Dolphin Square Charitable Foundation has put out a listed bond through the Retail Charity Bond umbrella, which issues bonds on behalf of charities. This is not an exciting bond in terms of yield, but on a relative basis it represents fair to good value. It could be a good place to park your money where capital preservation is of primary importance.
Dolphin was founded in June 2005 as a charitable trust, following a donation of the £125m proceeds from the sale of the leasehold of the Dolphin Square mansion block in Pimlico. It is a housing charity but not a housing association, which means that it is not regulated by the Housing and Communities Agency (HCA) although it has an HCA-regulated division through which it provides social and affordable housing. The charity has 600 homes in central and inner London and is in expansionary mode, with 196 homes under construction and more planned (hence the bond issue). These span six sites in Westminster, and one site each in Hackney, Camden, Lambeth, Ealing and Waltham Forest.
The charity aims to supply intermediate housing (as opposed to social and affordable housing) at below-market rents. Since intermediate housing is not regulated by the HCA, it has greater flexibility on the rents it can charge. The level of subsidy seems in line with affordable rents, although the overall rent is higher as the homes are better quality. On average Dolphin charges 53% of market rent where it is subsidised, with some flats let at market rent. One crucial question is how Dolphin can make new sites work economically when it is in competition with the private sector and it only charges half of the market rent. The chief executive tells me that there are a number of reasons. Sometimes it is awarded the affordable housing part of a development. In other cases, it will be chosen for non-economic reasons (eg, when a Methodist church is redeveloping a site). It also has no outside shareholders to please. Finally, affordable rents do not fluctuate in the way that open market rents do and Dolphin will always have demand (since the rent is subsidised) so it has greater certainty of income than a commercial operation.
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Dolphin's balance sheet is robust. As of 2016, the charity has £123m of property assets (£38m are developments) and investments (cash-like instruments) and working capital of £84m. Dolphin only commits to development once it has the cash in place, which explains the large investment item. Borrowings are £58m. In 2016, its net rental surplus was £759,000 (rental income minus property costs). Other encouraging indicators include a 98.53% occupancy rate (not a surprise given it is subsidised accommodation in prime locations); average re-let time of 17 days; and rent arrears of 1.8%. Dolphin is a financially very sound proposition. Given that ten-year gilts yield 1% and investment grade corporate bonds yield 1.75%-3%, the relative value of this bond is clear. Any doubts relate to the wider outlook.
Since my last article we have had the general election. The Maybot has blown many fuses. The Tories dare not trade her in for an upgrade (is one even available in the cabinet?). The shadow of Pol Pot looms over Number 10 and his Year Zero acolytes are on the march. The portents are not good. Meanwhile, government debt marches onwards and upwards. Inflation stands at 2.7%, and austerity (if it ever meaningfully happened) is said to be over, which is not good for further inflation. The only comfort is that property and UK equities will suffer more if the worst happens. That and the fact that, as a charity supplying subsidised rent, Dolphin should be relatively immune to credit deterioration in any Corbynista new reality that confronts us.
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Terms
Issuer
Retail Charity Bonds
On behalf of
Dolphin Square Char. Found'n
Nominal amount
£25m
Rating
Unrated
Coupon
4.25%, semi-annual
Coupon dates
6 July, 6 January
Maturity date
06-Jul-26
ISIN
XS1634535253
Denominations
£100
Listing
London Stock Exchange
Housing subsidies are a dangerous policy
Dolphin commissioned the University of Westminster to produce a report on the value of subsidising rental accommodation. This concluded that subsidies should be used for key workers: teachers, nurses, emergency service workers, and civil servants (all public sector), plus those in the charity sector (why?). Workers in east London creative industries and those supporting London's mainstream cultural attractions are also mentioned, but the everyday office worker doesn't get a look in.
I also note that tenants in Dolphin's outermost site (Waltham Forest) pay full market rent, but in five out of six of the Westminster sites subsidised intermediate rent predominates. The charity's justification for providing this heavily subsidised housing in the priciest parts of London when the ordinary workers have to commute from cheaper zones is to improve social cohesion and avoid the experience of Paris, where a prosperous centre is ringed by poor suburbs.
In Dolphin's favour, it wants to encourage workers. It is also trialling personalised rents where what tenants pay is linked to earnings (although, in my view, this creates an incentive to lie). But this does not negate the worrying direction of travel in housing policy more broadly. In a world of subsidy, those who game the system win and those who select the winners wield power.
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