Hearthstone Investments completes investments for its “Hearthstone Residential Fund 2”
Hearthstone Investments, an investment manager focused on affordable private rented housing in the UK, completed the deployment of its £152m Hearthstone Residential Fund 2 (“HRF2”) with a duo of transactions.
Over the last month, a transaction for 45 new houses in Exmouth exchanged with a regional developer, in addition to an acquisition in Newcastle with a national housebuilder.
Both the capital raising and investment for the HRF2 occurred during a period of unprecedented challenges.
Following the investment of the Hearthstone Residential Fund 1 (“HRF1”) from 2017 to 2019, capital raising for its successor fund HRF2 started in the autumn of 2019. Engagement with existing and prospective investors was then severely disrupted from March 2020 onwards with a series of lockdowns, and investors effectively stopping any face-to-face meetings well into 2022.
At this time, the housing market faced a series of challenges.
Andrew Smith, Chief Investment Officer at Hearthstone Investments comments: “The lock-downs resulted in disruptions across the value chain: planning, development, viewings, repairs and maintenance, conveyancing and valuations were all impacted. Even once some of these activities started normalising, the supply chain for housebuilding was severely interrupted with delivery times for key building materials escalating, slowing down construction of new homes. To make matters worse, the war in Ukraine led to a spike in inflation which further slowed construction of new homes and led to the cost-of living crisis impacting affordability for renters.”
With a “fully remote” approach to capital raising from March 2020 onwards, Hearthstone Investments achieved a successful first close of £97m in November 2020 and a final close in December 2021 totalling £152m. All investors are UK Local Government Pension Schemes, 2/3 of which were new investors whilst 1/3 had previously invested in HRF1.
According to Hearthstone, the track record gained with HRF1 was a critical success factor in gaining the trust and support of existing and new investors without the benefit of meeting them in person.
Investment of capital began in the middle of the second lockdown in 2020. By December 2022, within a year of the final close, transactions had been verbally agreed for 100% the committed capital. And by the end of December 2023, 90% of the committed capital had been allocated to transactions that had completed or exchanged.
As per February 2024, the HRF2 portfolio holds 312 units with a further 150 being built.
The portfolio is regionally diversified across 18 sites resulting in positive regional economic impact both during the construction stage and on an ongoing basis by creating employment for local agents and contractors. 34% of the new homes were built as part of transformational brownfield regeneration projects.
Importantly, locations for investment are selected in areas of particular supply/demand imbalance. 46% of renters in the portfolio moved 10 miles or less. Placemaking and community building are important aspects of the investment philosophy: 85% of homes are within 500m of public transport, 100% of homes are within 250m of public green space.
All homes are highly energy efficient with 98% of the homes being EPC B rated and 2% EPC A rated. This results in an average CO2 emissions of 1.2 tonnes per annum per home, five times less than the national average.
With its focus on regional investments outside prime urban areas, rents remain affordable to a broad range of residents including families, young professionals and key worker (circa 25%). The average rent as % of income is 27%, below the national average of 30%.
Finally, the portfolio is delivering on its returns objectives with investors enjoying a yield of 4% income yield (net of all cost and fees).
Helen Simons, Investment Director of Hearthstone Investments says: “Over the past 5-10 years, Hearthstone Investments has built an excellent network with housebuilders and agents, and critically gained their trust having already successfully deployed HRF1. This laid the foundations for the successful investment of the committed capital even under such demanding conditions.”
Hearthstone Investments is currently raising capital for the successor fund for HRF2, the Hearthstone Residential Fund. It follows the same investment strategy as HRF1 and HRF2, and has a semi open-ended structure, offering flexibility for institutional investors to adjust exposure.
