Mountgrange Investment Management has teamed up with the partners of residential specialists Pluto Capital to create a niche real estate debt fund, it revealed today.
The London-based firm said it was investing in a fund to be managed by Pluto Finance that expects to provide £50 million (€56 million; $81 million) of mezzanine loans over three years to help finance residential developments in London and the south east of England. The initial commitment is £25 million, which Mountgrange hopes to recycle twice to give it a total capacity of £50 million in bridging finance loans.
Mountgrange and Pluto said the UK residential development market had been significantly affected by the tougher conditions for bank financing since the credit crunch impacted the market in 2008. Senior lenders have become more capital constrained and speculative lending for new developments has been particularly hard hit, they said. At the same time, some development projects have stalled as a result of tightening lending criteria. Many traditional lenders have also left the market which has added more pressure on developers seeking to fund new development projects or conclude those which have commenced build-out.
In response, the pair aim to take advantage of the funding gap in the residential market and described the opportunity as “potentially fertile”.
While the number of private residential developer units has dropped radically between 2007 and 2010 from 200,000 to 90,000 units per year, population growth and increasing household fragmentation should increase the number of residential projects in the UK at an average of 252,000 units each year until 2031, they argue.
Central London and regions close to London are expected to outperform and will lead the recovery in the residential market, Mountgrange said. The new fund, the first institutional fund of its type and size to serve this sector, will consider investment opportunities of £2 million upwards to sit alongside debt financing and developer equity.
Rob Mills, a Mountgrange partner, said: “The residential property market in London and the South East is set to experience growth as the region is well-placed as the economy emerges from recession. Despite this, developers continue to experience difficulties in sourcing adequate funding both for new projects and to kick-start those which have stalled because lending banks have curtailed facilities. Our new fund with Pluto is designed to help correct this investment stagnation.”
The team from Pluto include Chris Philp, Andy Blenkinsop, Iori Antcliffe and Andy Scotting, who have developed Pluto’s property financing model based on experience managing a large portfolio of UK property development loans on behalf of an undisclosed major US finance house.
Philp said: “We are aiming to fill the gap left caused by the significant reduction in banks’ development lending. Having identified this opportunity, we sought a partner with the property investment expertise to marry up with our market knowledge and asset management skills. Pluto and Mountgrange together have the experience in this sector, and the funding, to make a difference to developers seeking to arrange financing packages to take their plans to fruition. We expect to be able extend the fund’s investment profile by attracting additional investors in due course. ”
Pluto has offices in London, Serbia and Montenegro, and already manages a development fund which is active across a range of sectors – from city centre residential and coastal holiday homes to major retail and commercial projects.