London lettings are Prime target for Residential Land

The specialist in reworking prime leased central London assets has signed up two North American backers for its latest venture

“A couple of years ago we started looking for institutional partners to invest in the private rented sector, specifically in prime central London, which is our backyard,” says Bruce Ritchie, Residential Land’s chief executive. The hunt was spurred by the credit squeeze. “There is appetite for lending in London, but not at the levels previously available. So the necessity for a larger equity check was the biggest driver for us,” he says.

Advised by Simon Berrill at Macquarie Capital Partners, Ritchie travelled the world, meeting Asian wealth funds, US institutions, property companies and British insurers, before finding his funders: US opportunity fund Apollo, and Ivanhoe & Cambridge Properties, the property arm of the $30bn Canadian pension fund Caisse de Dépôt et Placement du Québec.

They have teamed up in Prime London Ventures, a partnership that will buy blocks of flats in central London’s prime postcodes  and rework them for letting – Residential Land’s successful formula for 20 years.

Ivanhoe & Cambridge is a big Canadian residential landlord and is now targeting foreign cities, including New York and San Jose in the US, plus London and Paris. “They were very specific about the cities they wanted to be in,” says Ritchie. “It was a timing opportunity; we were asking for an equity partner to get involved in London’s private rented sector as they were looking to do what they’d done successfully elsewhere.”

The partnership has £160m of equity  and four properties: Roland House in South Kensington; 56-60 Lancaster Gate near Hyde Park; Garden House in Bayswater; and Elliott House in Marylebone. The plan is to buy from distressed vendors. “We’ve got a target pound per square foot and a discount we’d want to buy at,” says Ritchie.

The partnership is not targeting the super-rich. “We’re happy to be in quality locations, but prefer smaller, more affordable and easier to let units than high-net-worth rentals,” says Ritchie. “There’s also an elasticity effect: as prices rise at the higher end, we benefit strongly at the lower end in our portfolio.”

The average rent in Residential Land’s portfolio is £480 a week and the average flat size 780 sq ft. “We try to have average rents below £1,500 a week, which gives a far larger audience of tenants to keep your properties full and keep your rents slowly but surely moving upwards,” says Ritchie.

Prime central London rents have bounced back by 26.9% since mid 2009, but growth slowed last autumn and has now stopped. However, the strongest part of the market, the £500-£1,500 per week bracket, fell only 0.1% in the three months to February.

Rental growth now sustainable

“I am pleased rental growth is slowing, as the pace was unsustainable,” Ritchie says. “I’d be far happier with mid-single figures per annum for the next few years than double-digits, which cause rents to rise to the level where they present a political problem.”

Residential Land’s formula is to buy stock at the right price, improve or redevelop it and enhance rents with its branding. “This, with perhaps a slightly rising market in the next few years, provides good internal rates of return for investors,” says Ritchie.

He is “fairly confident” of hitting the venture’s 15% internal rate of return target, as “for the past 20 years our average has been 34%”, says Ritchie. He’s “pleasantly surprised” at the amount of stock he’s being offered and is analysing about £1.5bn-worth.

“Our partners are comfortable to fill the gap in debt we might need to buy in quantity in central London. It makes financial sense, as the cost of the debt makes it worth their while to compete as a lender as well as an equity provider,” says Ritchie. “This could grow to a multi-billion platform if we get it right, which is what our intention is.”