Pramerica to bring ground lease strategy to Europe

Pramerica Real Estate Investors is in talks with European institutional investors about rolling out its UK ground lease investment strategy to Continental Europe.

'There is no reason our ground lease business can't reach a billion-plus in size over time,' Paul Dennis-Jones, director of UK real estate at Pramerica told PropertyEU. 'Given the demand we have seen for the UK Ground Lease Fund, I imagine we could generate equity commitments in Europe to match the amount of underlying assets that we could buy,' he added.

Dennis-Jones said the company is currently talking to European insurance and pension providers to educate them about investing in ground leases. The process will probably take six to 12 months. 'But as soon as we are confident that investors are comfortable with the product, we could launch our strategy and start buying,' he added.

The ground lease business is now firmly established in the in the UK, and Pramerica has some EUR 500 mln in equity allocations divided between a fund and a separate mandate to invest in ground leases.

A ground lease is like a bond as the holder is the first to be paid, even in the case of bankruptcy. The business is also driven by the pricing of bonds: at a time when long-dated UK gilts are offering a return of zero to 1.5%, investors can get 3% on UK ground leases. Therefore the equity for ground lease investment tends to come from an institution's bond rather than real estate allocation.

Earlier in March Pramerica reported that it has secured £44 mln (EUR 52.6 mln) in new subscriptions from UK pension funds for its UK Ground Lease Fund, increasing the amount committed to this vehicle to about £285 mln.

The new subscriptions bring the total amount Pramerica has allocated to the sector to £420 mln (EUR 500 mln). They follow a November 2011 announcement that the company won a separate account ground lease mandate to manage £135 mln on behalf of a UK corporate pension fund.

Since the transfer of the fund from UBS to Pramerica on 1 September 2010, the vehicle has sourced and transacted ground lease deals worth £135 mln, with assets diversified across the office, hotel and residential sectors. The most recent acquisition was that of a portfolio of six hotels from the Principal Hayley Group for £90 mln.

Pramerica Real Estate Investors is the European arm of the real estate investment management and advisory business of Prudential Financial, which is headquartered in the US.