QD View – IPO REIT to get excited

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It was refreshing to see news this week of the intention to launch a new real estate investment trust (REIT). Listing a new REIT during the pandemic may have raised a few eyebrows among investors, but it appears to offer investors something different and has strong growth prospects.

UK Residential REIT (URES) aims to raise £ 150million through a initial public offering (Initial Public Offering) and will focus only on the private rental sector (PRS) of the residential market.

PRS as asset class It has grown steadily in the UK, especially since the 2008 global financial crisis when tighter credit restrictions prevented many people from accessing homeownership. The UK PRS market totaled 4.6 million households in 2020 and is expected to reach 5.2 million by 2025.

With house prices skyrocketing, even during the pandemic where prices rose 10.2% in the year through March 2021, home ownership is out of reach for many. Renting has become a way of life for an increasing number of people, who increasingly choose to rent.

Lifestyle flexibility, social aspirations, labor mobility, the emphasis on life experiences and the growth of consumerism are all factors which, according to URS Director, L1 Capital , attract residents to the PRS market.

A growing population and chronic housing stock shortages that are expected to persist indicate sustained demand for the PRS market.

URES will focus on the industry’s most affordable mid-market segment outside central London. His manager has said he will target regional cities such as Manchester, Liverpool, Leeds and Bristol and has a seed investment wallet worth £ 145million lined up. This seed portfolio, which includes 28 buildings and 1,214 apartments, shows an initial yield of 5.8%. It has an additional £ 440million pipeline of investment opportunities.

Mid-range PRS provides relative affordability to tenants, with rent charged on seed portfolio assets (between £ 600 and £ 850 per month) averaging around 20% of tenant income. This should help maintain a defensive and stable tenant base. In 2020, the seed portfolio recorded rent collection rates of 97% and over the past two years the occupancy rate has been 95%.

Grainger and PRS REIT, both listed real estate companies focused on PRS are more development-oriented, with Grainger focusing on the more high-end market and PRS REIT building houses rather than apartments. URES, by comparison, will focus on acquiring existing buildings in the secondary market, with plans to renovate and add value to some of the properties.

This distinction, coupled with the defensive nature of the tenant base, leads me to believe that this company may offer investors something different in an industry conducive to rental growth and which should support the annual returns targeted by the URS of 10% and one dividend 5.5% yield.

QD View – IPO REIT to get excited

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