Affordable and social housing has been moving up the political agenda. There is widespread concern about a shortage and there have been calls for a state spending spree to build more, but the government appears more inclined to rely on private housebuilders and housing associations to fill the gap. In that case, private-sector funding of social housing will need to increase – good news for investment trusts in the sector.
Why share prices have rallied
The biggest fund in this area, Civitas Social Housing (LSE: CSH), has seen its share price rally by 25% this year, with the Triple Point Social Housing Reit (LSE: SOHO) not far behind. The social-housing policy backdrop hasn’t been the key driver; investors realise that government backing for (subsidised) rent rolls is a better bet in a crisis than commercial leases, where tenants are walking away. Triple Point has said that 100% of rent due in the second quarter of 2020 had been received.
Both Civitas and Triple Point operate specialised supported-living accommodation for adults, many of whom have learning disabilities or mental-health care needs. Civitas, which yields around 5%, has also been quietly moving its focus towards a niche called high-acuity (medically intensive) care properties – shifting the business closer to healthcare than traditional social housing, which might in turn mean that the yield is dragged towards 4% as investors’ interest grows.
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Both trusts report strong pipelines of new projects. Civitas has bought a £12m new-build, supported-living and healthcare facilities in Wales. It provides 65 beds for people with learning disabilities, autism and mental health needs.
Civitas also benefits from a low loan-to-value ratio of around 25% and is looking to boost dividend cover in the coming year to one. Triple Point recently completed the acquisition of 16 properties (comprising 70 individual units) for a total of £9.6m. Its dividend – the yield is also 4.9% – is already covered.
Then there is Residential Secure Income (LSE: RESI), which focuses on shared ownership. Rent collection has been unaffected and it boasts a strong growth pipeline. It recently announced the acquisition of 73 shared-ownership flats at the Clapham Park development in London.
As of 28 July the portfolio consisted of 205 homes, of which 88 were occupied, 44 were reserved and 58 were available for shared owners. The yield on this fund is 5.6% but the discount to net asset value (NAV) is 15%, which could tighten quickly if interest in social housing grows. However, the shared ownership model seems more exposed to a possible housing market downturn in 2021 as first-time buyers’ finances deteriorate after the end of furlough.
A potential bargain
The fund most exposed to a housing slowdown is the PRS Reit (LSE: PRSR). This fund invests in newly-built family housing for rent, a sector many think is primed for rapid growth as institutional investors move into the space vacated by buy-to-let landlords. PRS is at the forefront of this push and again, so far, rent collection looks strong. PRS Reit reported a 98% collection rate in the second quarter. It has built 2,082 homes since May 2017.
The board is targeting a dividend of at least 4.0p for the financial year to June 2021. There is some evidence that the economic downturn might encourage demand for rented accommodation: PRS reports that rental demand remains high, with over 500 reservations awaiting a move-in date. That will add £4.6m of annual rent once occupancy has started. PRS Reit has slipped by 15% this year and trades on a 20% discount to NAV. But my sense is that there is a shortage of affordable family homes. If PRS Reit can avoid a nasty spike in arrears in 2021, it could be a bargain.
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