Totally Ordinary Mid-Market Houses Are Now Hot Properties
Covid-19 has done it again.
The UK Residential REIT, a proposed closed-ended real estate fund, is targeting proceeds of £150M from an initial public offering on the main market of the London Stock Exchange.
The REIT is also planning an issue of up to £50M to help fund seed assets.
Its aim is a diversified portfolio of affordable, privately rented residential real estate assets in UK regional cities. It has a £440M pipeline of near-term acquisition opportunities and is targeting 10% net return for shareholders.
The pandemic proved the regional private rented sector could be a defensive asset class.
The new venture is not looking for anything very special: The promoters don’t use the words “bog standard,” but they do make it clear this is not targeted at the higher end of the market. Instead the REIT will aim for mid-market PRS homes that are affordable, relative to the local demographics. Judging by the first buys, rents will be around 20% of the tenant’s disposable income.
The promoters call this “day one income generating PRS properties, which have the benefit of a track record of historical occupancy providing predictability and security for the future net rental income, let at mid-market rental prices, in attractive regional city locations.”
The UK Residential REIT will start with the immediately income-producing Seed Portfolio, valued at £145M. The 28-property portfolio includes 1,214 residential units, six ancillary ground-floor commercial units and two student blocks located in strong rental macro-locations outside of central London, which include Manchester, Sheffield, Leeds, Liverpool and Bristol.
The Seed Portfolio performed well during the Covid-19 downturn, with 96% rent collection in 2020 and 95% average occupancy in the past two years.
The purchase price for the portfolio is at a 29% discount to the rebuild or replacement costs, the company said.
The move is a step ahead of most of the market: Today, institutional investment represents just 4% of the PRS market.
The venture will be managed by L1 Capital UK Property Advisors Limited.
Promoters say the PRS market has exhibited growth of 4.1% per annum since 2000 and risen from 2 million households to 4.6 million households in 2020, underpinned by tenants’ restricted access to alternative housing tenures, tightened lending requirements since the financial crisis and an inherent structural undersupply of housing within the UK.