M&G plans equity drive into shared ownership

News06 Jun 2019Luke Cross

The residential real estate arm of M&G is planning to launch into shared ownership this year with an equity offer and a for-profit registered provider (RP), Social Housing can reveal.

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M&G Real Estate’s residential team is looking to emulate its track record in the private rented sector, where M&G Real Estate’s UK Residential Property Fund has grown to £1bn and 3,000 homes in five years.

The proposal is to forward-fund new build shared ownership primarily, alongside potential acquisitions, including on the Section 106 market.

The investor – already the biggest institutional debt provider to the housing association sector with £6.5bn of investments – is now looking for housing association (HA) partners to build and manage new homes.

The structure is likely to be similar to the residential fund but with an asset-owning entity sitting within it, which Social Housing understands could mean launching a for-profit registered provider and applying for government grant funding.

Alex Greaves, head of residential investment at M&G Real Estate – who has grown the residential business from a seed fund – told Social Housing: “We’re hoping to partner with HAs to help fund the development of new build shared ownership properties; we’d like to have a seed portfolio in the same way I had a seed portfolio six years ago and went out to see investors.

“And then we have done soft market testing with the various pension fund consultants and intermediaries who really like the product and opportunity.”

Mr Greaves added: “The penny dropped for me about two years ago that shared ownership is a brilliant investment opportunity for pensioners and pension funds; you can not only provide something for my investment base but do something from a social housing point of view that’s beneficial.”

Strong investor appetite

The residential fund is an evergreen, semi-open-ended fund that has 37 investors, primarily from local government pension funds, corporate funds, and insurance and assurance companies that invest for anywhere between 10 and 50 years. It has also attracted investment from overseas, with the potential for a social housing fund to tap into the impact investing market.

A shared ownership platform would seek returns of between five and seven per cent, which is slightly below the seven to eight per cent that the market rent fund offers to investors.

The rental element of shared ownership is not affected by the government’s reduction on social rents. So for investors seeking inflation-linked cash flows, it can provide Retail Price Index-linked income.

Mr Greaves added: “I go back to the ‘three Ds’: defensive, demand/supply and diversification – these are three key reasons for investing in residential.

“[This offers] a combination of an index-linked income stream and exposure to a market that is under-supplied and unlikely to change any time soon, and is a diversification from the other asset classes.”

The residential business already has some exposure to shared ownership, with a historic lease-based portfolio of around £40m of properties through advisory firm Chaco.

But Mr Greaves said that the new equity offer would not take a leaseback approach, instead building and funding developments to sell to “an end user”.

In numbers

£1bn

Value of M&G’s UK Residential Property Fund

5-7%

Returns that would be sought by shared ownership platform

37

Number of investors in UK Residential Property Fund

£40m

Value of residential business’ lease-based portfolio

“We have very strong investor appetite for it and in the early days of what is a much longer journey.

“In the same way as the residential fund, we want to build really efficient, good-quality homes.”

That means putting people in locations “where [they] can aspire to own a home”, and where service charges will not make it difficult for people “to make ends meet”.

“We are super-keen on partnership; the transactions in forward-funding for residential have got more complicated, take a long time and are difficult to do, so we do them with people with whom we can do it on a repeat basis, which is why you need that shared philosophy.”

It could also mean a single organisation having an oversight role in property management.

Mr Greaves said that M&G has a “strong handle on the market and market risk” and supply and demand in local housing markets in the event of a housing downturn.

Asked whether the offer could also constitute a more ‘commercial’ type of shared ownership, Mr Greaves said: “Whether it is social or not is irrelevant to me in terms of its legal definition.

“This is more about on one hand creating a quality product and a return to my investors, but actually I can do something with a social benefit to it, too – and that’s attractive both on a personal and a professional level, to my underlying investors and the people who are then being housed.”