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QD view – REIT IPO to get excited about

It was refreshing to see news this week of the intention to float of a new real estate investment trust (REIT). Listing a new REIT during the pandemic may have seen a few eyebrows raised among investors, but this one appears to offer investors something different and has strong growth prospects.

UK Residential REIT (URES) is aiming to raise £150m through an initial public offering (IPO) and will be solely focused on the private rented sector (PRS) of the residential market.

PRS as an asset class has been steadily growing in the UK, especially since the global financial crisis of 2008, when tighter lending restrictions locked many people out of home ownership. THE UK PRS market totalled 4.6 million households in 2020 and is projected to grow to 5.2 million by 2025.

With house prices going through the roof, even during the pandemic where prices have risen 10.2% in the year to March 2021, home ownership is out of reach for many. Renting has become a way of life for an increasing number of people, more of whom are choosing to rent.

Lifestyle flexibility, social aspiration, labour mobility, focus on life experiences and growth in consumerism are all factors that URES’s manager L1 Capital believes are pulling residents to the PRS market.

A growing population and chronic shortages in the housing stock that are expected to persist points to sustained demand for the PRS market.

URES will be focused on the more affordable, mid-market segment of the sector outside of central London. Its manager has said it will target regional cities such as Manchester, Liverpool, Leeds and Bristol and has a seed investment portfolio worth £145m lined up. This seed portfolio, which comprises 28 buildings and 1,214 flats, reflects an initial yield of 5.8%. It has a further pipeline of £440m in investment opportunities.

The mid-market PRS offers relative affordability to tenants, with rent charged on the seed portfolio assets (between £600 and £850 per month) on average around 20% of the tenant’s income. This should help support a defensive and stable tenant base. During 2020, the seed portfolio had rent collection rates of 97% and over the past two years occupancy has been 95%.

Grainger and PRS REIT, the two listed property companies concentrated on PRS, are more development focused, with Grainger centred on the more high-end market and PRS REIT building houses as opposed to apartments. URES, by comparison, will focus on acquiring existing buildings in the secondary market, with plans to refurbish and add value to some of the properties.

This distinction, coupled with the defensive nature of the tenant base, leads me to believe this company can offer investors something different in a sector that is conducive to rental growth and which should support URES’s targeted annual returns of 10% and a dividend yield of 5.5%.

QD view – REIT IPO to get excited about

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