EWI in UK build-to-rent deal
Developer enters into a RM2.12bil deal with American pension fund
PETALING JAYA: In yet another first for the Ecoworld brand, EcoWorld International Bhd (EWI) has successfully clinched its first buildto-rent (BTR) deal for two of its project sites in Britain, at an estimated value of £400mil (RM2.12bil).
This will be Malaysia’s first property developer to have this international tie-up with a pension fund for a BTR project in Britain. Kenanga Investment Bank’s head of equity research, Sarah Lim Fern Chieh, described the partnership as commendable and helping to meet the sales target of EWI.
“It (the partnership) locks in sales ahead of Brexit and helps with meeting sales targets. It is also a reflection of the confidence in EWI at a more international level, which is commendable.
“We like these deals, as it means surety in future contributions with high cash and profit conversion on completion, which is a decent trade-off for perhaps lower margins, which is typical in such ‘ en bloc’ deals,” Lim said.
While the partnership is viewed positively, Lim said if the method of recognition follows the conventional standards in Britain, then earnings recognition from this project is
unlikely (to be) immediate (with target delivery only in 2020). Lim covers the parent company of EWI - Eco World Development Group Bhd - but not EWI directly.
Based on the UK’s method of recognising revenue from property development, the earnings are back-loaded and reflected in the books after the units are completed and handed over.
A fund manager said EWI is expected to show good earnings numbers from this year after completing its maiden project in London, which is the residential Amelia Building in London City Island.
The units have been handed over to purchasers this quarter and the numbers are expected to be reflected in EWI’s books next quarter.
EWI’s executive vice chairman, Tan Sri Liew Kee Sin, had said previously that he wanted to build a sustainable stream of profits for EWI, and towards this end, was looking at launching projects every year.
In a heads of terms inked yesterday, North American pension fund Invesco Real Estate will forward fund the development of more than 1,000 BTR homes in Kew and Barking.
The partnership is expected to further create value for the Ecoworld brand. Invesco Real Estate managed over US$66.4bil in real estate globally as of Dec 31, 2017.
EWI’s 70%-owned UK joint venture - EcoWorld London - will complete the construction of the developments to the high specifications agreed with the investors, and will then undertake the long-term management of the assets on their behalf.
In general, BTR schemes are projects specially designed to be sold to pension funds and insurance companies that will own the development for rental yield.
According to EWI, planning permission has been secured for both sites and development work has already commenced with construction due to be completed in stages from 2020 onwards.
As both parties head into a period of exclusivity, the detailed contractual arrangements are targeted to be concluded by the end of October 2018.
The BTR deal secured is in line with EWI’s strategic move to make the BTR business one of the key growth drivers for EcoWorld London.
“EcoWorld London will continue to seek opportunities for similar BTR agreements as part of its growth strategy.
“According to research by CBRE, the annual BTR investment volume in the UK is currently relatively small at £2.4bil (RM12.69bil) compared to £103bil (RM544.73bil) a year in the United States.
“With North American funds now actively pursuing BTR opportunities in the UK, there is huge growth potential for the sector and CBRE expects the annual investment volume to quadruple within five years to £10bil (RM52.89bil),” said EWI in a statement yesterday.
Liew said the group had already received expressions of interest from other funds, particularly from Asia, which are keen to pursue potential investments into the BTR sector in the UK. “This signifies their confidence and ours in the positive long-term prospects of the UK property market, particularly that of the BTR sector.
“As a business, we are perfectly placed to develop and manage these schemes to the high quality that investors and residents expect from us and through EcoWorld London, we have the best-in-class BTR capabilities.
“This significant investment by a US-based global pension fund in two of our projects is testament to that,” he said.
EWI’s BTR business model is cen- tred around a golden brick arrangement where land and costs incurred are paid upfront, with the remaining costs funded through a progressive payment structure.
This enables the group to effectively leverage on a relatively small amount of upfront equity to fund the entire BTR development and generate positive project cash flows earlier.
As a result of this, EWI’s BTR business can be scaled up quickly and allows the group to work on multiple projects concurrently.
Commenting on the deal, EcoWorld London CEO Cheong Heng Leong said the timing of the announcement clearly demonstrates London’s enduring appeal to well-informed global property investors who can see beyond current pre-Brexit market uncertainties to seize good opportunities to acquire quality assets.
“This will stabilise and enhance EWI’s income generating capacity going forward to include steady cashflows from institutional investors buying BTR properties to complement retail sales made to local homeowners and international investors in the open market sale side of the business,” said Cheong.
Of EcoWorld London’s 12 development sites in Greater London, almost half are to be earmarked as BTR projects.
It’s a deal:Liew (standing, left) and Invesco Real Estate director John German (standing, right) look on as EcoWorld London CEO Cheong Heng Leong (seated, left) and Invesco Real Estate managing director Simon Redman sign the Heads of Terms.