EDR REIM: Debt costs do not ‘make sense’ for UK residential development

The manager, which has sourced a £42m loan for a Birmingham BTR scheme, will pause further borrowing activity in the sector due to the rising cost of debt.

Edmond de Rothschild Real Estate Investment Management, which this week announced it had sourced £42.3 million (€47.8 million) of financing for a build-to-rent scheme in Birmingham, has said it is unlikely to take on further UK residential development finance this year due to escalating debt costs.

EDR REIM is currently investing through the Edmond de Rothschild Residential Investment Fund UK, which held a final close last year on £320 million. The vehicle invests in the private rented sector in the UK and has a focus on “need and affordability”.

Speaking to Real Estate Capital Europe, James Whidborne, head of fund management, residential UK, at Edmond de Rothschild, said that, in reaction to the sharp movement in base rates, the fund is unlikely to look to obtain new development finance “over the next 12 months”.

“At the moment, the cost of development finance, when you account for transaction fees and costs, is close to parity with the fund’s target return (8 percent). So, it just doesn’t make sense to us to use debt. We’re close to negative leverage,” he explained.

He added that movements in capital market pricing this year may make the firm reconsider whether debt is accretive or not for future development opportunities.

The manager signed its first – and what could be its last – construction financing deal in the sector this year, with UK bank Barclays providing the five-year loan. The financing will enable EDR REIM to continue the development of Kent Street Baths in Birmingham. The project will see it construct 406 BTR units in Birmingham’s Gay Village. The scheme is due to complete in April 2024.

Whidborne explained that the deal, which was underway before last year’s sharp increase in debt costs, continued to make financial sense to the fund.

“Barclays and EDR REIM have been working on it together for over two years. So, it’s been a long-term project,” he said. “We have a range of lenders spanning from Barclays and other clearing banks through to more alternative lenders, and certainly Barclays show good value within that spectrum. It’s a longstanding relationship.”

Barclays provided a similarly sized finance deal to EDR REIM in 2019. The lender provided a £40 million loan to EDR REIM’s Cording UK Residential Investment Fund – a vehicle inherited by EDR REIM when the firm acquired a majority stake in Cording Real Estate Group in 2017. The deal was to finance two UK PRS developments in Leicester and Warrington.

While EDR REIM will not seek out new development finance for UK residential schemes, Whidborne said the firm will undertake refinancing and loan extensions this year. He also believes loan margins are beginning to come down but not enough to compensate for the base rate movement this year.