Dutch pair eye UK’s PRS market

[gallery type="slideshow" ids="873402,873403"] ANALYSIS: The UK PRS is widely mooted as ripe for investment, but the advances of two of the Netherlands’ largest pension funds is perhaps the ultimate seal of approval. For APG and PGGM, which have a combined €648bn (£549bn) of assets under management, the projected returns from PRS match their long-term liabilities. And while the sector may be a concept some UK institutions are still getting their heads around, for them it has long been familiar. Confidence bolstered The duo’s confidence has been further bolstered by the government’s housing white paper, released last week, which suggested making build-to-rent a formal part of the National Planning Policy Framework. Robert-Jan Foortse, head of European non-listed property investments at APG, said that no geopolitical concerns had changed the opportunities he saw in affordable UK PRS. He said: “We try to focus on those markets and those projects where we feel that strong underlying demand will protect us somewhat from these risks. “People still need a place to live, and we are active in the affordable segment of the market in growing regions, which implies there will be demand for these kinds of units going forward.” APG, which has €443bn in AUM, entered the London PRS market in 2013 when it partnered with Grainger to create GRIP, a £349m fund focused on the sector. GRIP, which converted to REIT status last year, now has a £600m portfolio in the capital and the South East. For the Dutch pension fund, the decision to invest in UK PRS was an obvious extension of the work it does in Germany and the Netherlands, where there is a stronger tradition of renting. “We always wondered why PRS did not exist in the UK – we believed it would work there. We decided that if the market’s not there, why not help create that market?” said Foortse. Transforming the market Between new-found support from the government for PRS and a demand from millennials faced with soaring house prices, APG has seen an opportunity to play a role in transforming the market. “Where PRS was always a ‘moms and pops’ industry in which people would rent out single units, as you do it more professionally, it’s becoming a better-perceived industry,” said Foortse Last year, APG, Delancey and Qatari Diar started a £1.4bn residential investment partnership with an initial portfolio of 4,000 rented homes in East Village, Stratford, E20, and another scheme at Elephant & Castle, SE1. Part of the goal was to create a brand – Get Living London – that would be associated with professionalised PRS. The project now has 2,000 homes under management with a further 3,200 in development. However, with all of its investments focused on London so far, the pension fund is looking at new markets outside the capital where housing and development costs are more sustainable, Foortse said. Earlier this month it appointed Rick de Blaby as executive vice-chairman to help lead the charge. According to construction consultancy Turner & Townsend, low-rise apartment development in London cost £242 per sq ft in 2016 and that figure is expected to grow by about 3% this year. In the North, build costs are only £151 per sq ft. “We’re not active in the luxury part of the market. It’s the affordable part of the market that’s important to us. If we can’t develop in London because of rising prices, then we have to make a choice: either do nothing and wait for prices to come off for a year or two or three, or start looking at other cities in the UK,” said Foortse. He added that although there is no “second London”, APG was looking at Birmingham, Manchester and Leeds to see whether the demographics and returns make a case for investing in affordable housing long-term. As in London, entry into a new city could take years of planning. Foortse’s efforts to develop affordable housing go beyond investing in what APG sees as a resilient market with long-term returns. He said it fits into APG’s responsible investment initiative as it targets a growing need in UK society. He said that with an extensive portfolio, his firm can take an active role in the community and work with local authorities toward a solution to the shortage of affordable housing. “People will have a pension when they retire, but if they have some money and live in a society that is unliveable, what does that money do for them?” said Foortse. “We always need to get the right returns because that’s why we are here, for the participants of the Dutch pension funds we serve. But it’s also nice to be active in a part of the real estate sector that is helping to solve society’s problems.” PGGM hits the mid-market While APG has taken on affordable housing, PGGM, which has €205bn in AUM, partnered with Legal & General last year to deliver at least 4,000 mid-market private rental flats. Like its rival, PGGM has identified UK PRS as a market with long-term return potential and has partnered with a local player to give it a foothold in the sector. Focus on quality Tinka Kleine, director of private real estate at PGGM, said: “We focus on quality and strong location, so we’re hit less than the overall market. That is our strategy, so we don’t get as nervous when something happens. “In the UK, we have had a great return, and then Brexit happened and it came down a little bit. But if you look at it long term, we’ve made great investments.” Kleine said the UK needed more mid-market private rental schemes that would ensure greater social mobility. People need to live in areas with easy access to work, but in places such as London, a lack of options is pushing them further away. However, she added that the UK PRS was starting to get the public sector support it needed to develop. The partnership with Legal & General, which started last January, had an initial plan to invest £600m into UK PRS. It has now been enlarged and has £1bn to invest and develop build-to-rent homes, with more than 1,000 under construction in Bristol, Salford in Greater Manchester, and Walthamstow, E17. The first tenants will move into the Salford flats in May. A further pipeline of developments is planned in Bath and Leeds – and in London. PGGM is planning to do more in the capital “where the people are squeezed out the most”, said Kleine. For both APG and PGGM, the UK has always been a core part of their property portfolios, with investments across a range of asset classes. • To send feedback, e-mail karl.tomusk@estatesgazette.com or tweet @ktomusk or @estatesgazette