UK govt to guarantee £3.5bn of real estate debt

Asset manager and lender Venn Partners will manage the scheme which is designed to attract institutional investors to the private sector rental market.

The UK government announced a £3.5 billion ($5.5 billion; €4.4 billion) loan guarantee scheme to encourage private sector real estate projects for the rental market. The programme is designed to attract institutional capital to invest in private rental-only housing developments.

UK-based asset manager and direct lender Venn Partners has been mandated to manage the scheme.

The UK government will guarantee debt backing newly built private rental properties. To qualify, projects must meet a minimum value of £10 million and be completed after June 2013.

The financing guarantees are aimed at institutional investors looking for long-term investments.

Asked why government guarantees were necessary for investments that will have to be credit-worthy and offer a return to investors, Venn’s management explained that this asset class, which exists in other countries such as the US and Germany, is almost completely absent from the UK market.

The UK has a low stock of high quality multi-family rental developments with a single owner as UK developers tend to sell off individual units to owner / occupiers or buy-to-let investors, Venn Partners head of real estate and managing partner, Paul House, told PDI. The UK model results in lower quality and fewer private rental properties, he added.

Venn’s role will be to set up and manage the scheme. It will underwrite the loans, analysing the credit and structuring the financing. Tenors of up to 30 years will be available and the firm will also manage the portfolio of loans over their lifetime.

Venn subsidiary, PRS Finance, will issue bonds with a government guarantee for the scheme. It is unlikely that bond investors will have visibility on the underlying loans, said Venn chief executive and managing partner, Gary McKenzie-Smith.

Management of the scheme was awarded by tender and Venn’s fees for arranging the loans are fixed and will be paid by the borrowers, who will also pay a fee for the government guarantee to cover administration costs.

The scheme does not cover construction financing but it is a follow-on from a sister programme, the £1 billion Build to Rent scheme, which made its first allocations in February.

A number of institutional investors have begun to invest in real estate debt and equity, the long-term nature of the asset appeals to pension funds and insurers. M&G Investments, the credit arm of insurer Prudential, is a significant player in various real estate debt instruments.