Invesco Real Estate has bought into PRS developer Platform through a joint venture – the first portfolio deal of its kind in the burgeoning UK residential rental market.
The pair have created a £116m jv seeded with 580 units across five blocks developed by the Westrock-backed Platform.
The non-exclusive partnership will run for 10 years. Invesco will own a majority stake in the assets while Platform will retain a minor equity interest and continue to manage the blocks. As well as retaining its minority stake, Westrock will provide development finance to Platform.
Under the terms of the deal, at the end of the 10 years Invesco can continue the current arrangement, with Platform managing the assets, or it can buy its partner out completely.
Since the 2012 Montague Review, in which the government acknowledged the importance of PRS, a new generation of sector-focused developers established themselves to create a pipeline of developments and management platforms to sell to the institutional market and provide a ready-made business to service the assets. The sale by Westrock-backed Platform is the first such deal.
John German, senior director of residential investments at Invesco Real Estate, said the pair had spent a lot of time working together on how best to structure the jv.
“We have here a partner who has been through the growing pains. That’s already been borne by Platform and Westrock. For us to be able to park £116m in income-producing assets is attractive to us as an investment manager but to also our investors.
“We see this as similar to how we operate in the US, where we may have a building operated by Bozzuto or Greystar, and effectively it will be branded by the underlying operator,” he said.
Invesco has invested more than £17bn in the US residential market throughout its 35-year history and announced its UK PRS intentions in 2014.
It announced its first UK deal for 118 apartments at the Old Vinyl Factory in Hayes in partnership with be:here in 2014, but made no further announcements until a new £250m fund was raised in early 2016 from a group of institutional investors.
Platform was set up by US private investment firm Westrock in 2014, and amassed a PRS portfolio through the conversion of a number of offices across regional locations in the South East and South West. It was spun out into a separate business in 2016, with the appointment of Jean-Marc Vandevivere, the former head of residential at British Land, as chief executive.
“The strategy is to build up Platform as a big company, a big operating company and manager of assets,” said Vandevivere.
“In order to get there, we have got equity from Westrock. The ambition is much greater than what Westrock would be able to provide if it was keeping all its equity invested in every single asset.”
Platform intends to further expand its pipeline and take on more direct development. The partnership will look for future co-investment opportunities but both will also continue to pursue separate projects in the sector.
“The cost of equity is naturally more expensive for Westrock than the cost of equity for pension fund-type money,” he adds. “It’s different equity for different risk-return profiles. That’s why we are using the Westrock equity to take more risk.”
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Comment: Is there really such a depth of appetite for PRS investment?
Will Rowson, partner, Hodes Weill
Immature and fragmented are the best words to describe the UK PRS market at present, but it is clearly a rapidly growing sector with enormous focus given the lack of “affordable” housing in the major cities and especially in the South East. The mature European markets of the Netherlands and Germany are decades ahead of the UK in provision of rented stock, mainly due to consistent government policies allowing the institutional investment market to flourish.
A lack of supply in any market with strong demand generally means that capital should be easy to raise for most real estate strategies, but there are hurdles for UK PRS which make this harder than expected. Firstly, there is very little purpose-built stock of the concentrated scale that makes PRS really become efficient. Rented housing yields are low to begin with, but then reduce the return by a further 25% for the operating costs and income returns can be very low, between 2-4% net. However, the institutional PRS sector on the Continent proved to be very resilient during the 2008-2012 period and hence these returns can be viewed as “bedrock” income for liability-matching institutions.
The lack of stock also means that the market needs to create it either by attracting risky development capital or through forward funding from institutions or PRS funds. Investors in the longer-term PRS funds therefore will have an annoying “J” curve to wait through to get these income returns. In our experience there is demand from UK and some Continental European investors for the longer-term UK model but this capital pool remains limited, hence causing “lack of equity” issues for some fund managers trying to raise PRS funds.
There is a huge opportunity in the development of PRS stock, but it needs specialist knowledge of efficient design and a cooler build-to-sell market or local authority intervention to allow the PRS developers to outbid the rest of the market for the best schemes.
All in all, the capital pool for UK PRS is more limited than may be assumed.