Throughout the first half of 2015 a number of real estate investment management houses have been investing heavily into the UK’s private rented sector (PRS) as they try to take advantage of a lack of housing supply.
Previously, the sector has been somewhat of a cottage industry largely down to there being very little stock available for large amounts of institutional capital to be put to work. But this is set to change with groups such as Delancey with APG Asset Management, Realstar Group, Legal & General Capital, the principal investment division of UK insurer Legal & General, Patrizia Immobilien, the German-based real estate investment company, LaSalle Investment Management, and Apache Capital Partners, the London and Gulf-based private real estate investment management firm creating their own stock. The list extends beyond far beyond this one, but the rationale remains the same as the sector is to achieve a better match to long-term annuity liabilities than existing fixed-income assets, according to Andrew Stanford, UK residential fund manager at LaSalle Investment Management.
“As a house we feel very positive about residential as an asset class in the UK for a number of reasons. The biggest one is the low correlation and attractive risk-adjusted returns compared to other UK asset classes, like equities, gilts and UK commercial property,” Stanford says. “We also see it as being a good medium of accessing inflation-correlated investment because it is one of the asset classes that most closely relates to inflation when you compare it against retail, office and industrial for example.”
Further fuelling the institutional appetite for UK residential is government intervention. The UK government is investing £1 billion (€1.4 billion; $1.6 billion) in a Build To Rent Fund, which will provide equity finance for purpose-built private rented housing, alongside a £10 billion debt guarantee scheme to support the provision of these new homes. The debt guarantee is designed specifically to attract investment into the private rented sector from fixed-income investors which want a stable, long-term return on investment. Furthermore, it set up a specific PRS taskforce which was led by Stanford.
“There is a widespread view that we have been undersupplying the housing market by about 100,000 homes per year and that is insufficient to satisfy the growing demand,” Stanford relays.
This is leading to large institutions moving up the risk curve and taking on development risk to generate their own stock. L&G for example kick-started a £1 billion program of investment by acquiring a regeneration site in Walthamstow in east London for £25 million in February. The firm plans to develop and rent more than 300 apartments on the site. L&G followed up with an investment in New Bailey in the Salford area of Manchester which was devised and designed by English Cities Fund – a joint venture between Muse Developments, L&G and the Homes and Communities Agency – last month.
“My view is that it’s a misnomer to call it PRS, this is not about the private rented sector,” Bill Hughes, managing director of L&G Property, told PERE. “The private rented sector is a description of the cottage industry that we have had in the UK where people have Buy to Let mortgages on a personal basis. My view on what we are talking about now and what L&G specifically is trying to get into and address is Build to Rent, a whole different thing.”
A key differentiator of the Built to Rent (BTR) product will be the services and amenities available at these sites. Take New Bailey which will also feature a 125,000 square foot office development – currently under construction and due to complete in May 2016 – and a mix of cafes, bars and restaurants, as well as a new public square and an outdoor events space.
Hughes says that L&G is building with a purpose-built specification in mind, something that is built for the rental sector and will never be used in the owner occupation world. “BTR in the UK does generally not exist at the moment. We are not interested in buying houses built by house builders because they can’t sell them and then saying they could be rentals. We believe in developing a new sort of purpose-built product for the UK rental sector and that’s what we are interested in and excited by.”
Apache are following a similar path. The firm is set to create a UK private rental sector portfolio valued at £1 billion through a joint venture with UK PRS specialist developer and operator Moda Living to create purpose-built, rentable property. The pair currently have a pipeline of approximately 5,000 units across the UK.
“The strategy with Moda is simple,” says Richard Jackson, co-founder and managing director of Apache. “Acquire prime sites in the largest regional cities to develop the PRS building of choice in each location. That is focusing heavily on high quality amenities, services and specifications. The reason why we are focusing on that is, if you look at the sectors we have already invested in – student accommodation and healthcare – we are actually creating someone’s home. So you have to think about the ultimate occupier and create something people want to live in.”
Apache’s portfolio will be concentrated on regional centres where there is population growth and an undersupply of residential accommodation. The seed asset of the portfolio is the Angel Gardens development in Manchester which includes a 36-story tower, comprising 458 units, gardens and resident amenities. Angel Gardens residents will have exclusive use of all amenities within the building, including resident lounges, a cinema room and business meeting space.
Continuing the theme is Patrizia, which is raising a dedicated fund for the strategy, and made its first foray into the UK sector with the acquisition of the First Street site in Manchester last month. Patrizia acquired the partially-developed site, which includes an 180,000 square foot office building, capacity for the development of up to 1 million square feet of office space and approximately 500 new apartments. A source close to the transaction said the development is expected to be valued at approximately £500 million once it is completed.
And, according to James Muir, managing director of Patrizia UK, “the focus on providing amenities and services with the residential units makes sense when there is nothing nearby. But when PRS opportunities have come through mixed-use or commercial investments with a residential element, the broader place-making may mean services and facilities are already in abundance. A good example of this is First Street in Manchester.”
Other assets recently completed at the First Street site include a 208-bed Melia Innside hotel, nine bar and restaurant units, and 700 carpark spaces. Patrizia will develop offices and residential on the remainder of the site over the next five years to seven years.
Yet, the sector is not only of interest to real estate players looking at building PRS units from scratch. One such group is Kennedy Wilson, the London-listed real estate investor, which has taken a purely opportunistic approach to UK PRS. The firm secured the 294 units at Pioneer Point, in Ilford, east London by buying the debt.
“It was a really complex situation,” says Mary Ricks, president and chief executive of Kennedy Wilson Europe. “We were buying the debt, the previous developer was overspending and had lots of issues with the ownership and within the asset itself. For us, because it was a complex situation on a product we know it worked out really well. In the PRS space in the UK, to the extent something is complicated, and be it debt, development issues or structuring, that is something we would want to be involved in. We won’t be there competing with your PRS institutional investors.”
Grainger, the residential property specialist, is also getting in on purpose-built PRS and has just completed Abbeville Apartments, 100 PRS units in Barking to the east of London. Yet, despite the increased stock that all the above groups are promising, Derek Gorman, managing director for market rented assets at Grainger, says it will still take some time before the UK PRS supply side catches up with demand.
“The real issue we have in the market right now is that there is no established secondary market, trades in that market are difficult because we haven’t got the product to trade and so trying to price product is difficult. You tend to go back to discounts to vacant possession value as if you were to break them up and sell them as individual units.”
But, with a handful of real estate investors aiming billions of pounds at creating an institutional scale UK PRS asset class the sector looks set for a paradigm shift in the near future.
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