Hearthstone Investment Management has raised £97m from three local authorities for the expansion of its suburban rental housing portfolio.
Lincolnshire Pension Fund, South Yorkshire Pensions Authority and Tyne & Wear Pension Fund provided the finance in the first close of Hearthstone Residential Fund II.
The 10-year close-ended fund has a target size of £300m. It follows the £200m Hearthstone Residential Fund I, which is now fully deployed, with commitments for 1,000 homes across the UK.
The second fund will target net annual income returns in excess of 4%.
Hearthstone IM invests primarily in family housing and low-rise flats across the UK, building up clusters of 50-100 in cities and towns. The homes are middle-market for families, professionals and key workers in well-connected locations.
The first fund has invested in locations from Exeter to Newcastle, Manchester and Wigan to Crawley, through partnerships with national listed housebuilders and smaller private-owned developers.
The new finance will support expansion into Scotland and Greater London, among other new geographies. Hearthstone anticipates significant additional capital commitments from investors in the next three to six months, as demand for rental housing continues to attract blue-chip investors. It expects to raise the full £300m within the next 12 months.
Richard Otten, head of asset management at Hearthstone IM told EG: “Having done the first fund with seven local government pension funds, it was known that we could raise and deploy the money.
“The returns on residential, from an income perspective, are very strong. Some of the housebuilders are very keen to have a pipeline of certain sales and certain cashflow over the next couple of years.”
Otten added that the pandemic has also accentuated demand for quality rental housing in suburban locations with outdoor space, offering local government pension funds an opportunity for investment with strong social impact.
Jo Ray, head of pensions at Lincolnshire Pension Fund, said “We were keen to invest in the residential sector, and in particular into a strategy involving houses and small block of flats.”
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