The UK’s residential rented property sector is very different to that of the Netherlands and other markets. Being so fragmented, it is not an institutional asset class yet, which explains why there are hardly any large rented portfolios for sale in the UK. However, if you are APG, the giant Dutch pension administrator with some €325 billion in assets and a lot of investment experience, the lack of a UK institutional market is hardly an insurmountable problem.
Having decided it liked the London rented residential property sector, APG was presented with an opportunity via an existing relationship with Grainger, the largest listed residential landlord in Britain, in which APG already owns a stake. Knowing the manager via the listed equity, it wasn’t such a big leap to form a fund with it.
Last month, therefore, it was announced that APG and Grainger had created a new vehicle called ‘GRIP’ owning approximately £349 million ($553 million; €415 million) of rented residential property, mostly in London and the southeast of England. The new fund has been structured as a five-year vehicle that can be renewed.
Robert-Jan Foortse, APG’s head of European property investments, told PERE that the pension administrator’s residential property portfolio in Europe had been located mainly in the Netherlands via a large minority stake in Dutch property company Vesteda, equating to roughly €1.2 billion of residential property. It also has had residential exposure to Germany since 2007, when it made an investment alongside US residential REIT Archstone.
Foortse said the Grainger deal is the first purely London-focused residential property investment APG had made. He added that the deal showed its “willingness and aptitude” for working with investment managers “to modernise, recapitalise and extend the life of existing vehicles owning good quality real estate.”
The backstory to the deal is as interesting as the investment thesis. In 2005, Grainger created a property fund, G: res 1, in which it owned a 26.2 percent equity stake worth around £50 million. However, unidentified investors in G: res 1 became restless and asked Grainger to liquidate the fund. Indeed, in June 2011, investors voted to that effect, but Grainger wanted to retain the management of the vehicle to expand its third-party fund model. Hence, the need for a solution.
As a result, Grainger, the existing investors in G: res 1 and APG, advised by Macquarie Capital, came up with a solution whereby all parties essentially got what they wanted. The assets of G: res 1 have been sold to the newly-established GRIP fund, into which APG is investing £158 million. Grainger remains as the fund manager, asset manager and provider of property services and earns roughly the same fee as it would have this year from G: res 1, plus the potential to earn additional performance fees. Furthermore, Grainger will re-invest £59 million from the sale of its stake in G: res 1 into the new fund and inject another £9 million of fresh equity.
“We see APG’s commitment as a clear acknowledgement of UK residential property’s growing appeal as an institutional asset class,” said Andrew Cunningham, chief executive of Grainger, in a statement.
Grainger and APG currently are out in the market looking for one or two ‘like-minded’ institutions to further grow the fund. Such is the interest in the UK residential rented sector that such investors surely will not be too hard to find.