A tipping point

For a business well-known for conservative investment, PRUPIM’s rhetoric regarding its £105.4 million (€124.2 million; $159.1 million) investment in a UK private-rented residential portfolio this week was remarkably bullish.

Indeed, in buying a 534-property portfolio from homebuilding stalwart Berkeley Group Holdings, the real estate investment management platform of UK insurer Prudential’s M&G Investments has firmly tied its colors to a mast not widely seen in the country for a long time.

Until recently, institutional investment in private-rented residential real estate in the UK has been something of a misnomer. However, the private real estate investing universe should sit up and take note of PRUPIM’s foray, not least because of how excited the fund manager is getting.

Chairman Martin Moore, an industry veteran of multiple cycles, told PERE this week how PRUPIM was seeing strengthening demand from tenants for rented accommodation not seen in decades. He cited compelling indicators ranging from key economic considerations – unattainable and expensive financing for both homebuyers and developers and an acute supply/demand imbalance – to demographic factors like increasingly fragmented families and rising immigration.

His upshot was that the UK had reached a tipping point in its perception of homeownership as the solution to its housing requirements. “I think we’ll see an exorable move to the continental European or North American solution, where the predisposition to own will dissipate,” he said.

While the vernacular was undoubtedly bullish, it should be noted that PRUPIM has bought in London and the South East of England, residential markets managing growth amid falling valuations elsewhere in the country since the global financial crisis started. The properties also are completed and have income-fuelled return expectations between 7 percent and 10 percent – not exactly opportunistic.

Still, in keeping with the firm’s fervor, Moore declared that the investment thesis could well extend outside the refuge of London and its immediate reaches. In addition, it could involve development, such is the shortfall in supply versus perceived demand, he noted. “There are many reasons why we feel this strengthening demand for rented solutions will be with us for the long term,” he added.

With its deal, PRUPIM has made one of the boldest strides into this renaissance and, in indicating it might one day be the starting point of a bigger fund involving other institutional investors, it is clear the firm will keep going.

Nonetheless, PRUPIM isn’t alone in its enthusiasm. In January, Europe’s largest pension administrator, Algemene Pensioen Groep, invested £158 million into a portfolio of private rented residential assets managed by another London-listed company, Grainger.  That followed partnerships struck last year between international institutional money and domestic partners such as Canadian state investor Ivanhoé Cambridge with Residential Land, M3 Capital Partners with Essential Land and Delancey with Qatari Diar. PERE suggested in this column last year that the latter of those partnerships, which bought London’s Olympic Athletes’ Village for £557 million, offered up a blueprint for engaging the private rented residential sector in the future.

When scanning these examples, the telling commonality is location: each is focused on London and the South East of England. Home to the most foreigners, it is an area where cemented conceptions that homeownership is so important stand the best chance of melting. Assuming the English are ready to relinquish such thoughts and are doing anything but renting because mortgage finance currently is unavailable might be dangerous.

According to Wednesday’s front page of City AM, the London business newspaper, the UK has now paid more than half the debt it accrued during the housing boom between 1998 and 2008 and, consequently, better capitalized lenders could well start to engage with borrowers more meaningfully than in recent times. Judging by the concentration on improving homeownership in the government’s annual budget announcement last month, it would be fair to concurrently predict English borrowers would plough back into house buying as soon as they are better enabled.

Moore responded to that suggestion. “Do I see improving lending a threat? Absolutely not,” he said. “It’s important people have a choice.”

Whether a paradigm shift is upon us might be debatable. But one thing at least is certain: institutional capital is taking private residential real estate in the UK very seriously now, and not just the traditional opportunistic folk.