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REITs still offer a huge opportunity for the sector
The share prices of social housing REITs may have fallen in recent weeks, but ‘alternative income’ is here to stay, writes Phil Jenkins
A decade of low interest rates and historically low yields in traditional asset classes such as bonds and equities have forced UK investors to widen their horizons in search of new investment income opportunities.
Combined with the greater flexibility enjoyed by private investors since the pensions freedom reforms of 2015, this has spawned the rapid growth of a new investment class known as ‘alternative income’.
Funds have been launched across a range of sectors spanning peer-to-peer lending, aircraft leasing, and infrastructure debt and real estate, to name but a few.
Although these funds are structured as equity, investors are looking for something which is more akin to a fixed-income product, ie stable sources of income (dividend yields are usually 5% or more and sometimes index linked) backed by secure revenues from real assets or other receivables.
While a relative latecomer to the party, the social housing and wider residential sectors have seen a flurry of activity with a number of real estate investment trusts (REITs) launched in the past 18 months, underpinned by various strategies and portfolios from private rented and retirement housing through to specialist accommodation and supported living.
Civitas, Residential Secure Income and Triple Point have all completed initial public offerings and deployed some or all of the circa £1bn of capital raised. More recently another REIT called Fundamentum launched a £150m fundraising in spite of recent sharp falls in the share prices of two social housing REITs.
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Investors’ initial enthusiasm has waned more recently, with Civitas’ shares falling by around 15% between late December and the end of March (although it has since recovered to its current position of circa 10% down) as financial problems have come to light at First Priority – a housing association in whose schemes it has invested – raising concerns that credit quality of the supported living sector may be less robust than investors previously thought.
Residential Secure Income has also seen its share price drifting lower, possibly as a result of slower-than-expected deployment of the cash it has raised as well as read-across from the problems at Civitas.
While some of these issues are fund and social housing sector specific, there is also a sense that the REIT market generally is suffering a degree of indigestion as a result of significant supply over the past two years. Is this just a blip or does it mark a sea change in investor appetite for equity investment in the social housing and wider residential sector?
“While some of these issues are fund and social housing sector specific, there is also a sense that the REIT market generally is suffering a degree of indigestion as a result of supply.”
First, as with any quoted share, negative news (or sometimes lack of positive news flow) will generally be reflected in a fall in the share price.
This situation may persist or recover depending upon whether the issues in question are rectified or whether they raise more fundamental concerns around the risks associated with the investment strategy of the relevant fund.
Second, alternative income remains a nascent asset class with different sectors and strategies often falling out of favour rapidly if the stability of the supposedly safe cashflows is called into question.
This perhaps highlights another point, namely that the investor base for these funds is, at least in part, relatively unsophisticated and perhaps more focused on absolute yield than the nuances of the underlying credit quality of the underlying investments and strategies employed by different funds.
With something of a stampede of issuance into this market in recent years and relatively high returns compared to those on offer elsewhere in the fixed income universe, it should perhaps come as no surprise to investors that they may also have bought higher risk.
While social housing as an asset class may not currently be flavour of the month, it is worth noting that Triple Point recently raised a further £47.5m in spite of well-publicised problems elsewhere. While this was well below the £200m they had hoped to raise, it does demonstrate that investor demand for this asset class hasn’t entirely disappeared.
“What we are seeing is likely to represent the first steps in a much more significant trend towards equity capital investment in social housing.”
Nonetheless, alternative income as an asset class does face headwinds as expectations begin to shift as to the direction of interest rates and bond yields.
After all, if investors were ‘forced’ into these higher-risk and somewhat esoteric and less proven assets, will they revert to more conventional and arguably lower-risk investments if interest rates begin to normalise?
My own view is that alternative income as an asset class is here to stay but as with any new investment class, winners and losers will emerge as performance varies over time between different strategies and managers. Furthermore, what we are seeing is likely to represent the first steps in a much more significant trend towards equity capital investment in social housing and wider residential assets.
Large-scale institutional capital will follow the largely retail-driven flows seen to date through the REITs and this will unlock significant opportunities for the housing sector to unlock much-needed new capacity.
Phil Jenkins, managing director, Centrus Advisors
