Edmond de Rothschild Real Estate Investment Management is preparing to launch its third UK-focused residential fund, targeting £500 million ($604 million; €563 million) in equity to develop affordable private rental housing in regional cities and take advantage of near-term pricing conditions, PERE can reveal.
The asset manager is looking to seed Edmond de Rothschild Residential Investment Fund UK III with at least £100 million in the first close. EdR REIM was originally planning to launch RIF III in 2022 to cater to two seed investors, both German institutions. Due to the events of last year, however – namely the war in Ukraine and the UK ‘mini-budget’ in September – one of those investors became overweight to both real estate and the UK as a result of the denominator effect.
“That’s really what is dictating the timing of the launch,” James Whidborne, the firm’s head of fund management residential UK, told PERE. “We had hoped to have launched it in the second half of last year, but we’re now looking to launch it in the first half of this year.”
The closed-end fund is the third vehicle from EdR REIM focused on the UK multifamily market. The first, PRS Club 1, or EdR RIF I, was a single-asset mandate which closed on £25.5 million in 2017 and was backed by a Danish institution. The most recent vehicle, Edmond de Rothschild Residential Investment Fund UK, or EdR RIF II, reached a final close in March last year on £320 million – £70 million in excess of its target size. The fund is now fully deployed.
Both prior funds had a core risk/return profile, but the strategy has shifted for the new fund in light of the market correction, said Whidborne. “With the pricing adjustment that has happened in the UK, we think there’s an opportunity to get slightly higher returns over a shorter period, purely by function of market timing. We think there’ll be an opportunity now to buy attractive deals in the short term, and then take advantage of pricing reverting to pre-mini-budget levels over the next five years, as momentum continues to accelerate within the UK living or residential sectors.
“The combination of yields softening in the short term and then tightening will give investors potentially double-digit returns over that short, initial five-year period. And then from years five to 10 it will revert back to a more core return profile.”
The initial target return in this scenario is 10 percent net of fees for the first five years, before moving to a 7 percent target with a 4.75 percent income component. The fund has 10-year life, but there will be a continuation vote after five years.
“We think we can achieve those returns unleveraged,” adds Whidborne. “At the moment we don’t anticipate using debt in the short term because, frankly, it’s not very accretive. If the debt markets move in our favor we will reconsider that in due course; we can well see a situation where within the ‘investment tail’ in years five to 10 debt will once again become accretive.”
Whidborne recently spoke with affiliate title Real Estate Capital Europe in detail on the firm’s decision to pause new development finance for its UK residential projects.
While its equity-only position will restrict the size of deals that EdR RIF III can make, Whidborne told PERE this may change in line with the fund’s roadmap: “We’re looking at deals between £15 million and £50 million initially, but we could see that growing as the fund grows. As the fund matures we could be looking at £50 million to £100 million-plus deals. It’s a case of balancing diversification with fund size.”
‘Nice buying window’
Through its second UK fund, EdR REIM built exclusively in regional cities including Birmingham, Nottingham and Newcastle. Its latest development is Charolais Gardens in Rugby, which reached practical completion in mid-January. The first 143 units of the 357-apartment building are 70 percent let, for which headline rent is at a 5 percent premium to underwriting. Phases 2 and 3 are set for further rental uplifts. “[This asset] really does highlight that in the regional towns and cities, the supply/demand imbalance is as acute, if not worse, than in, say, London,” said Whidborne.
Although the manager has mostly targeted regional UK cities through its previous funds, Whidborne said there may be scope to extend that to London within this repricing period: “In previous markets, you wouldn’t have been able to access gateway cities as they were too low yielding.”
As to how long this opportunity will last, the latest indication is that the tight grip on monetary policy may be loosening. The Bank of England’s most recent rate rise on February 2 was a comparatively modest 0.5 percentage points. “There’s talk of inflation normalizing from early 2024 onwards,” said Whidborne. “Ultimately that’s what creates this nice buying window for EdR RIF III: 12 months where the market will be finding its price, and thereafter it will be back to business as usual.”
Headquartered in Geneva, EdR REIM is the real estate business within the wider Edmond de Rothschild group, and holds €12.8 billion in assets under management. The platform was established in 2020 after the group integrated existing businesses Orox, Cleaveland and Cording Real Estate Group together into one entity under the EdR brand.
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