Previously we have looked at the relative merits of Real Estate Investment Trusts (REITs) whose permanent capital structure enables managers to target specialised and typically less liquid areas of the property market such as GP surgeries, student accommodation and social care assets. While any investment has to “stack up” for the investor, if its activity can bring benefits to the economy and wider social advancement, then that should be applauded. This is particularly prescient given the enormity of the challenges the UK is facing with regards the under-investment in infrastructure and housing over the last decade at least.
Capital markets can be remarkably efficient when it comes to identifying opportunities to do just that. We are already seeing large sums of capital being raised for listed infrastructure vehicles and that is extending into the REIT space. The latest example is PRS REIT, which successfully raised £250m (with demand from investors far exceeding this figure) to fund the development of newly built quality family homes for rent, predominantly in the regions.
The Private Rented Sector (PRS) is dominated by small scale private landlords, whose portfolios can be hard to manage and are typically focussed on apartments. Many of these landlords may have been forced into the position due to an earlier inability to sell their homes when they needed to move house. Additionally, the expansion of the “Buy to Let” market has been typified by an abundant supply of city centre apartments targeted for “young professionals”. Sadly, for investors and the UK housing crisis, while the supply of city centre apartments has ballooned, the under-supply of family homes has not.
There is a significant undersupply of (new) housing and an expected 10% growth in the population over the next 15 years makes this hard to resolve. The government is keen to address this and its recent White Paper proposed further support and incentives to the PRS sector for institutional investors.
Changes to mortgage rules, particularly with regards to affordability constraints, has bolstered rental demand. Meanwhile, private landlords are facing a tighter regulatory backdrop, a tougher tax regime and the supply of tradesmen for maintenance requirements has become more difficult.
The UK private rental sector by value is over £1trillion. It has grown by 2.2m households in 10 years, with a projected further rise of 1.1m over the next 5 years; equivalent to demand for £300bn of housing. However new supply is insufficient with current total new supply of housing running at only c. £17bn per annum.
Against this backdrop, the imbalance between commercial property and PRS between investor type is shown below:
(Source: PRS REIT)
Crucially, what little institutional investment there is in the PRS industry is almost exclusively in city centre flats as opposed to sub-urban family homes. For example, Liverpool’s former HMRC building on the waterfront was recently converted into PRS apartments by Glenbrook a private developer and investor.
PRS REIT provides a solution; working with established housebuilders Countryside and Keepmoat to source land (often from government departments) and roll out house units at a rate far quicker than can be achieved by the owner-occupier market due to the significant pent-up demand for such accommodation. With an initial targeted portfolio of more than 2500 units, the opportunity to achieve industrial type economies of scale of both construction and maintenance is clear.
With a targeted income yield of 5% (against IPO price), increasing to 6% by year 3; a degree of capital return and a far more diversified portfolio of assets than any private landlord could achieve; the relative merits compared with a private property portfoli