Business plan relies on government allowing use of affordable rent model
Places for People mulls £500m REIT
Places for People is set to launch a real estate investment trust that could raise up to £500 million, provided the government allows it to use properties let under the affordable rent model.
The 62,000-home landlord has put in place a financial model that will allow it to launch a REIT - a tax-efficient stock exchange-listed investment vehicle - as soon as possible after the close of a government consultation on using REITs to help fund future affordable and social housing.
Simran Soin, finance director at PfP, said the model would only attract sufficient investors if the government allows organisations to use affordable - rather than social - homes.
He said he would expect equity investors to demand returns of around 7 per cent, which could be achieved if affordable rent properties were included in a REIT as these would allow a landlord to charge up to 80 per cent of market rent.
‘Those returns are achievable using affordable rent levels,’ said Mr Soin. ‘That’s the feedback we have given.
‘We have a working financial model. It has been looked at by a couple of the big merchant banks, who have said they would be on board, and some of the big equity investors.’
PfP wants to transfer 4,000 to 5,000 properties with a total value of between £400 million and £500 million into its proposed REIT. Mr Soin said the process, which would start with the establishment of a for-profit subsidiary, could take up to two years to allow time to convert empty homes into affordable rent properties.
Profit generated from the investment could be recycled into other parts of the business.
‘We mustn’t lose sight of why [social housing] REITs are being proposed,’ added Mr Soin. ‘The proceeds would be used to build more affordable housing.’
Last month, Inside Housing revealed that a consortium of 10 housing associations was planning on launching a social housing REIT in September, claiming that institutional investors in the project would receive returns of 4.5 per cent.
But Mr Soin questioned whether these returns would attract investors.
‘I would be sceptical about whether investors would be happy with a 4 to 5 per cent return as equity is more risky than debt,’ he said.
The government consultation into social housing REITs closes on 27 June. It will look at how attractive affordable housing is to institutional investors and what barriers exist to investment.
Success of REITs with social housing dependent entirely on levels of return
In 2007, REITs were introduced as a tax-efficient method for individuals and institutions to invest in residential and commercial property collectively, with the investments being quoted on a recognised stock exchange. Existing property investment companies were able to convert into a REIT, although there was a tax charge on conversion. Some commercial property companies such as British Land plc made the change.
In 2010, a consortium of housing associations looked at setting up a residential REIT, particularly to hold the unsold equity in shared ownership properties. However, lack of co-operation from HMRC about whether these would be eligible investment properties or treated as a trading activity, as well as cost issues, stopped this from proceeding.
Most of the main issues, other than those concerning the tax status of shared ownership homes, are being addressed in the draft 2012 Finance Bill, due to be debated this autumn.
To attract investors, a REIT would have to achieve an initial distributable yield of at least 4 per cent, increasing by inflation. This, at an estimated annual inflation rate of around 2 per cent, would be slightly in excess of
the yield on long-term housing association bonds which currently is between 5 per cent and 5.25 per cent. Also, although a REIT is not for a fixed term, it is tradable on a market and asset-backed by property (rather than secured).
This level of return could be most obviously achieved via market rent housing. Where individual housing organisations or consortiums acquire/develop housing for sale as part of the mixed tenure on schemes which include social rent, affordable rent and shared ownership, the structure of a residential REIT could be a suitable vehicle.
The launch of a REIT to hold only social or affordable housing for rent will hinge completely on the level of return that can be achieved from those types of properties.
Susan Kane is a partner at Altair