Legal & General Investment Management Real Assets has raised a further £170m of equity investment from major institutions for an open-ended build-to-rent fund. The vehicle will pave the way for institutional fund managers to put their capital to work by generating rental income at a time when more traditional investments are offering little or no return.
LGIM has already invested £600m in build-to-rent and there are more than 1,000 homes at the planning stage or under construction. However, investors looking to make a return from this relatively small but fast-growing sector of the housing market may want to look further than LGIM Real Assets, which is a division of Legal & General Investment Management with assets of £842bn.
More direct exposure can be found through housebuilders such as Telford Homes (TEF) (see page 50 for Telford's results), which has already sold sites to London housing association L&Q and Prudential arm M&G. And Telford's chief executive, Jon Di-Stefano, reckons this could make up half of all Telford's business in the next two or three years.
The business model is highly attractive because the schemes are forward funded by the institutions and pension funds taking part. Telford therefore doesn't invest its own capital, which can be used elsewhere to invest in conventional sales. And the margin difference between ordinary sales and build-to-rent is not as big as it looks. Gross margins of around 24 per cent on private sales come down to a net 16 per cent after sales and finance costs. But with build-to-rent, there are no sales and finance costs that are paid by Telford, so build-to-rent margins compare favourably at 12-13 per cent. Telford is already negotiating its third and fourth build-to-rent transactions.
