M&G is first institution to make big return to resi, in deal overseen by property arm’s retiring head
Martin Moore is preparing to step down as chairman of PRUPIM after nearly 40 years with the group and with his reputation intact as one of commercial property’s most respected and influential figures. Yet his final, market-defining deal for the Pru couldn’t be farther from an office block or shopping centre. It is, instead, pure residential investment.
Moore leaves next month as PRUPIM, M&G Investments’ real estate investment management arm, is due to become the first UK institution in a generation to invest in the private rented sector, by completing the £105.4m acquisition of 534 rental flats across London and southern England.
For some observers there are echoes of a bygone age when major pension funds and insurance companies – not least the Pru – were the country’s biggest residential landlords. That dominance lasted throughout the mid 20th century, until residential property lost its lustre following the onset of rent controls and regulation. All of which was nicely teed up for Moore’s arrival at the Pru as a young trainee surveyor in 1974.
“I can see long-term investors forming a much bigger part of the residential market than they do today, to a degree substituting the more fragmented private ownership of rented property” Martin Moore, PRUPIM
“One of the first things I was involved in during the first two or three years was working with senior people who at that time were disinvesting the tail of the residential portfolios the Pru built up in the inter-war period,” he recalls.
Institutional investment door reopens
“I saw the sector door being closed with the incidence of Rent Acts and regulation. At the end of my Prudential career I see the door opening again. It may have taken 40 years, but what goes around comes around.”
Indeed it invariably does in institutional circles – and sometimes with a rebranding to boot. Next month PRUPIM will change its name to M&G Real Estate, but the salient point about the residential portfolio is that it is being bought on behalf of the main Prudential Assurance Company Life Fund.
Moore makes a big distinction between this deal and the recent £125m sale and leaseback by housing association Genesis of 401 new-built rental flats in east London to M&G’s Secured Property Income Fund. The fund gets long-dated, index-linked income, guaranteed by Genesis – which is about as secure as residential investment gets.
By contrast, the new portfolio – acquired from Berkeley Group and the Homes & Communities Agency – is all assured shorthold tenancies, heavy on management and with the threat of dreaded voids. In other words, it is the sort of package that UK institutions have deemed too much like hard work, despite years of superior returns over commercial property.
If PRUPIM’s calculations are correct, the 97%-let portfolio will produce 7-10% total returns, which may persuade the institutional naysayers to reconsider the sector.
“I can see long-term investors from the UK and abroad forming a much bigger part of the residential market than they do today, to a degree substituting the more fragmented private ownership of rented property, which has been a bit of a cottage industry in the past decade,” says Moore.
Not so long ago Moore was also a sceptic, although PRUPIM has at least kept on top of the new-build sales market through its long-standing joint venture with Berkeley, called St Edward.
Moore suggests demand in the private rented sector has become far more attractive since the global financial crisis and the increasing difficulties young people have encountered when buying property.
At the same time, a “lot of effort and research” by PRUPIM have reinforced its renewed interest in the sector. “We believe it’s a tipping point,” says Moore, “where residential will move towards commercial, retail and industrial to become the fourth mainstream sector, rather than something that’s treated separately and differently.”
Deeper residential data needed
A common complaint from fund managers is that IPD’s residential index is weighted too heavily to London, while the quality of information on residential performance is less robust than for commercial property. “The data are far from as rich and as deep as one would like,” Moore concedes, “but over time we believe that will improve.
“But PRUPIM has often been seen to be a pioneer and willing to take the first step. We have got as comfortable as we can about the prospects; by analysing the past to help inform a view of the future, we have taken what we believe will be a very exciting and rewarding step for our investors.”
That first step followed nearly a year of negotiations with Berkeley, suggesting that PRUPIM was confident enough in the private rented sector to proceed without waiting for the outcome of the Montague Report last August. “We were happy to make that investment in the environment that exists today,” says Moore.
Future investments will be the responsibility of Moore’s successor as chief executive, Alex Jeffrey, who has benefited from a near year-long handover.
As for Moore, he has come full circle – happy to be retiring from an institution that has re-established itself as a major residential player. “It feels very exciting,” he says. “As I observe the company from outside in future years this will be one area I would expect to see growing very strongly.”