As the eighth anniversary of UK real estate investment trusts fast approaches, the industry finally may soon see the much-anticipated launch of the first residential REIT.
Residential investment manager Mill Group, led by chief executive David Toplas, aims to capitalise on the forecast growth in demand for rented homes by using the new REIT to buy up a £50m portfolio of up to 200 mainstream flats and houses for the private rented sector during the next 12 months.
Mill Residential REIT will focus on Southern England and the Midlands and has already acquired an initial £2.5m portfolio with a gross yield of around 4.5%.
The company plans to float The Mill Residential REIT in December, with former Land Securities director Ian Ellis as chairman.
Simon Phillips, executive director at Mill Group, who will also sit on the board of the new REIT, says he is convinced that demand for PRS flats and houses will continue to grow.
“It is getting increasingly difficult to get a mortgage, and you need a bigger deposit, which is difficult to find. We expect more people to be living in the PRS sector,” he says.
Savills recently forecast that the number of private rented households in England and Wales would increase from 4.9m in 2014 to 6m by 2019.
Mill Group expects to raise at least £2.5m through the IPO on the London Stock Exchange and will simultaneously offer shares to crowdfunding investors.
It will use the SyndicateRoom platform, which allows members to co-invest alongside professional investors with a minimum investment of £1,000.
As a REIT, no tax would be paid on its core rental income or capital gains, and it would pay out 90% of its real estate income to shareholders.
Mill Group’s Toplas says: “We are keen to establish the REIT and grow it in a structured, methodical manner. We believe that this vehicle can play a small part in helping to consolidate the UK residential investment market.”
Resi REITs: reasons for the long wait
Despite government hopes that the introduction of REITs in 2007 would boost housing stock, no residential REITs have so far materialised. Fund manager Invista, which was wound down from 2012, pulled its plans for a £500m residential REIT back in May 2007, citing concern that the 90% profit distribution rule would not leave it with enough capital to refurbish its properties. Several others have been mooted.
Most recently, estate agency chain Ludlowthompson began consulting on plans for a 450-PRS home portfolio in March. Six months later the firm’s broker, Liberum, put out a new research note on the proposed vehicle, suggesting that plans have been resurrected.
Dr Jacqui Daly, director of residential investment research and strategy at Savills, says: “Dedicated residential REITs have never really taken off in the UK because the REIT rules and regulations did not favour the growth of residential funds using a REIT structure.
“But the rules are much more favourable today,” says Daly.
She cites the abolition of the 2% conversion charge. In the past, firms entering the UK REIT regime had to pay the one-off charge equal to the value of their property assets – a big deterrent for smaller companies and start-ups.
She adds: “However, a potential obstacle that remains is that residential investors, say through a REIT, would in effect be charged VAT on any repairs and maintenance of the rental units. It is likely that this outstanding issue will need to be addressed before residential REITs can emerge in a significant way in the UK.
“It will be difficult in the current market because large house builders are reluctant to sell stock to PRS investors and PRS investors are struggling to compete for land. It is not a barrier but an obstacle. I expect that more residential REITs will come to the market but there is still a good while to go.
“But Mill Group’s decision is going in the right way, and the more players that follow will help to deliver increasing numbers of PRS homes.”
