Investors can now put their money into social housing through an ever-growing number of real-estate investment trusts (Reits), operating in what seems likely to be an area of significant expansion. Not only is this good news for those unable to afford or even find somewhere to live, it is also good news for institutions looking for a long-term return at an attractive rate, something that has all but disappeared through conventional investment instruments because of the low interest rate environment.
But there remain several hurdles that have held back the construction of new affordable homes, not least the fact that until 2019/20 social housing rents are capped at consumer prices index (CPI) inflation minus one percentage point. This affects valuations and the ability of any housing association to borrow money, where headroom is already running out. They are not allowed to raise equity, and so there has been a move to raise funds in another way. Central government housing grants have been chipped away over the years, although there are signs that this will be reversed.
Meanwhile, one simple way to obtain new funds is to sell existing housing stock and use the proceeds to build new homes. There is plenty of institutional money looking for somewhere to earn a reasonable return, and this explains why a number of Reits have been created to act as the conduit. As analysts at Hardman & co point out, social housing stock is currently valued at over £300bn, compared with just £1.28bn raised by Reits so far. There are around 23.5m households in the UK, but more than 4m of these live in properties owned by local authorities and housing associations.
There are some risks with mainstream residential assets, mainly maintenance and running costs, although social housing Reits will outsource these, plus modern stock naturally needs less maintenance. And while pure residential yields are lower than the broader sector at around 2.8 per cent, adding in a capital return increases the yield significantly. There may be concern that increased supply would put downward pressure on rents. This is a possibility, but with more than 1m households on local authority housing waiting lists, it’s going to take a massive move up in output to address the imbalance.
And there is plenty of scope to develop mixed-use sites, with builders operating on a forward-funded arrangement, whereby institutional money pays for the whole process from planning to completion. That leaves the builder with little risk and a capital-light trading model. In the past year, five residential Reits have been launched, including Civitas Social Housing (CSH). Civitas is the largest, raising £652m when it floated in November 2016. And more recently it secured an interest-only fixed-rate loan facility for £52.5m. Crucially, around three-quarters of its portfolio focuses on 'specified needs' social housing, where rents are not governed by the one percentage point reduction rule. The year 2017 was the start of a new sub-sector, leaving student accommodation aside. With the pressing need for homes it’s likely that we’ll see more residential Reits coming to the market in 2018.
