These social housing bonds are a solid place to park your money

This social housing bond could be a good place to park your money if capital preservation is of primary importance, says Oliver Butt.

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.

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.

Terms
IssuerRetail Charity Bonds
On behalf ofDolphin Square Char. Found'n
Nominal amount£25m
RatingUnrated
Coupon4.25%, semi-annual
Coupon dates6 July, 6 January
Maturity date06-Jul-26
ISINXS1634535253
Denominations£100
ListingLondon 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.

Recommended

Bonds
Glossary

Bonds

A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020
“The economics of investing in bonds has become stupid”
Government bonds

“The economics of investing in bonds has become stupid”

Ray Dalio, one of the world’s most successful hedge fund managers, says that investing in bonds right now is “stupid”. But why, and what does he sugge…
16 Mar 2021
Bond investors should beware the panic as inflation approaches
Bonds

Bond investors should beware the panic as inflation approaches

With yields at record lows and fear of inflation rising, bondholders have rarely looked this vulnerable
8 Mar 2021
The charts that matter: tech-stock sell off gathers pace
Global Economy

The charts that matter: tech-stock sell off gathers pace

US stocks, and the tech-heavy Nasdaq index in particular, took a big tumble this week. We look at how that’s affected the charts that matter most to t…
6 Mar 2021

Most Popular

The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021
Central banks are rushing to build digital currencies. What are they, and what do they mean for you?
Bitcoin

Central banks are rushing to build digital currencies. What are they, and what do they mean for you?

As bitcoin continues to soar in value, many of the world’s central banks are looking to emulate it by issuing their own digital currencies. But centra…
8 Apr 2021
Four investment trusts for income investors to buy now
Investment trusts

Four investment trusts for income investors to buy now

Some high-yielding listed lending funds have come through the crisis with flying colours. David Stevenson picks four of the best.
12 Apr 2021