Home REIT saga raises doubt over the viability of investing in social housing

The aim of such investments is laudable, but is the risk too high?

The Home REIT saga continues to rumble on, with the investment trust last week rejecting a takeover approach from Bluestar Group that it said was “unlikely to maximise value for shareholders”.

Home’s shares have been suspended from trading since January, its FY22 financial results (due in November) remain unpublished, and its notional 60%+ discount to net asset value could be either much wider or much narrower, given a likely significant reduction (in line with other property funds) in the 111.2p NAV (last published as at February 2022) along with the fact that the 38p share price at suspension fails to reflect significant bad news from its tenants in recent months.

Meanwhile, Civitas Social Housing (CSH) has recommended a cash bid of 80p per share from a subsidiary of Hong Kong property developer CK Asset Holdings (formerly Cheung Kong Property), which also owns UK pub group Greene King. While CSH’s share price has jumped by 35% as a result, many investors are unhappy with the approach, given it still represents a c 35% discount to NAV.

While Home targets the reduction of homelessness and CSH provides supported housing for adults with physical or mental health needs, both are effectively trying to provide investors with a return by investing in social housing.

The social aim of such investment is laudable, but do the problems of rent collection and counterparty quality (tenants of Home, CSH and Triple Point Social Housing, the other supported housing REIT, have all been criticised by the Regulator of Social Housing, or RSH) mean the sector is effectively uninvestable?

The answer is probably both yes and no. The ‘yes’ primarily relates to the abovementioned REITs, one of which is suspended, one likely to be taken private, and the other still standing at a 56% discount to NAV despite a slight bounce in the share price after the bid for CSH.

However, the ‘no’ camp can point to a 2021 report commissioned by the Impact Investing Institute and authored by the Investment Property Forum, which concluded: “Our research into social and affordable housing suggests this sub-sector’s attributes are likely to justify its inclusion in a diversified portfolio that is seeking to achieve superior risk-adjusted returns.” The report points to low or negative correlations between both capital values and rents from social housing when compared with mainstream property, equities and gilts.

Gemma Bourne, housing investment managing director at social impact investor Big Society Capital (BSC), explains that away from the problems in the REIT space, the financial (as well as the societal) case for investing in social housing remains strong: “These are high-quality cashflows, rent collection is really high, and the sector has quite low correlation to economic cycles and other real estate assets.”

While impact investors may sometimes settle for concessionary (below-market) returns in order to achieve the desired social or environmental outcomes, Bourne says that what “on the face of it might look concessionary is actually risk-adjusted return, providing the right diligence is in place”.

Due diligence is key in selecting strong counterparties (that is, the registered providers or RPs through which the housing is provided to the end user) in order to avoid the problems seen in the social housing REIT sector. Bourne stresses that “we have been investing with mission-led, high impact property funds for 10 years, and what has been publicly reported about Home REIT – with rent going unpaid and unsuitable accommodation provided – is really atypical.” BSC acts as portfolio manager for the Schroder BSC Social Impact Trust (SBSI), an investment trust with around one-third of its portfolio invested in social housing, mainly through private or limited partnership funds.

“We invest in managers who really understand and have experience in social issues, and work with long-standing, community-based counterparties with good RSH governance ratings,” says Bourne, adding that these deeply experienced, robust and financially sustainable RPs are completely unlike the often inexperienced providers seen in some of the REIT portfolios.

In a report on the social housing investment sector published last year, BSC stated: “An impact investor in this space should facilitate investment flows into models where incentives are aligned and risks are shared, intentions are clear, and there is transparency and accountability to all stakeholders. Long-term impact capital from institutional investors should be well-aligned to the long-term nature and needs of the social housing sector.” Perhaps there is lesson here for long-suffering investors in social housing REITs.

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