DIY Investor Magazine
|
June 2017
43
Rents are maintained at affordable levels for low income
households; today they are set at 80% of private sector
rents – across the social housing sector 60% of the
of the rent roll is paid by the Government via Housing
benefit with 40% paid directly by the tenant.
From an investor’s perspective, social housing has many
positive attributes:
•
leases are long, up to 50-years, and linked to CPI
•
Rental voids are covered by the HA
•
Virtually 100% occupancy levels with low bad debts
- c2.5% of gross rent per annum, and less than 1%.
in London and the SE
•
Implicit support from local government; the sector
has never suffered a credit default despite around
£60bn having been lent over the past 30 years by
banks and building societies.
•
A regulated framework provided by the Homes and
Communities Agency (‘HCA’)
•
Properties are professionally managed by a
Registered Provider (‘RP’), regulated by the HCA,
who service all management and maintenance
obligations.
RPs have sought to address the shortage of homes
by reducing costs, enabling a drive to build more
homes, this was also partly necessitated by a 1%
reduction in annual rent and cuts to grant funding. In
Europe, institutions have supported the development
of the sector, but the UK has used a combination of
Government grants (c£60bn) and senior bank debt/
building societies (c£65bn).
Local authorities cannot borrow, so to overcome
this around 1m social properties were transferred
from local authorities to HAs, who can borrow, at no
effective cost; whilst the Government has progressively
reduced capital subsidies to HAs, many of them have
a substantial base of housing assets, held on their
balance sheet at cost or very low levels.
The sector has an excellent credit record, the few RP
that have encountered financial problems have been
rescued by stronger associations, while no private
lender has ever lost any money – there has never been
a credit loss across the social housing spectrum.
Until the financial crisis, the sector was well-supported
by banks, building societies and specialist lenders,
while some borrowers issued corporate bonds.
In general, lenders were attracted by the inflation linked
rents with income effectively paid by government via
housing benefits and a strong regulator. In summary,
we have a bricks and mortar investment opportunity, in
a highly-regulated sector, supported by central / local
government; assets (the properties) are professionally
managed, and let on long-term leases linked to CPI.
Better still, tenant demand outstrips limited supply, with
4.5m people on social housing waiting lists in England
and Wales and just 58,000 properties built in the last
two years.
This gives investors the opportunity to access long-
dated ‘real’ income that could be described as from a
supra-national provider. Small wonder that some of the
biggest investors in the sector are pension managers
such as L&G and M&G, who use the sector as a way of
matching their long-term pension liabilities. For example:
1.
M&G Real Estate is provided £19m for the
development of 189 residential homes for a
development company owned by Welsh housing
association, RCT Homes.
2.
Source:
Legal & General (L&G)
announced it has secured a portfolio of over 4,000
housing units, let to Places for People Homes on a
new 50 year lease, as it continues to grow its role in
supporting the UK’s housing needs.
Source:
So far, hopefully interesting, but how do you access the
sector? There are ORB listed bonds issued by HAs such
as Places for People, and Alpha to Dominion, or the
REIT issued by Civitas Social Housing.
To my mind none quite hit the spot, what I would like is
long-term CPI linked coupons/dividends.
There is the Places for People 1% index-linked bond
but the real value of that is paid at maturity as the
redemption is also linked to inflation.
Civitas have a target dividend yield of 5% p.a., which it
expects to increase broadly in line with inflation.
Both, to my mind are “close but no cigar”. Still, a
sector worth watching……….
