PRUPIM and APG deals show institutions warming to private rented sector, writes Doug Morrison
If it’s true that good things come in threes, then 2013 could mark a step-change in institutional investment into privately rented housing, after years of fund managers standing on the sidelines.
The sector has sprung to life this year following three influential deals – two involving PRUPIM and the other a joint venture between Dutch pension fund manager APG and Grainger, the UK’s biggest private landlord (see below).
What is all the more remarkable about these deals is that none of them was directly attributable to Sir Adrian Montague’s housing review, whose favourably received recommendations for boosting investment in rental stock have been swiftly enforced by the government.
Last August’s Montague Report has undeniably added to the investment momentum in the sector, but the latest entrants to the market have turned to housing simply because of its inherently strong supply and demand dynamics.
As Europe’s largest pension fund manager, APG’s investment represents a blue-chip endorsement of a sector that has already attracted an eclectic mix of overseas investors over the past two years: Qatari Diar, which partnered with Delancey to buy the London Olympic Village; US opportunity fund Apollo and Canada’s Ivanhoe & Cambridge Properties, which backed Residential Land in a prime London fund; and Swedish charitable foundation Akelius, which plans to amass a 10,000-unit portfolio.
“We are going to see some new players coming into this market, with the confidence that the private rented sector is a good alternative for their cash” Andrew Pratt, CBRE
Their enthusiasm has been in contrast to the reticence of domestic investors – until now. PRUPIM’s double swoop means it has become the first mainstream UK institution in a generation to make a big-money commitment to residential.
“We think it will capture people’s attention and encourage them to look at the sector more closely,” says PRUPIM chief executive Alex Jeffrey. “That’s probably a good thing, because it will increase liquidity and general interest, hopefully improve the quality of data and encourage high-quality managers into the sector.”
CBRE, advisor to Akelius in the UK, is in talks with overseas investors looking to break into the UK market, says Andrew Pratt, the firm’s residential investment consultant.
Rented sector attracts new entrants
Pratt suggests the latest deals – particularly PRUPIM’s exchange of contracts with Berkeley Group last month for market-rented stock – will encourage a range of entrants to the sector in the coming year, including UK institutions, as well as “prolific” residential investors from North America and Europe.
“We’re going to see some new players coming into this market with confidence that the private rented sector is a good alternative for their cash,” he says.
Pratt’s assertion is supported by the latest Investment Property Databank figures, which show residential has outperformed other asset classes in the long term and only lagged behind equities in 2012 (see chart below).
CBRE’s latest research suggests financial returns have been underpinned by a big rise in the private rented sector’s size and importance. CBRE says the shift away from home ownership towards private renting has pushed up the latter’s share of households from 12% to 17% in England and Wales.
According to Bill Hughes, managing director of Legal & General Property, while the underlying performance of the sector is not in dispute, finding the right model for rental property remains a challenge.
He also points out that L&G adopts a more rounded approach to housing than many other fund managers – in the past year alone, student accommodation and housebuilding have formed part of L&G’s investment strategy.
“As far as the private rented sector is concerned, my firmly held view is that the only way to be successful is to build to rent – design specifically for a rental product so that as you go into the sector, you can then have a product that works,” he says. “It’s to do with rental specification in large, single developments, which brings with it the ability to manage those units efficiently.”
In other words, Hughes says, the design needs to reflect a higher turnover of tenants compared with owner occupier properties, while rental blocks should have more lifts, wider corridors, big door spaces and a different configuration of bedrooms.
“There are lots of fundamental reasons why we would say that the private rented sector has got to be designed and fit for purpose,” he says.
“If an institution invests in owner occupation units that happen to be providing a rental income, in my view that is fundamentally flawed. It might be just good enough, but it’s nowhere near as efficient, or as appealing, as build-to-rent for purpose-built, specified units.
“I would suggest that recycling owner occupation stock that happens to be producing a rental income is not the future.”
Hughes adds: “We’re committed to finding a solution for build-to-rent housing. We believe we’ve got enough knowledge and property skills to operate sufficiently early in the supply chain to ensure that we can create value. We’ve got a number of conversations going on at the moment about how we would deliver stock that is fit for the long term.”
Montague report enshrines build-to-rent
Build-to-rent is at least enshrined in the government’s post-Montague Report policies, particularly a new development fund that has seen 45 developers pitch for a share of £700m. The government will announce a second tranche of developers in June, pitching for a further £300m.
In a sense these developers are seeking to emulate Berkeley and the eventual sale of its rental portfolio to PRUPIM. In the process, the government claims, the fund could create up to up to 10,000 homes across the UK, although applications for funding are still subject to due diligence. Whether all of these proposals involve schemes actually designed for rent remains to be seen.
Nick Jopling, executive director of Grainger and a member of Montague’s advisory panel, believes one of the report’s more contentious recommendations will prove beneficial to institutional investors.
Montague argued that planning authorities should waive s106 obligations for social housing on an application for private rental housing, but with the proviso that the scheme must remain rental property for 10-20 years.
Putting this in the covenant means the property is not required to be valued on a vacant possession basis, which has been an anomaly of the private rented sector to date and a big sticking point for institutions. As Jopling says, such a covenant can be enforced by councils without the need for new legislation.
He adds: “I think people will look back at the Montague Report as the tipping point for getting institutional investment in the private rented sector.”
Hat-trick for rented sector
Pru is assured of 7-10% return…
PRUPIM will next month complete the £105.4m purchase of 534 private rental flats from the Berkeley Group and the Homes and Communities Agency.
When created in 2010, the portfolio was more about getting Berkeley to build than build-to-rent. The flats were not designed any differently to neighbouring flats for sale but the initiative helped extract development finance from the HCA and bring forward major schemes by several years.
PRUPIM’s main Prudential Assurance Company Life Fund nonetheless stands to gain total returns of 7-10% from flats in 13 locations, such as Kidbrooke Village in south-east London (pictured above).
…and finds Genesis for M&G buy
In January, housing association Genesis agreed a £125m sale and leaseback of 401 flats in its Stratford Halo development in east London to M&G’s Secured Property Income Fund.
Genesis will pay M&G, a subsidiary of insurer Prudential, £7m a year, adjusted to RPI, for 35 years and take responsibility for managing and renting the flats out to private rather than social tenants.
“That fund is catering for a range of third-party investors who are looking for this long-dated, inflation-linked income that matches their liabilities very closely,” says PRUPIM chief executive Alex Jeffrey.
APG gets GRIP in London
Dutch pension fund manager APG joined forces with Grainger in January to buy the assets belonging to the latter’s G:res1 fund, placing them in a new vehicle, called GRIP.
This unit trust starts with a £349.4m dowry of market-let blocks in London – such as 181 Este Road, Battersea (pictured right) – but with a remit to purchase more in greater London, and to seek build-to-let development opportunities.