Interview: Akelius’ heel

Swedish housing group Akelius hit the UK market hard in 2011 with plans to snap up 10,000 homes in five years. Three years on and the group hasn’t even hit a tenth of that. New UK director Hans-Peter Hesse tells Annabel Dixon how the firm is responding.

Hans-Peter Hesse runs his hands anxiously along the newly-painted walls in the stairwell of Akelius’ recent acquisition, Hamlet Gardens, W6. The UK director of the Swedish housing company leaves nothing to chance as he examines the refurbishment work in the redbrick Victorian mansion block in leafy Hammersmith.

And fair enough. He has a lot to prove. Akelius burst on to the UK rental scene in 2011 with the aim of snapping up 10,000 homes in mid-market blocks in and around London within five years. It was reported to be spending £2bn to create what would be one of the largest rental portfolios in the country, keen to replicate its established private rented estates in its native country and Germany.

But the group has not got off to quite the flying start that it had hoped. Ambitious plans have been stalled by what the firm has put down to a lack of available stock in and around London. To date, it has just 870 homes in the UK, not even a tenth of the way towards its target.

All eyes are now on Hesse, Akelius’ former south Germany regional director – who took over the reins last July from Lars Lindfors – to turn the company’s British fortunes around. He is undeterred by the slow start.

“We are a long-term investor,” says Hesse, who first joined the housing group three years ago as an asset manager. “If it takes us longer to get those units, as long as we see that our strategy works, which is obviously the case, then it takes longer. We would always wait for the right properties. It is only a matter of time.”

In his first interview since taking over the role, he reveals how he plans to get Akelius back on the acquisition trail in the UK, discusses his strategy for managing the portfolio and predicts what could lie ahead for the UK private rented sector.

The UK problem

Akelius’ private rented business was started by Roger Akelius in Sweden in 1994 with the acquisition of properties in Helsingborg, Gothenburg and Trollhättan. In the following years it continued to acquire stock – and listed company Mandamus – in Scandinavia before successfully expanding into Germany in 2006. With 34,000 flats in Sweden and Germany by 2011, the group decided to launch into the Canadian and UK markets.

Hesse says that there are no differences in the strategy between the countries it is operating in. It focuses on existing residential stock in large growing cities with refurbishment potential.

In Canada, Akelius focused on the Greater Toronto area, securing its first 900 homes in 2012, then almost doubling that figure to 1,700 last year. In the UK, however, the group sought flats in and around London, increasing the number of homes from 100 in 2011 to 827 in 2012. But there the UK expansion stopped.

Akelius is addressing this by extending its geographical remit beyond London and the M25 to major regional cities, including Manchester, Leeds, Birmingham and Bristol.

Hesse is encouraged by what he sees as improving economies and capital growth projections as well as opportunity for rental growth in the regions. The supply-demand balance is in favour of the investor.

Chris Lacey, executive director at CBRE, who works closely with the group, says: “The way the market and the economy have moved is suggesting that the regions are beginning to look interesting. It is not just blindly chasing volume and stock, it is about finding the right returns over a period of time.”

Akelius had better be prepared for a lot of leg work if it wants to crack the regions, however. It expects the bulk of new stock to be from the private sector in block sizes of between £2m and £7m, rather than institutions and banks, and has ruled out office-to-residential conversions despite their popularity under newly relaxed planning rules.

“The risk would be too high with our size of portfolio at the moment,” explains Hesse.

“We simply do not have experience of office-to-residential conversions. We have other projects, for example in Berlin, where we tried it and converted commercial buildings into 100 homes. But in the UK we want to establish our core business. Maybe we will consider it in two or three years’ time.”

In-house management

This year Akelius will start to manage its near 1,000-home UK portfolio internally for the first time. It is implementing new software – Yardi – which will allow the group to manage everything in-house. Only rent collections will continue to be managed externally.

“It is almost never about the costs, it is more about the quality. Not that we are not completely happy with our external partners,” Hesse adds quickly. “I think we can do a better job and provide a better service for our tenants. That is why we have it in-house. Costs of course are also an issue because when you reach a certain amount of homes, it makes sense to bring everything in-house.”

The group refurbishes its flats to its own particular Akelius Class Standard. It includes all streamlined materials and processes – all of which is detailed in the group’s “bible”. The standard extends to service and management.

Hesse explains: “We have a book which defines all kinds of specifications, including tiles, floorings, kitchens and also finishes, such as the width of grouting. The idea behind it is that a tenant has the same apartment in Berlin, Cologne or Frankfurt as they would in Toronto or London. The Akelius standard should allow us to establish a brand in the UK as we have done already in Germany, Sweden and Canada.”

Bend the rules

Its main aim is to let flats unfurnished, but it is bending the rules to accommodate the local market. For Hesse, the detail is “really important”. Right down to the group’s aim to ensure that every tenant that hits a problem has an answer within 24 hours. Most issues are resolved within 48 hours.

Akelius’ is showcasing Hamlet Gardens as an example of its success in the UK. The 94,600 sq ft freehold property was bought from an arm of Royal Bank of Scotland and Akelius then negotiated the departure of the existing leaseholder, a registered social landlord. It is being refurbished in phases. Akelius had expected to achieve rents of £30 per sq ft at Hamlet Gardens, but has secured rents 25% higher than initially anticipated on the first tranche of homes.

“We now have potential corporate tenants, such as relocation agencies, which would take the whole block without even seeing it.”

With a 42,000-home global portfolio valued at £4.2bn, Akelius has plenty to say about the UK’s burgeoning private rented sector.

“Rents in London are quite high, but the quality you get for the property is not according to the specification I am used to,” says Hesse. “It is just very ordinary and if you produce something that is better as a rental standard, it stands to reason that you are going to get a far better rent. People are going to want to be in that space.”

The prospects for the PRS in the UK brightened last year, with new investors such as Dutch pension fund APG entering the space and the launch of Get Living London, Delancey’s and Qatari Diar’s private rented initiative at East Village. So what does the next few years look like to Hesse?

“I expect a constant rental growth of at least above inflation between 2% and 3% in the next five years,” he predicts. “The UK residential sector provides a greater range of opportunities than one might think and if these investments are managed well, they provide high returns at less risk than many other asset classes.”

With 2013 being a muted year for Akelius, with no new properties added to its UK portfolio, Hesse has some catching up to do if he wants to make some noise this year. And with a raft of potential investors, including pension funds and sovereign wealth, now eyeing the PRS eagerly, he will need to get moving quickly before the opportunities fade.

Hans-Peter Hesse THUMB