Editor's Choice: Safe as houses

European real estate investors are taking the recommendations of the latest edition of ULI/PwC’s Emerging Trends report to heart: a growing number are getting more creative as they seek to access future prime assets at reasonable prices.

Just look at the deals PropertyEU reported on in the past week: a significant number revolved around development deals spanning the office, retail and logistics sectors. But the biggest deal of the bunch centred on an agreement between Legal & General Capital (LGC) and Dutch pension fund manager PGGM to pump an initial £600 mln (€790 mln) into the construction of 3,000 new homes for the private rental housing in the UK.

Regions on the rise
Interestingly, the development schemes are not only located in London, but also in a number of regional UK cities including Bristol, Salford and Manchester. And despite strong price growth in parts of the UK, the homes are being built to rent rather than sell, Mathieu Elshout, investment director real estate at PGGM, told Dutch financial daily FD. ‘The strategy is “develop-to-hold” for the longer term,’ he said. ‘We will be developing good quality in core markets where we expect above average economic growth.’

PGGM has a reputation alongside its larger Dutch peer APG for its acumen in spotting new real estate investment opportunities. But it’s not the only foreign investor pushing into residential development in the UK. Just this week, listed German property company Patrizia Immobilien confirmed its aim in an interview with PropertyEU to continue its drive into the UK private rented sector (PRS) following its first investment in the segment in May 2015.

Following its maiden €140 mln investment in an eight-hectare plot in Manchester to develop office space and around 500 apartments, Patrizia is looking at other regional UK cities such as Birmingham, Cardiff, Coventry and Edinburgh, the company’s chief operating officer Klaus Schmitt said.

The Augsburg-based company, which entered the UK three years ago and has since built up an overall real estate portfolio of over €1.8 bn, is targeting regional cities in its bid to scale up its presence in the sector, he added.

Opportunity knocks
Demand for private rental housing remains strong. At Mipim UK last year, market experts called for 250,000 new homes every year to mitigate the country’s housing crisis, and said more of these should be in the private rented sector to meet the needs of an increasingly young and fluid working population. Investors and developers – both home-grown and international - are in fact waking up to the opportunities offered by the nascent PRS sector in the UK. A recent report by the British Property Federation (BPF) and law firm Addleshaw Goddard claims that the UK is on the verge of a rental revolution with around £30 bn (€43 bn) of institutional investment earmarked to build and manage new homes for rent.

While expects agree that prospects for the PRS in the UK are bright, it still has a way to go to be recognised as an asset class equal to that in the US, according to Nick Jopling, executive property director at London-based residential specialist Grainger. But change is afoot as more specialist operators – including established US companies - move into the sector and create more scale.

Chicago-based Atlas Residential is a case in point. In August last year, the US operator made its debut in the UK PRS sector together with European fund manager Rockspring following the purchase of a 13,370 m2 site in the southern English coastal city of Southampton from the local city council. Atlas Residential is one of the largest private rental sector operators in the US, having owned and managed over 75,000 apartments with a transaction value of over $7 bn (€6.1 bn).

New fund
In another sign that the UK PRS sector is coming of age, US-based Invesco Real Estate announced earlier this month that it had successfully completed the first close of its new dedicated, open-ended UK Private Rented Sector (PRS) fund with £250 mln (€328 mln) of investable capital, including debt, from five institutional investors in Australia, Canada and the UK.

IRE, which has invested around $16 bn (€14.7 bn) in the US residential sector over more than 30 years, said the new UK PRS fund ‘seeks to respond to the clear opportunity created by Britain’s growing imbalance in residential supply and demand’.

‘The PRS or ‘multi-family’ sector is an established and well-understood asset class in parts of Europe and North America/Canada, so we are particularly pleased to have attracted experienced investors from these regions to our UK PRS fund,’ commented John German, IRE’s senior director of residential investment, responsible for spearheading the firm’s European residential expertise.

Research from Invesco Real Estate shows that under 5% of the UK PRS is owned by institutional investors in the UK compared to over 25% in the US so there is still plenty of room to grow. Moreover, residential investments in the UK have a strong track record, according to Patrizia’s Schmitt. Between 1982 and 2013, the segment delivered an annual average total return of 14%, he said.

With yield compression eroding returns in many other real estate segments around Europe, it’s little wonder that institutional investors like PGGM are targeting the PRS sector in the UK. Not only is it an attractive bet in terms of total returns, it’s also as safe as houses.

Judi Seebus
Editor in Chief