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Reit market is choppy, but don't dismiss social housing

UK houses_London_PA_230x150
By Aidan Gregory
01 May 2018

The launch of yet another new social housing real estate investment trust (Reit) this week will not be easy. The market has felt congested recently, and peers have ridden over a few bumps. But there ought to be a place for this asset class.

Horizon, the alternative investment manager, announced plans on Monday to float a new £125m ($169.93m) Reit focused on social housing. The properties it owns will be let to housing associations — UK not-for-profit social housing providers.

The decision looks bold, as it comes less than a week after Fundamentum Supported Housing — another new fund, focused on providing housing to people with disabilities — withdrew its £150m flotation, citing difficult market conditions.

Civitas Social Housing was the first UK social housing Reit to list, in November 2016. It was followed by Triple Point Social Housing and Residential Secure Income Reit. The three firms have raised a combined total of more than £1bn of equity to buy a finite number of assets that are in short supply.

Since it is notoriously hard for local councils and housing associations in the UK to build new social housing, new supply is unlikely to come to market in any great volume — so that ought to support valuations.

Yet market participants warned at the end of last year that after so much equity issuance from the wider property sector, particularly the proliferation of niche Reits, space in equity investors’ portfolios for the asset class was dwindling.

Equity investors began to show signs of UK Reit fatigue as early as last year. Since November, numerous specialist Reit IPOs have had to be cancelled, including a multi-let commercial property fund from M7 and a long lease office fund by Aviva.

Even the sub-market of social housing specialist Reits looks saturated. As Fundamentum's stumble suggests, any new fund must offer a suitably differentiated product, or risk a similar fate.

Different prospect

Horizon Housing Reit is pitching itself as different from its listed peers, because the assets it plans to buy are split between properties for rent at below market rates and accommodation designed for the elderly and people with disabilities.

But bankers working on the deal are under no illusions. They know it will be a difficult transaction to pull off in this market environment, despite a big cornerstone order from the East Riding Pension Fund.

“Nobody is suggesting that it is going to be a walk in the park,” said a source close to the deal. “You can’t be in a situation where you turn up with an identical offering and expect investors to put money in.”

Despite there being a huge demand for quality social housing, it is not a riskless sector.

Civitas, the market leader, traded off in February and March after First Priority, the Kent-based housing association that leases 45 of Civitas' 400-plus properties, was revealed to have fallen into financial difficulty.

The Reit said it would not enter into any new leases with First Priority until the difficulties had been resolved, but it said First Priority had paid all rents in full up to the end of January. Its share price has bounced back, after bottoming out in late March. 

Social housing is very exposed to government policy, which has at times looked unpredictable.

However, the basic argument for private involvement in social housing remains strong. The government does not have the resources to meet all the sector's needs. The more private capital is injected into the space, the more money is freed up for housing associations and councils to build more social housing for society’s vulnerable.

For institutional investors and wealth managers, social housing Reits offer the prospect of high yields with inflation protection. Horizon is promising to pay its investors 4-5% initially, rising with inflation in subsequent years.

Social housing Reits offer the added benefit that housing associations collect housing benefit paid by local councils, which receive their financing from central government. This gives the income stream a perceived security.

Without a rapid increase in UK interest rates, which the market does not anticipate this year, the existing products are likely to remain popular with investors.

They provide a stable stream of decent income, offer portfolio diversity and achieve a social good.

Capital raising may remain tricky and subject to the whims of the market, but the asset class in principle deserves investors' attention.

By Aidan Gregory
01 May 2018