The UK Residential REIT (URES) has announced its intention to float with the aim of raising £150m to be invested in a diversified portfolio of affordable, privately rented residential real estate assets in attractive locations outside of prime central London (the announcement mentions Manchester, Sheffield, Leeds, Liverpool and Bristol). The company intends to use the net IPO proceeds to acquire a £145m seed portfolio of 28 properties, comprising 1,214 residential units.
In doing so, the company would be income-generating immediately upon the acquisition of the seed assets and will have no material development risk, minimising cash drag in the process. Beyond this, URES has identified a £440m pipeline of further investment opportunities, while adding that it expects the balance of the net proceeds to be invested within twelve months of its listing on the premium listing segment of the London Stock Exchange.
Targetting a 5.5% yield and a 10% total return
URES is targeting a dividend yield of 5.5% per year from 1 July 2022 once fully invested and a net total shareholder return of 10% per year. Dividends will be supported from rental income from the properties, which it notes have been proven to be resilient in past economic downturns. The company also aims to target properties that provide scope for capital appreciation through active asset management initiatives including refurbishments and asset repositioning.
URES will be managed by L1 Capital UK Property Advisors (L1). The L1 management team and their affiliates will have an investment of no less than £5m in the ordinary shares in aggregate. URES adds that in addition to targeting gross issue proceeds of £150m, it intends to issue up to 50m consideration shares in connection with the acquisition of seed assets. The expected market capitalisation following the completion of the acquisition of the seed assets will be £200m.
‘Institutional investment represents just 4% of the overall private rented sector market’
The announcement went on to list the following as key highlights around the potential opportunity set.
Investing in the structurally supported high growth UK Private Rented Sector (PRS) market:
- The PRS market has exhibited growth of 4.1%t per annum since 2000 and risen from 2m households to 4.6m households in 2020, underpinned by tenants’ restricted access to alternative housing tenures, tightened lending requirements since the financial crisis and an inherent structural under-supply of housing within the UK
- Further population and market growth, coupled with the existing dynamics of affordability and under-supply, primes the PRS market for sustained growth over the next five years
- Institutional investment represents just 4% of the overall PRS market
- Existing assets command an approximate 20% discount to vacant possession value and an approximate 29% discount to the rebuild costs.
Defensive strategy focused on affordable, 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:
- Targeting predominantly core, stable product, with selective investment in under-managed assets, focusing on implementing value-add initiatives to improve asset quality and deliver strong rental growth and capital appreciation
- Focus on regional cities and towns that serve as key employment hubs, which are typically anchored by strong corporate companies and which will have benefitted from recent historical population growth, and in turn wider gentrification that provides the foundations for sustainable long term rental growth
- A focus on PRS homes that are categorised as affordable, relative to the local demographics, or ‘mid-market’, which encompasses the largest segment of the PRS sector
- Rents charged across the Seed Assets properties are approximately 20 per cent. of the tenant’s disposable income
Acquisition of immediately income-producing Seed Portfolio (“portfolio”), which has performed well during the Covid-19 downturn with 96% rent collection in 2020 and 95% average occupancy in past two years:
- circa £145m acquisition of a 28-property portfolio, comprising 1,214 residential units, 6 ancillary ground floor commercial units and 2 student blocks located in strong rental macro-locations outside of central London, which include Manchester, Sheffield, Leeds, Liverpool and Bristol
- Tenanted, day-one income-generating portfolio, thereby minimising cash drag, representing a net rental yield of 5.8%
- Seed assets delivered average rental growth of 5.1% per annum since their original acquisition
- The purchase price represents an attractive 29% discount to the replacement or rebuilding cost
- Assets let at the mid-market rental segment within their local markets, with rents typically between £600 to £850 per calendar month.
URES: The UK Residential REIT – Intention to float targeting private rented assets outside Central London