September 10, 2009 / 11:31 AM / 8 years ago

Fund manager sets sights on residential property

LONDON (Reuters) - Fund manager Mountgrange spies more money-spinning opportunities in the housing market than in commercial property, where prices are rallying fast under the glare of the world's wealthiest bargain hunters.

Nick Berry, a partner at the privately owned fund manager, said sheer weight of money chasing discounted UK offices and shops was inflating values quicker than the fundamentals alone would support, pushing the firm to consider alternatives.

"There's a stronger case for optimism in the residential sector at the moment. There is an overwhelming shortage of housing, in particular affordable housing so demand is easily identified," Berry told Reuters.

"Available commercial property stock is much less abundant and when you're thinking about where demand is coming from in that sector, it's not so obvious. Unemployment is rising and that is pushing up vacancy rates too," he said.

Berry said the appeal of the residential sector was underpinned by lower construction costs and cheaper land prices, as well as a willingness on the part of some UK banks to take action on their problematic residential assets.

He said Mountgrange, which has 260 million pounds of equity to invest, was looking at possible joint ventures to help cash-strapped landowners or housebuilders to develop or to help over-burdened banks unlock capital tied up in non-income producing land.

"Political support for new build residential property means you can be quite creative about how you might bring new housing to the market," he said.

Earlier on Wednesday, housebuilder Berkeley Group (BKGH.L) said it had bought a number of land sites after identifying signs of stability in housing markets in London and southeastern England.

COMMERCIAL FALSE DAWN?

Berry said Mountgrange was still hoping to strike deals in its more traditional commercial real estate hunting ground but well-priced properties remained difficult to find.

"The reality is, a lot of stock is still firmly locked away and has not come out of the cupboard yet," he said.

"The sub-5 million pounds and the very prime slices of the market are in heavy demand and therefore there has been a degree of yield compression. For someone who doesn't know the market very well, that can really colour your perception as to how improved things are," Berry added.

Mountgrange, which was set up by veteran property entrepreneurs Martin Myers and Manish Chande, made its last acquisition in August 2008 when it bought a portfolio of retail and office properties from PRUPIM for 140 million pounds.

Berry said Mountgrange's investors -- a mix of sovereign wealth funds, European and North American fund of funds and state pension investors -- have been supportive of a decision to remain on the sidelines and placed no pressure on them to rush back into the UK property market.

"I'd say that whilst rents continue to fall and it is unclear where new occupier demand is coming from, it is difficult to argue that funds who have adopted this approach are in danger of missing out," he said.

"The market and the banks have not deleveraged in any great way. Stock markets have bought into the corporate recovery story but we are cautious. We are earnestly looking for new deals but we are looking for scarcity value and where we can see tangible reasons for growth," he said.

(Editing by Andrew Macdonald)

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