Sigma Capital’s London-focused deal accelerates build-to-rent trend in the UK

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London is going to have many more homes owned by investment funds and property developers in the coming years, echoing a trend in the USA.

Accelerating this trend, Sigma Capital Group PLC (LON:SGM) on Tuesday launched a new venture that plans to build and invest in an initial portfolio of around 3,000 homes, with a total value of GBP1bn.

The residential development and urban regeneration company is hooking up with Swedish private equity group EQT’s real estate arm for the joint venture, which is being supported by Homes England, the housing agency of the UK government.

Sigma is committing GBP16mln, or 5%, of the initial committed equity of GBP316mln of the JV, which plans to invest in new, high quality build-to-rent private rented sector apartment blocks and houses in zones 3-6 over a period of at least five years.

Homes England has agreed an initial GBP50mln loan facility to support with the delivery of initial acquisitions.

Sigma is also selling two sites it is currently developing, at Fresh Wharf in Barking, and Beam Park in Havering, which will contribute 157 homes to the JV when they are acquired by the JV for GBP48mln on completion.

The JV has also agreed to acquire five sites from Countryside Properties PLC (LON:CSP), in Ealing, Enfield and Havering, which are expected to deliver 361 homes for a total gross development cost of GBP102mln.

The growing build-to-rent market

Built-to-rent seems to be expanding in the UK and becoming an increasingly established product since last year, though the proportion is quite small due to the UK’s historical owner-occupier housing model.

In some parts of America, institutional investors reportedly own at least one in five single-family rented apartments after a literal residential land-grab in recent years.

“However, how we interact and what we seek from our homes is changing,” argued analysts at Berenberg in a note earlier this year.

“Younger generations increasingly prefer the flexibility, level of amenity and social aspiration that renting provides, all achievable without having to sacrifice quality of life to build a deposit.”

In other words, it’s become far too expensive to buy a house, so most people are realising it’s more sensible to rent.

Berenberg also reckons than more renters are “buying into the concept of a branded product which often offers hotel-style services and amenities”.

“As such, institutionalised BTR is increasingly categorised along similar lines as wider commercial real estate stock, with varied yields applied on the income.”

But just looking at listed property companies and it’s a trend that has accelerated since Sigma launched the PRS REIT (LON:PRSR) in 2017 to bring a REIT model to the residential market, with Sigma’s investment management subsidiary sourcing investments and managing the assets.

Other listed specialists in the sub-sector include Newcastle-based private landlord Grainger PLC (LON:GRI), which now describes itself as a leader in the build-to-rent market; and Watkin Jones PLC (LON:WJG), where an increasing focus on this area has seen it overtake the group’s student accommodation business.

Watkin Jones recently suggested COVID-19 could be “the catalyst for BTR to come of age”, as it now believes demand for purpose-built private rental homes could be further boosted by people deciding they are better off renting and by “an institutional hunger to replenish dwindling sources of yield”.

It’s also influencing the construction sector, with Galliford Try PLC (LON:GFRD) last month winning a GBP105mln contract for a new build-to-rent residential scheme in Leeds, while earlier in the summer Inland Homes PLC (LON:INL) said it was being approached by build to rent funds for bulk purchases of apartments under construction.

As Berenberg further explained, unlike traditional REITs which collect rental income deriving from the long-duration lease of property, most residential real estate companies, including Grainger, the PRS Reit and those in the purpose-built student accommodation sector, are “more akin to operational platforms with an asset-backing”, such as self-storage operators Big Yellow or Safestore, meaning they accept additional operating risk but generating genuine value and returns materially above their cost of capital, which the analysts say justifies their premium ratings.

The analysts expect Sigma to profit from the JV in five ways: receiving fees relating to the identification and delivery of assets, recurring management fee, performance-based incentive payments should the JV exceed return hurdles, profits from the sale of its two London developments currently underway, and carried interest of its 5% in the JV.

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