The UK’s first residential REIT has also taken the unusual step of using crowdfunding to raise capital
This week’s news that Mill Group is preparing to launch a new REIT is unusual for two reasons: not only will it be the UK’s first residential REIT, but the company will also be using crowdfunding to raise capital for the new fund.
As residential REITs are an untested concept, Mill is starting out small and looking to ramp up as confidence builds. The management team has committed £2m to the fund and is aiming to raise at least £2.5m from institutional investors.
It is also looking to raise at least another £300,000 using the crowdfunding platform SyndicateRoom. Speaking to Property Week this week, Mill Group’s executive director Simon Phillips said that by going down the crowdfunding route, the company hopes to reach a wider base of investors than would otherwise be possible.
“We wanted to introduce an element of crowdfunding because it provides a route into the market for high net worth individuals and professional investors, as well as the institutions that would normally be approached for an IPO,” says Phillips.
The buzz is around the development of purpose-built blocks for the private rented sector that offer clear economies of scale. As Mill Residential REIT is focused on traditional stock, it will have to rely on buying stock with good rental and capital growth prospects and refurbishment potential.
The company has already bought a portfolio of seven properties to seed the REIT — two flats in London, four houses in Guildford and one in Bristol for a total of about £2.5m. The purchase reflects how the new REIT will look to invest in future. It will focus on areas where there is a mismatch between demand and supply and where yields are around the 4.5% mark.
Tax advantages
Rather than buying houses on the direct market, it will look to acquire residential portfolios from companies that would benefit from the capital gains tax advantages of selling to a REIT. “We have started early stage discussions with companies that hold residential assets and believe we can generate a win-win by using a REIT structure,” says Phillips.
In addition, it will look to acquire from smaller buy-to-let investors. Instead of offering them cash, it will buy their properties in exchange for shares in the company, giving the investors an opportunity to keep up their exposure to the sector without the hassle of managing properties and allowing Mill Residential to expand its portfolio without having to raise more equity elsewhere.
Mill Residential is expected to float as early as next month, and by this time next year its ambition is to build a portfolio worth some £50m. It is targeting a total share return of 10% and a 3% dividend yield.
“We are very confident about the residential sector and its ability to deliver a good, attractive return,” says Phillips, pointing to recent Savills research that indicates that the number of households in private rented accommodation will grow by 1.2 million between now and 2019.
He believes the track record of the team will be a decisive factor in making the REIT a success. It will be chaired by Ian Ellis, who was formerly chief executive of Land Securities Trillium. The board will be responsible for investment decisions and will be advised by the managers, Mill Group Residential, which will manage the portfolio day-to-day.
“It is all about the quality of the board and the asset management platform,” says Phillips. “We are confident that we have a really good team and a high quality board.”
If successful, Mill Group Residential could well prove a catalyst for the launch of other residential-focused REITs.
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