Living has been tipped as the sector to invest in next year because of chronic housing shortages. M&G has been investing in residential property for 10 years in the UK and the fund manager has now expanded the strategy to the rest of Europe, where built-to-rent is in its infancy.
CoStar News visited Thames Quarter in Reading, near London, which serves as a template for M&G’s European rollout.
“We have had Aramco employees and when their projects finish in the UK and they go to Madrid or India, they said please find me this [Thames Quarter] in Madrid,” said M&G fund manager Freddie Wonnacott.
Thames Quarter sits on a roundabout within walking distance from Reading’s town centre and railway station. At 73 metres, it is the town’s tallest building and has 315 built-to-rent apartments. The building was completed in June 2021 during the pandemic, but the building was leased within 12 months, said Georgina Wakeman, the building’s letting agent. She is employed by property consultant Savills but forms part of a team of 120 who work exclusively for M&G’s residential business.
Wonnacott notes that you “don’t want to lease up all the space at the same time, because you don’t want too many leases expiring at the same time”.
When entering the building it feels like a hotel with a manned reception desk. There are shared facilities, such as a gym, cinema and kitchen. The shared office space feels a bit like coworking place with young professionals wearing headsets bending over their laptops.
The service, however, goes beyond facilities. The Savills team organises activities for the residents, or customers, as Wonnacott prefers to call them. When CoStar News visited Thames Quarter posters were advertising an upcoming Diwali party.
The sleek, some might say a little sterile-looking, apartments start at £1,300 a month for a studio. One-bed rooms are £1,600 a month and a two-bed apartment costs £2,000 a month. Only internet is included in the prices. Council tax and utility bills come on top of that.
In Finland, M&G charges all-inclusive rents, starting at €975 a month for a studio unit or one-bedroom apartment. It includes internet, heating, water and storage but no electricity. Electricity is excluded in most European markets as tenants are keen to choose their own provider. The rent may seem much cheaper than in Reading, but for Helsinki is the top end of the market, said Marcus Eilers, M&G’s head of European residential. He prefers all-inclusive, or "warm", rents including heating and hot water.
“The landlord can run energy as a profit centre, but he also needs to invest in energy-efficient buildings,” said Eilers.
Back in Thames Quarter, Wonnacott said that the customers are from “wider demographic [backgrounds] than you might think. From chief executives to footballers and even keyworkers”.
Although the keyworker would need to share a two-bed apartment to be able to afford the rent. There are even students, but their numbers are capped at 10% and Wakeman makes sure she picks serious students, such as postgraduates.
Customers sign for at least 12 months, which also happens to be the typical stay at Thames Quarter. Wonnacott said that Reading “has always been a transient town” being home to many large international companies, such as Microsoft, PwC and Procter and Gamble.
M&G’s private rented scheme in Dublin, Ireland, is as close a copy of Thames Quarter as it gets. Eglinton Place, close to the city centre, is a bit higher quality, but it has the same facilities, including a rooftop, kitchen, co-working space and a gym. It has 148 apartments made up of one, two and three-bed apartments. These amenties are standard for the UK and Ireland markets but buildings in the Netherlands must also have bike storage and those in Finland a sauna to cater to local demands.
These minor differences can easily be overcome. Regulation is more difficult to deal with. Ireland is one of the most heavily regulated rental markets in Europe whereas the UK is not regulated. Irish rents will be in line with market rents, but after that landlords may only raise rents by 2% a year. Eilers calls the Irish model “the toughest” in Europe. Other European markets also have caps in place, but they are based off inflation.
Earlier this month, M&G made its debut in the Netherlands, another regulated market. M&G made a forward funding commitment to a €41.7 million built-to-rent scheme in Leiden, near The Hague. Government proposals to tighten its points-based system, which determine how much rent can be charged, to make housing more affordable, have deterred investors.
“Regulation is not a problem,” said Eilers. “Uncertainty is. New regulation has no big impact because we take a conservative approach anyway.”
Surely, with different pricing and regulation, the return expectations of M&G’s UK and European fund will be very different.
“We haven’t compared the funds in terms of return profile,” said Eilers. “The European fund is too young. In Europe, you have expensive markets like Germany and France and then you have market where you can create higher yields, such as the Netherlands and Ireland. We mix-and-match country risk, which tends to return attractive yields. The UK doesn’t compare too well. It’s a single market strategy where you can play with the regions.”
The UK Residential fund is in its 10th year of existence. It has grown to £1.24 billion. The M&G residential team also manages a further £400 million on behalf of international capital. The UK Residential fund targets a long-term annual net return of 6 with an annual 3 distribution yield. At the end of the first quarter of 2021, the fund’s portfolio, which was £1.16 billion at the time, produced a gross yield of 4.79% and a net yield of 3.53%, according to the fund’s latest available fact sheet.
M&G launched the European fund in January with €578 million of equity, with Dutch pension fund MN providing €400 million. The fund aims to provide institutional investors with attractive, risk-adjusted returns through investment into some of Europe’s student housing, single and multi-family housing and retirement living sectors. It targets different groups of the population in each country. Its Dublin scheme should attract young professional couples earning two incomes. In Berlin, one third of the units are social housing. It is rare to see amenities in the German buildings as landlords cannot impose cost on renters if they don’t want to use the amenities. In Lisbon, M&G is targeting local and international students. When entering new markets, there will always remain a level of uncertainty about how successful it will be, just as there was when M&G built Thames Quarter.
"You can build it but how people react to it, you don’t know for sure," said Wonnacott.