UK resi fund gains momentum

The opening-up of the UK residential property fund market to institutional investors has gained momentum as specialist fund manager Hearthstone Investments announces a deal to seed its new fund.

London-based Hearthstone said it had agreed to buy £22.5 million (€28.7 million; $35 million) of show homes from Britain’s biggest home builder, Barratt Developments in order to seed an open-ended fund called TM Hearthstone UK Residential Property Fund. It comes just days before the vehicle is ‘soft marketed’ to potential investors.

While a relatively small investment deal, the announcement is nevertheless significant because institutional investors are only now beginning to be offered a fund route into Britain’s residential property sector. The sector is estimated to be worth trillions of pounds by UK industry body, the Council of Mortgage Lenders – more than the value of listed equities and commercial property combined.

In a statement today, the firm said this was the first of £50 million-worth of transactions with major housebuilders and that the fund would be formally rolled out to investors in September.

Christopher Down, Hearthstone founder and chief executive, said Barratt’s showhome portfolio would provide the fund with “immediate scale and income” together with deals with other partners yet to be announced. He said also it would give investors and their advisers the ability to “invest with confidence”.

Hearthstone launched two years ago and in May this year became the UK’s first residential Property Authorised Investment Funds (PAIF) to gain approval from the Financial Services Authority (FSA). “The Hearthstone business was set up to fundamentally change the way the UK invests in residential property,” Down said. “We believe that investors should have the same choices in residential property as they do commercial property and other asset classes, and our strong relationships with Barratt and other housebuilders will play an important part in achieving our goal.”

Down highlighted how there was a place in the UK’s for its ‘fragmented’ buy-to-let sector. The UK’s private rented sector alone is worth £750 billion, but up until now investors have been limited to buying property directly or investing in small, unregulated funds, both of which carry substantial risks. In order to encourage greater institutional investor participation in the private rented sector, the UK government has commissioned 3i chairman Sir Adrian Montague to issue a report on the matter, with his findings and recommendations expected to be published this summer.

Down added: “While individual buy-to-let portfolios and owner-occupiers will remain important, the reality is that the country needs investment in housing on a scale which these methods cannot deliver. Professionally managed funds are a very important tool, long-established in other countries, which will deliver this investment and offer advantages for both investors and the industry.”

Mark Clare, chief executive of Barratt Development, said: “We are pleased to be playing our part in the creation of the UK's first FSA-authorised residential property fund. This new fund is an important strategic development in our marketplace – the creation of a professional private rental fund operating at scale, which is something that the UK really needs.” See PERE's Friday Letter for how the Olympics' site in London serves as a reminder of institutional demand for the UK private rented sector.