Perhaps the most significant problem in the UK property market is the severe shortage of affordable housing, especially in the social-housing sector. These kinds of properties are highly unlikely to emerge on the green edges of metropolitan Britain, simply because the main private-sector builders don’t want to build them. Someone, somewhere, is going to need to figure out how to fund the cost of building our social-housing infrastructure.
There’s no doubting the demand for this kind of affordable home: there are around 4.5 million people on local authority housing waiting lists in the UK. The bad news is that government grants to housing associations to build more properties haven’t kept up with demand. So now we’re seeing a slow but steady transformation within the sector, with portfolios of social houses becoming available for other investors to buy as current providers seek to reduce their costs and become more efficient.
Cue the launch last month of a new closed-end fund managed by Civitas Housing Advisors (CHA). The CHA management team has direct experience in the social-housing sector, having managed more than 80,000 social houses throughout the UK and raised £350m for a real estate investment trust, Civitas Social Housing (LSE: CSH), which is now listed on the main market of the London Stock Exchange.
CSH will invest in a diversified portfolio of social housing in England and Wales and is targeting a dividend yield of 5% based on the issue price of 100p (although it will pay 3% in year one), which it expects to increase in line with inflation. The last time I looked, CSH was already trading at a premium of about 5%, and my guess would be that, given the demand for this kind of asset-backed structure, we could see that premium rise to as much as 10%.
The fund has entered into an agreement to acquire a portfolio of specialist social houses with a purchase price of around £65m. This portfolio is situated in the south of England and the Midlands and is leased to two housing associations on leases with effective terms of 25 years, and rents that are indexed to rise in line with the consumer-price index plus 1% each year.
These housing providers have clients who are renting their properties on long-term leases and occupancy agreements of typically ten to 40 years, with roughly 85% of the rental income to be paid directly by the government or by local authorities.
On paper, this kind of fund sounds exactly what many investors are looking for in these uncertain times. It is asset-backed, should see regular income, fills a specialist niche and has government support. In terms of risks, it’s worth noting that the social-housing sector has yet to see any loss suffered by investors due to a registered provider (such as a housing association or local authority) going bust and defaulting on its debts. In addition, the fund will not be involved in developing new projects, thus removing another element of operational risk.
However, there are some more general risks investors need to be aware of. For instance, we could see a dramatic reversal in residential prices in the UK. That would surely have some knock-on effect, however indirect, on the balance sheet of social-housing organisations.
A big recession might also result in a steep increase in rent arrears in some types of developments, although presumably the government might step into the breach. I would also be concerned that the financial requirements of these investment structures might be too onerous for the precarious balance sheets of some housing associations, who are often reliant on government grants.
Still, despite these risks and challenges, I think this fund launch could be the start of a bigger push to tap investors for new social-housing projects. That’s a welcome development, not least because it will help make the UK a better place to live for the less fortunate in society.