“As with many things, we have reached a tipping point,” says Ben Sanderson, director of fund management at Hermes Real Estate, which recently joined forces with property service giant Countrywide to launch a UK residential fund. “Investors are looking at the particular characteristics of residential and have seen that it has outperformed commercial real estate over the long term. They are also looking for different correlations, diversification benefits and a balance of capital and income. Typically residential will give you a lower income yield but a higher capital growth and total return.”
Given the choice, institutions would prefer buying ready-made blocks of rented homes in order to avoid the upfront costs and risks associated with planning and construction. Deals, though, such as the one struck by the real estate arm of M&G in 2013 are rare. It bought 534 existing homes for £105m from developer Berkeley Group with the majority being one or two bed flats in 13 different locations across London and the south.
“The UK has the oldest housing stock in Europe and the PRS is a common reflection of that and the quality of management,” says Alex Greaves, residential fund manager at M&G, which has been one of the longest investors as part of thePrudential. “The assets under management are hard to get and the barriers of entry are high as it is difficult to find people with the right skills. Things are changing but it will take time.”
Richard Levis, global real estate analyst with Aviva Investors, agrees adding: “In the past residential was seen as too difficult to invest in but now people see it as an alternative to commercial property. One of the biggest challenges though is that unlike in other countries such as the US and Germany, the infrastructure does not exist. It has to be created from scratch. This is not easy to do, which is why we are seeing fund managers forge partnerships with developers to build new homes.”
The benefit of developers is that they are often better placed to navigate the complex planning maze and can leverage their relationships with local authorities.
As John German, residential investments director at Invesco Real Estate, notes: “It is paramount to form partnerships with developers who are able to create viable investment opportunities in this sector. The company collaborated with Be:here, Willmott Dixon’s PRS company to acquire the freehold on 118 PRS units for £32.5m in Hayes. “They have been able to source the sites, secure planning permission, develop and eventually manage the completed building.”
One of the most successful affiliations has been between UK-based developer Delancey and Qatari Diar, the property arm of the Qatari sovereign wealth fund. They were involved in the largest transaction to date – the £557m deal to build 1,439 properties in the former Olympic Village at Stratford, east London. The flats will be rented out on long-term three-year tenancies, with no management or agents’ fees.
Other fund managers active in the market include LaSalle Investment Management, which teamed up with Dutch pension fund APG to finance £238m of debt for residential projects in London and student housing elsewhere in the UK. APG has also been involved in other weighty residential deals, including last year’s acquisition of the Elephant & Castle shopping centre in a joint venture with developer Delancey to build a large-scale buy-to-let scheme.
The competition is only set to intensify. Late last year, Hermes threw its hat into the ring by pairing with Countrywide to launch a UK housing fund seeded with £95m of equity, which could grow to £1bn gross asset value over five years. This followed on from Cordea Savills and Mill Group, which both announced last September plans to raise PRS funds of around £300m each.
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