Patrizia targets further push into ‘attractive’ UK PRS sector

Listed German property company Patrizia Immobilien is set to continue its push into the UK private rented sector (PRS) following its first investment in the segment in May.

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.

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, which invests on behalf of institutional investors, often as a co-investor, as well for its own account, says it is seeking to bring more clients into the sector as several factors combine to create an attractive investment environment.

‘Residential investments in the UK have delivered an annual average total return of 14% over a 30-year period from 1982 to 2013,’ Klaus Schmitt, Patrizia’s chief operating officer, told PropertyEU in an interview. This compares with an average total return of around 5.5% in Germany in the last 15 years.

In addition, the sector’s lower volatility compared with other asset classes heightened its appeal for long-term institutional investors seeking to match their returns with long-term liabilities, he noted.

Patrizia, which already manages some 80,000 apartments worth €7 bn across Europe, will target the middle segment in its PRS drive, Schmitt said. The company is keen on university cities in the UK, where ‘the government has done a great job in bringing young people and their prospective employers together’, he added.

‘We can show institutional investors that, thanks to our local networks in Europe, we have a proven track record in the PRS sector,’ Schmitt said.

The Manchester project will form the foundation of Patrizia’s planned UK PRS Fund, which has a target size of £500 mln.

Economic and political drivers
But by far the biggest drivers of growth in the sector are economic, demographic and political, Schmitt said. ‘The severe shortage of housing in the UK, coupled with a sharp rise in house prices, means it is becoming more and more difficult for first-time buyers to get onto the housing ladder,’ he said.

Home ownership rates are declining, particularly among the young, which has led to those under the age of 40 being dubbed ‘Generation Rent’.

Recent research by accountancy firm PricewaterhouseCoopers predicts that by 2025, a quarter of all UK households – or 7.2 million - will privately rent, compared with 5.4 million at present. The biggest increase will be among people aged between 20 and 39, where ‘a clear majority’ will be private tenants within 10 years.

The total UK owner occupation rate is projected to fall from a peak of nearly 70% before the financial crisis to around 60% of households by 2025 and house price growth is projected to level off to around 5% per year.

In anticipation of this trend, the government has launched a number of measures to stimulate further growth of the rented sector. ‘The UK government is doing a great job in supporting the development of the sector, such as moves to offer existing rental stock to tenants and increasing the rental stock,’ Schmitt said.

Rental revolution
Investors and developers – both home-grown and international like Patrizia - are waking up to the opportunities offered by this nascent sector. 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.

The list of names of companies seeking to enter the sector is growing. UK-based institutions such as Hermes, RBS and Legal & General, but also foreign players like Patrizia, Lothbury, Middle Eastern investor Apache Capital Partners and Canada’s Kennedy Wilson are all getting in on the act. Bahrain-based Apache formed a £1 bn joint venture with Moda Living in May to establish a regional PRS platform under which five schemes totalling 5,000 units will be developed in Manchester, Birmingham, Liverpool and the South East.

Other markets
Besides the UK, Patrizia is also eyeing other residential markets in Europe such as the Netherlands, the Nordics and Spain. These provide a good diversification play and hedge against currency risk, which can be a disadvantage such as for Continental European investors in the UK, Schmitt said.

In the Netherlands, the company recently signed a deal with the authorities in The Hague to forward-fund the development of at least 150-200 new homes a year. Similar deals are planned for other Dutch cities. Spain is also rebounding strongly after being hit hard during the financial crisis and offers good prospects in the PRS segment, Schmitt said.