Britain has a growing shortage of affordable housing. The number of new houses registered in the UK’s affordable and build-to-rent sector last year was 42,084, according to the National House Building Council – up just 20% since 2008.
Part of the problem is that housing associations – which account for 94% of social housing in the UK – “are scaling back investment in new properties to focus on fire safety and energy efficiency”, says Ben Fry, manager of Residential Secure Income (LSE: RESI). That why “the government is keen to support new entrants to the sector” – which is where his fund comes in.
Two growth markets
RESI, which listed in 2017, owns a portfolio valued at £346m, including 2,222 retirement homes and 549 shared-ownership homes (plus 289 houses leased to local authorities to house the homeless, which is now “less of a focus”). The retirement homes offer “independent living” in blocks of one- and two-bedroom flats with communal spaces, a careline system and an on-site manager. The average rent is £640 per month – “around local housing allowance levels”, says Fry. A key benefit of these properties is “the provision of a solution for loneliness”. He estimates that the retirement housing stock needs to grow by 65% to 1.2 million by 2066, to cater for the growth in the number of people aged over 65 to 20 million.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Meanwhile, the government has initially committed £6bn to provide 100,000 shared-ownership homes and sees this figure becoming an annual target. That goal is “supported across the political spectrum”, in recognition of the growing number of people priced out of the full ownership market, says Fry. Although interest rates have fallen significantly in the last 25 years, house-price-to-earnings ratios have risen correspondingly. So total mortgage costs include higher capital repayments, while saving for a deposit has become much more challenging.
Shared ownership means the deposit requirement falls significantly and so does the income requirement for a mortgage. RESI’s offering is for 30% ownership/70% rental, with a consequent overall saving of £200 per month (£400 in London). What makes the numbers add up is the government subsidy averaging £29,000 per new home (but £38,000 for a project in Clapham), which results in an average discount of the purchase price to open market value of 19%. Tenants can increase their ownership share or – more likely – move on to a full ownership property when they can afford it. With just 40,000 shared-ownership properties in the UK at present, the long term opportunity is significant.
Built on low-cost debt
The focus on affordability means these are not high-yielding properties. Net yield on cost of the retirement properties (61% of the portfolio) is a lowly 5.3% and of the shared-ownership properties just 3.3%. However, a loan-to-value ratio of 50% pushes the yield up to 7%. After costs, a total return of 8% is expected, financing a 5% dividend yield and modest capital appreciation. Rents rise in line with the retail price index in the retirement portfolio and 0.5% ahead of retail-price inflation in shared ownership.
The financial model works because the debt costs only 2.7%, with an average maturity of 23 years. Most recently, the fund has negotiated a £300m 45-year debt facility, at a rate of 0.5% per annum plus inflation. This arrangement suggests RESI will be planning to issue more equity, mainly to fund growth in the shared-ownership portfolio.
With the shares trading at around net asset value of 105.5p, this is a steady, low-risk proposition. Investors are not only making a solid investment, but also helping the private sector to succeed where the public sector has struggled in the provision of affordable housing.
Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
Nationwide: UK house prices creep up by 0.2% - are we heading for a rebound?
Nationwide’s latest house price index shows property prices inched up by 0.2% as demand warms up - will this trend go into 2024?
By Kalpana Fitzpatrick Published
December 2023 NS&I Premium Bond winners revealed - have you won the jackpot?
Two Premium Bond holders are now millionaires as NS&I reveals December winners. Find out if you’re one of them
By Vaishali Varu Published
M&S shares shift from frumpy to fabulous as pre-tax profits are up by 56%
M&S is performing strongly and has announced it will pay a dividend for the first time since the pandemic.
By Dr Matthew Partridge Published
The rise and fall of Sam Bankman-Fried – the “boy wonder of crypto”
Why the fate of Sam Bankman-Fried reminds us to be wary of digital tokens and unregulated financial intermediaries.
By Jane Lewis Published
Three defence stocks set to flourish in an era of instability
A professional investor tells MoneyWeek where he’d put his money. Tom Bailey highlights three defence stocks that look promising.
By Tom Bailey Published
EasyJet shares rise after record results
The EasyJet group has shrugged off the cost-of-living crisis, restarted dividends and shares look good value.
By Dr Matthew Partridge Last updated
The fallout from the war on landlords
Investors fleeing the market and the rise in rents are affecting us all.
By Charlie Ellingworth Published
Eight small-cap trusts to bet on
Funds investing in market minnows are out of favour, but the cycle will turn. Here are the best bets.
By Max King Published
Trust in US TIPS to beat inflation
In an inflationary market TIPS, the US Treasury Inflation-Protected Securities are most compelling says Cris Sholto Heaton.
By Cris Sholto Heaton Published
What is Vix – the fear index?
What is Vix? We explain how the fear index could guide your investment decisions.
By Dr Matthew Partridge Published