsewhere)
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