Single Access Funding seeks investment of up to £300m by September
First social housing REIT set to launch
A new company is set to take advantage of the government’s attempt to open up tax-efficient property investment vehicles in the affordable housing sector by launching the first social housing real estate investment trust.
Single Access Funding plans to launch its REIT in September, shortly after legislation easing entry into the market is due to be approved.
SAF has targeted £500 million of institutional investment and will go on a ‘roadshow’ to raise funds next month. Phil Shanks, co-founder of SAF, said he hoped to have between £200 million and £300 million of funding in place by September.
The money will be used to finance up to 4,000 new social homes, initially extra care and supported housing. SAF will pool groups of properties provided by local authorities, before leasing them back to council-nominated housing associations. The SAF REIT, first reported in Inside Housing in December 2011, will aggregate these groups of properties, which would otherwise be too small to attract the level of institutional investment required to launch a standalone vehicle.
Investors, which are expected to include pension funds and insurers, will see returns of 4 per cent.
‘The key thing for us is the guarantee of income, as then you can get lower returns,’ said Mr Shanks, adding that the economic climate has made the security of investing in social housing more attractive to institutional investors.
SAF said it had commitments or indicative agreements from at least four councils looking to be involved in the REIT. Walsall Council is expected to provide a portfolio worth up to £30 million, while Isles of Scilly Council and Nottinghamshire Council, are undergoing due diligence ahead of joining the scheme.
The government is consulting on how to adapt legislation around REITs to help attract new investors into social housing. Some changes have already been included in the Finance Bill, which is expected to come into effect in July. These include the scrapping of a 2 per cent levy on starting a REIT and a three-year grace period before the vehicle has to be listed on a stock exchange.
These changes and the consultation have been broadly welcomed by the social housing sector.
‘[The] government looks committed to helping housing associations find alternative sources of capital to replace dwindling grant funding,’ said Phil Nicklin, a real estate partner at consultancy Deloitte.
Housing associations are in a unique position to attract institutional invesment
It is clear the government has listened to the social housing sector’s views in last year’s real estate investment trust consultation and as a result current policy is to make the UK REIT model flexible and efficient to stimulate external investment in the sector.
The only investors that will accept the lower investment returns paid on a residential property management REIT are pension funds and insurance companies. They are looking for investments which match their own long-term pension and insurance liabilities with a long-term, low inflation risk investment.
They are not interested in investing £50 million. They will not speak to you until you mention £500 million as it is only at this scale that the investment starts to make sense for them. This is where housing associations come in because only they have the current scale and management experience needed to make a residential property management REIT work at the economic level. It would take years for a new player to build up the necessary scale and no investor will take on development phase risk.
The government has realised this and it is one reason the new social housing consultation, which closes in June, has been announced so quickly. This raises the point that, at a minimum of £500 million, many housing associations are cut out. The solution is an aggregator REIT not dissimilar to the way the bond aggregators work so that smaller housing associations can access the new REIT investment model.
An aggregator REIT, unlike a bond aggregator, can be scaled more easily so that even the smallest housing association can participate. It is very exciting to see Single Access Funding looking at an aggregator REIT to finance future special needs and assisted care housing.
James Duncan is a partner at law firm Winckworth Sherwood