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M&G to partner with contractors as private rented sector fund set to expand

Exclusive: M&G Real Estate is on the hunt for construction partners as it expands further into the private rented sector.

The property investor wants to work with contractors to bring land forward and develop homes for rent, the head of its UK residential property fund told Construction News.

Alex Greaves said M&G had already begun talks with contractors about potential tie-ups. It would work directly with major contractors that have development or investment arms to find relevant sites.

Contractors with development arms include Balfour Beatty, Bouygues and Carillion.

Mr Greaves said M&G was already in talks with two potential partners, with deals expected to be finalised within six months.

The fund would buy suitable sites for PRS development, leaving the contractor to secure planning consent and build the scheme. The model sees planning risk sit with the partnering contractor, making deals more attractive to risk-averse investors, such as pension funds.

Mr Greaves also revealed that M&G was considering launching a separate residential fund exclusively for retail (consumer) investors, as opposed to institutional investors. This would enable individuals, trading with much smaller amounts, to invest in PRS.

“We’re doing research [into this]. We have a very successful commercial fund, which had retail investors going into it,” he said.

“We also run a very successful residential fund with institutional investors, so it’s a natural step for us to look at what it might look like if there was the same type of investor going into a different property type, but [a property type] we have experience with.”

M&G Real Estate set up its UK residential property fund in 2013 to enable institutional investors to take advantage of the growing private rented sector.

Since then, the fund has grown from having £105m of assets under management to £300m under construction or committed investments.

It also has agreements to fund a further three buildings worth around £130m, which are at various stages of development.

Mr Greaves said the fund would partner with housebuilders, developers, local authorities or contractors to bring forward PRS developments.

M&G is the first investor to have agreed a framework with a housebuilder – Crest Nicholson – and Mr Greaves predicted housebuilders would become increasingly involved in the sector.

“It works really well for a housebuilder when they have really large schemes, where they can only sell at a certain rate.” He explained that on these schemes, housebuilders would be able to accelerate development, as they can let the properties faster than they can sell them.

The housebuilders could then use the revenue stream created to pay for associated infrastructure costs. Building homes for rent also means they could be filled faster, bringing “life and activity” to the schemes sooner, according to Mr Greaves.

He added that the increasing complexity of planning requirements, which may demand a mix of tenures, including various types of rent, would also push more housebuilders to diversify into the sector.

M&G has agreed to fund a total of 12 projects with Crest Nicholson, with two deals committed so far in Bath and Crawley. The investor wants to bring around two projects a year forward with the housebuilder.

Mr Greaves said the fund was in “detailed discussions with a number of housebuilders” about large-scale framework agreements. Further detail is expected on this in the next 12 months.

He added that local authorities were “very natural partners to PRS” because of their large land holdings. “There are big opportunities for [local authorities] to partner with institutional capital to develop out and build schemes on land they own.”

Mr Greaves said local authorities would be better off retaining ownership of land they own and creating long-term revenue streams through PRS, rather than making a sale, getting a capital receipt and then putting that money through their books.

For more on the private rented sector see Construction News’ latest feature:

PRS: The future of residential? 

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