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Latest Manager Commentary

LUCENT STRATEGIC LAND FUND UP 0.36% in MAY 2014
 

Last month this note discussed the issue of ‘predictable outcome’ and the increase in house building that is occurring in the UK (new home registrations in April were the highest April total since 2007). We have spent many months arguing the different variations of this theme: whether it be the overwhelming demographic driver for house building that exists in the UK or the absolute cross-party political support for house building and the economic policy initiatives that have subsequently stemmed from that demographic reality.
 
A recent article in the Financial Times (‘UK housebuilders embrace collaborative spirit to lower risk’, May 28^th 2014) has prompted me this month, however, to emphasise some rather more technical issues that underpin the opportunity that the Lucent Strategic Land Fund (LSLF) is delivering to investors.

 There has been a paradigm shift in the way in which land is being brought forward for development in the UK. Housebuilders are increasingly focusing their efforts on housing delivery, rather than investing in strategic land, for the reasons outlined below. Having identified this trend several years ago, and the gap in the market that it created, the LSLF is delivering land in a manner that the market requires with planning consent and appropriate infrastructure in place:

• Housebuilders have been forced to adopt a less capital intensive model. As the article I referred to above reports, the house building industry has recognised it needs to work in a different way: “Collaboration was first born out of the tough funding conditions after a downturn in which almost all of the big housebuilders were forced to carry out rights issues just to survive. But as the market has improved many are continuing to pursue joint deals”. In other words: Lucent delivers the land, the housebuilders build the houses.
• This ‘financial trigger’ to change is being further reinforced by the nature and size of the developments that local authorities need to see brought forward in order to meet the chronic housing shortage. The demographic and political burden on local authorities to meet housing targets has never been greater and those targets will only be effectively met by bringing forward the larger and more complex developments that even the largest housebuilders are reluctant, or unable, to undertake. The house builder’s preferred model is a ‘simple site’ for 100 to a maximum 500 houses. The Fund’s Lincolnshire Lakes project, which is bringing land forward for 3000+ houses, is a perfect example. Prior to Lucent’s involvement, the local authority had approached several national housebuilders to bring the land forward and didn’t make progress with any of them. They considered the project too big and too complex. As well as housing, the master planning for this site required attention be given to schools, commercial space, flood defences and highway and infrastructure issues. For Lucent, as a land site assembly specialist, this was not a problem. Now that planning consent is approaching (a planning determination is to be given by Q4 this year), and the Fund will phase the delivery of the site, with consent, to housebuilders in the ‘bite sizes’ that they prefer, the housebuilders are actively competing with each other to purchase the site.
• The Financial Times article also states that “Property analysts expect the push to release more public sector land will prompt partnerships …. Particularly as local authorities require multiple tenures … that demand different expertise”. Lucent is leading the way on this front having created the first Investment Partnership of its kind with Allerdale Borough Council in the North West of England. This effectively appoints Lucent as the asset manager for the local authority with regards to its land assets. Lucent and the local authority will share in the uplift in land values that will occur as a consequence of them being navigated through the planning process and consent being gained. Please see the following link: www.allerdale.gov.uk/default.aspx?page=3096. The Allerdale Investment Partnership will have a determination on its first planning application, a 250 unit residential development on its Ashfield Road site, during quarter 4 this year. This will impact very positively on the NAV before the end of the year. A further 3 sites will be drawn down by the end of quarter 3 giving further momentum to the NAV. Lucent is enjoying ‘first mover advantage’ as a consequence of the development of its Investment Partnership concept with local authorities and is currently in detailed discussions with 2 further local authorities who wish to establish such a relationship with the Fund. The first of these will be completed by August.

The macro fundamentals supporting this asset class remain strong and, as outlined above, there are also important technical industry issues that serve to reinforce further the compelling opportunity that Lucent is delivering to investors. It is the opinion of the Directors that these circumstances, together with the granting of planning permission on Lincolnshire Lakes, further progress in the Lucent Investment Partnership programme, and advances in Southampton’s Royal Pier Waterfront development, will result in a significant increase in the NAV during the second half of this year enabling the Fund to comfortably exceed its stated target return of 12% (net of fees) in 2014.