Another week, another fund looking to offer up alternative sources of income, this time from social housing. The new fund will be called Residential Secure Income plc or ReSI for short (get it? Resi!) and is hoping to raise £300m via a placing. In terms of timelines the press note suggests that “it is currently expected that the Prospectus will be published and the Issue will open during the week commencing 19 June 2017 with the Issue closing on or around 6 July 2017. Admission and the commencement of trading are currently expected to take place on or around 12 July 2017.”
I have to say I have mixed feelings about this potential launch. For information purposes, I’ve pasted in the key highlights from the proposed raise below. On the positive side, I think there is an obvious demand for what’s called asset-backed long income i.e assets in a fund that produce inflation backed regular income that might grow over time. I’m also a huge enthusiast about pushing more private sector money into social housing. As I’ve observed already in a recent MoneyWeek column, the UK desperately needs more social housing. The government should, and will, pick up most of the tab but the private sector I think is willing to provide cash for the right projects — on the right terms. So a big thumbs up from me for the investment case.
The problem as I see it is the return profile. Put simply, most housing associations can already access the public lending pools — and private bank wholesale markets — with funding rates of below 3% in some cases for pure play social housing. Equally, progressive housing associations with growing private housing portfolios can also access private bond markets with borrowing rates below 5%. These low single digit numbers all make sense as social housing as an asset class (is it one?? I suppose it a sub-component of social infrastructure) is only ever going to be a low yield play. If it wasn’t it’d be higher yielding private housing by definition. No one will ever get rich investing in property owned let by poorer residents dependent on housing benefit. Nor should they as we, the taxpayers, will collectively end up picking up the tab.
This new fund promises returns of around 8% long term, I’m guessing with some structural leverage. I simply can’t see how those numbers stack up. Where are the investment opportunities in social housing producing those kinds of returns ??
Key highlights from the press notice
Fundamentally attractive environment for investing in UK Social Housing
• The pressure to build more homes combined with reduction of new UK Government grant is encouraging Housing Associations in the UK to seek new alternative financing routes to support their development plans, including diversifying into other activities to generate profits to replace grant and creating growth plans that do not rely on assets being held on Housing Association balance sheets.
• Similarly, many Local Authorities in the UK are focusing on increasing housing stock in their areas and are seeking private capital to facilitate this development and create new revenues streams to offset reductions to grant funding from the UK Government.
• The Company, therefore, seeks to meet demand from Housing Associations and Local Authorities for alternative equity-like financing sources, allowing them to re-cycle capital back into economically beneficial new developments.
Secure, long-dated and inflation-linked returns from a defensive asset class
• Homes acquired by the Company will predominantly be freehold or long leasehold basis (typically 99 years or more to maturity) and benefit from long term (typically 20 years plus) inflation-adjusted cash flows with the Company outsourcing day-to-day management, rent collection and maintenance.
• Acquisitions by the Company will be limited to Homes with sufficient cashflows, counterparty credit quality and property security that allow the Fund Manager to arrange long-term investment grade equivalent debt.
• The Company is targeting, on a fully invested and geared basis, a dividend yield of 5 per cent. per annum based on the Issue Price, which the Company expects to increase broadly in line with inflation, and a total return in excess of 8 per cent. per annum.
The Fund Manager Group has strong relationships and an extensive track record of executing transactions within the UK social housing sector
• ReSI Capital Management Limited a wholly owned subsidiary of TradeRisks, will act as the Company’s AIFM.
• TradeRisks’ core client base for corporate finance advice is the UK social housing sector, with its client base concentrated amongst the largest Housing Associations.
• In addition, TradeRisks provides corporate finance advice within the Local Authority sector, as well as to other social infrastructure and specialist residential property clients.
• The Fund Manager Group has advised, and to date, has arranged funding of over £10 billion in the social housing, care and other specialist residential property sectors.
Strong identified pipeline of off-market investment opportunities
• The Fund Manager has identified a strong pipeline of off-market investment opportunities, sourced by the Fund Manager Group through its extensive network of contacts and relationships.
• In particular, the Fund Manager has entered into advanced negotiations on behalf of the Company in respect of the acquisition of portfolios of Homes valued at, in aggregate, approximately £263 million.
• The Fund Manager will target standing investments and forward funded opportunities but will not undertake any direct development or speculative development.
• The Company currently expects the Fund Manager to be able to deploy the net proceeds of the Issue within nine months of Admission.
• ReSI Housing Limited, a wholly owned subsidiary of the Company, submitted a preliminary application to the HCA on 30 May 2017 to apply for Registered Provider status2.
Robust corporate governance framework with strong alignment of interest between the Fund Manager and shareholders
• Oversight will be provided by a highly experienced, fully independent Board of Directors.
• The Fund Manager will receive 25 per cent. of the fund management fee in the form of Ordinary Shares. The Fund Manager will not be paid a performance fee.
• The directors of the Fund Manager intend to subscribe for, in aggregate, 1.3 million shares pursuant to the Placing.