MIPIM 2016: Hermes targets £1bn PRS portfolio

The investment management arm of the BT Pension Scheme is making a push into the UK private rented sector.

Hermes Investment Management is seeking to become a prominent investor in an emerging real estate sector, UK private rented sector (PRS) housing. Over the next five years, the investment management arm of the BT Pension Scheme plans to grow its new real estate platform to £1 billion in assets under management over the next five years.

“Given industry expectations that this could grow to a £50 billion asset class in time, we don't think that's an unrealistic target,” Philip Nell, fund director at Hermes Real Estate, told PERE at the MIPIM conference in Cannes. He added that Hermes already has identified a pipeline of off-market opportunities, with approximately £85 million currently under offer.

Hermes launched its first dedicated PRS real estate fund, Vista UK Residential Real Estate Fund, last May. To date, the investment manager has raised £115 million from BT Pension Scheme, Countrywide, which is acting as asset and property manager for the strategy, and local UK pension plans, against an initial capital target of up to £250 million.

On behalf of the open-ended fund, Hermes will invest in a range of income-producing PRS properties across the UK, with a focus on regional towns and cities with strong economies and a maximum target exposure of 30 percent to Greater London. The firm will target a net return of 9 percent to 10 percent for the fund investments, which will be leveraged between 30 percent and 40 percent loan-to-value. About three-quarters of the VISTA capital raised already has been committed to or invested in PRS properties such as the 324-unit Baltic Village in Liverpool, the 38-unit The Point in Manchester, the 62-unit Mica Point in Birmingham.

In the UK, the PRS market has doubled in size over the past decade, as a result of renters that are unable to buy, saving to buy and choosing not to buy as a lifestyle choice. The demand for affordable PRS housing, moreover, is particularly acute, as rents in London are now 25 percent above pre-crisis levels, compared with 10 percent for the rest of England and Wales, according to housing market data provider Hometrack.

Established in 1983, Hermes Investment Management managed £23 billion of assets as of December 31. Of that amount, 31.1 percent was real estate, the second-largest component of its portfolio after equities.