The news that we have another social housing fund listed on the stock market should be a big positive. I’ve long maintained that if we’re to fix our multiple housing problems in the UK, we need to find a way of getting private capital working alongside social housing associations. These excellent market led, social enterprises can already access the wholesale lending markets but if wecould find a way of channelling more money from the retail space we could really speed up new social housing starts, as I explained in a recent MoneyWeek column at http://moneyweek.com/how-to-fix-the-housing-crisis/.
The new social housing trust is called Residential secured Income and has the ticker RESI. It looks like it’s raised £180m, and its shares are currently trading just up from the issue price at 100.12p.
But, and this is the important caveat I’m not currently inclined to buy either of the two funds (Resi and Civitas). Why my caution? Put simply I’m concerned that the target dividend yields – 5 to 6% – and the total expected returns (around 8%) look a bit heroic, especially if we assume that gross returns will need to be even higher to pay for fund management costs.
Most housing associations can already fairly easily tap existing sources of wholesale or government backed funding for rates of below 3.5% for the long term. So, why would any ambitious housing association want to endure a much higher cost of capital – and involve themselves in pesky public market investors? I can see how with the right amount of leverage; a smart social housing private investor could use 50% leverage to boost total returns to say 5% especially if they could cleverly play the capital values of the underlying property. But for the life of me, I can’t see we get much above 5% total gross returns on a heavily regulated asset. Three alternatives jump to mind. The first is that private buyer of social assets targets higher risk, higher margin property, possibly in the assisted living segment where higher yields are possible. But this makes me worry about the covenant of the end buyers in a social care funded market under strain.
The next alternative is to engage in more complex financial engineering which might boost profits. Again, there’s nothing intrinsically wrong with this but there’s a real reputational risk if these complex structures start to unwind after some form of exogenous shock or surprise. The last alternative source of value creation is that the portfolio of social assets might start to evolve over time. This could, for instance, involve changing the mix of tenants away from traditional social tenants to assisted living and affordable rents (at 80% of market rents). I think this is highly unlikely given the tough regulations but who knows? My point here though is that investor perceptions might have been set too high in my view. I did talk to one spokesperson for one of the funds concerned. I tried to get them to explain to me how these total returns are possible and I have to be honest and say that after numerous exchanges – and lots of impenetrable acronyms – I was still none the wiser.
My own sense is that social housing will only ever be a boring, low yield investment. And so it should be. It’s about helping poorer and more vulnerable members of society get a decent home. The private sector can and should play a role but this is only ever going to be a 2.5 to 5% total return prospect. Period. In an environment of low-interest rates and low inflation that’s a perfectly sensible return profile for large institutional players. It might even make some retail investors happy to know they’re backing charities and housing associations with reasonable, long term money – with inflation protection and asset backing. And in fact, we have seen retail bonds issued within this space which yields closer to the top end of this spectrum – around 4%, which suggests what I think is a more realistic return.