UK government agency invests £25m in housing investment vehicle

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The government has hit on a novel way to address the UK’s housing shortage – buying £25m worth of shares in a vehicle investing in homes for private rent.

The Homes and Communities Agency (HCA) is acquiring 10 per cent of the new real estate investment trust, which hopes to raise £250m on the stock market this month.

While 30 years ago the state built houses itself, it now hopes to bring in private investment and earn a return through dividends.

PRS Reit is the first of its kind, allowing investors to tap into the growing demand for long term private rented housing as families struggle to get a mortgage.

The cost of housing has become an election issue and the government is desperate to get more houses built. A new breed of property group is adopting the Continental-style development of large managed estates let to people on a long term basis. They are slowly replacing the army of DIY small landlords as regulation tightens.

The government likes the model because they can be built quickly as they do not need to be sold to replenish investor’s coffers. It has set aside £3.7bn to try to build an additional 140,000 homes by 2020-21.

The UK needs 240,000 houses a year and builds around 140,000. It has failed to keep up with demand since the 1980s when the state stopped building homes.

Sigma Capital, an Aim quoted developer of PRS homes, will be the investment adviser.
PRS’s first purchase from Sigma will be 221 homes on the redeveloped Boot estate in Norris Green, Liverpool. The 60 acre site consists of 829 homes, with 214 at affordable rents and 394 for sale.

It is targeting towns and cities outside London close to road and rail links, including the proposed HS2 and fast Transpennine rail networks.

The average UK house now costs almost eight times average earnings. The company said there was a pipeline of £17bn of rented stock with a forecast requirement of £300bn over the next five years.

Stephen Smith, chairman of PRS, has worked at property developer British Land and insurer AXA Real Estate. He said PRS “will break new ground, being the first quoted real estate investment trust to address the shortage of high quality family homes in the private rented sector”.

He said:

Demand for high quality, professionally managed new rental homes, especially family homes, is strong and growing. This reflects the structural undersupply of homes in the UK and the growth in the private rented sector.

By 2020, the PRS market is projected to grow to 25 per cent of all households from 19 per cent today. Buy to let transactions fell 13 per cent in 2016.

The Reit promises a dividend yield of at least 6 per cent per annum and net total shareholder returns of 10 per cent or more per annum after the first year.

Manchester-based Sigma is one of the leading providers of PRS properties in the UK, having delivered and let more than 1,100 homes in the last 30 months.

Nplus1 Singer is financial adviser and joint bookrunner to the Reit, and Stifel joint bookrunner. Lawson Conner’s G10 Capital is the investment manager.

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