The COVID-19 pandemic put construction projects across Europe on hold for several months, with lockdowns preventing both the completion of existing projects and new ground from being broken. This was a challenge for vitally important areas of the real estate industry like social housing, which is responsible for meeting the housing needs of vulnerable people across the continent.
However, when discussing the challenges of the last two years with leaders from across Europe’s social housing sector, this short-term disruption appears to not have had too severe an impact on its ability to deliver. Those operating in the industry report that despite some ups and downs in investment, they only experienced a temporary setback. Marc Brisack, CEO of Inclusio, highlights this by saying, “The pandemic caused very limited delays in the delivery of our projects. We only had one project for 40 units of affordable housing that experienced a two-months delay from the original delivery date.”
Indeed, some sub-sectors of social housing have not felt much of a pinch at all, as Paul Bridge, CEO of Social Housing at Civitas, explains: “In terms of our own sub-sector – specialist supported housing for vulnerable adults with complex needs – supply has always been constrained, whilst demand continues to grow. The requirement for an experienced and specialised investor like Civitas, therefore, remains very strong.”
Social housing has clearly come through the pandemic in good shape and has strong foundations for further growth. According to those leading the sector, REITs will have a big role to play in this as industry and policymakers look for ways to facilitate further expansion.
The role social housing REITs are expected to play in the delivery of homes in the sector is not fundamentally different to that which it did before the pandemic, but the broader economic changes ushered in by the last two years does mean that they will be relied upon much more heavily.
The simple reason for this is that Europe needs more social housing, but at the same time, squeezed public purses do not allow for a great deal of direct government investment. The imbalance between supply and demand remains just as high as it ever was across much of the continent, and policymakers and housing authorities face continued calls from citizens to build more social housing. At the same time, additional borrowing for one-off spending initiatives like furlough schemes has pushed debt-to-GDP ratios up significantly, which leaves little in the pot for ambitious social housing projects.
Furthermore, the European Commission predicts that up to seven million people from Ukraine could seek refuge in the EU because of the Russian invasion. While this policy is categorically the right decision, it will put further strain on the continent’s housing stock. Once these refugees are safely in the bloc, policymakers will need to consider increasing Europe’s supply of residential housing.
Private investment – in the form of social housing REITs – presents an ideal solution to this problem. The deployment of private capital in the social housing sector will therefore be central to the provision of more state and local authority-owned homes.
Many players operating in the industry have demonstrated strong track records of public-private partnerships, which has sown the seeds for successful collaborations in the future. Paul Bridge says that “one such project is the homelessness work Civitas undertook in partnership with Barnet Council in North London at the time of the first national lockdown, which saw us repurpose three buildings into specialist accommodation for the homeless”. Bridge continues that “this provided a number of beds to those who needed them most during this national crisis. Partnerships like these make financial and moral sense for the Government and local authorities to participate in, given they produce positive social impact at reduced financial costs when compared to putting people up in hospitals or other care settings.”
Private sector involvement in social housing can also help upgrade the existing stock, which is just as important as building new homes. “It is obvious that large public bodies in social housing lack financial means to maintain and develop their existing stock,” says Brisack. “A large number of housing units are therefore empty because they are ‘unliveable’. A collaboration with dedicated REITS, even through long-term lease agreements, could bring a serious improvement to this situation.”
To attract this investment, social housing REITs must appeal directly to investors and provide them with a compelling story about not just their returns but also their social purpose. Social housing REITs provide society with a lot of benefits, and it is important that this forms a large part of their narrative when it comes to communicating with would-be investors. Ultimately, social housing helps people with limited financial means and disabilities, which benefits society.
Social housing REITs can also offer a lower-risk profile as most of the contracts underpinning investments offer guarantees of the public sector supporting social rental agencies. Civitas’ Bridge explains that reliable income streams should also give shareholders plenty of comfort that their well-intentioned investments will perform well too. “Using CSH as an example, the Company has its annual rent roll paid for ultimately through rent exempt housing benefits, with an average net initial yield above 5%,” he says. Bridge continues that “together, leases with housing associations often last into the decades – 23 years in this case. The longer-term increase in the underlying value of the properties is also particular strength of social housing REITs.”
Balancing profit and purpose
Industry leaders also report that there is a wider shift in the industry to one that places social purpose at its heart. While the sector has always had a positive function, the focus of social housing investment has for many years been primarily on high-yield rental housing, which delivers maximum return on investment.
The IMF has called for this balance to be redressed, and Inclusio’s Brisack agrees with its call to action, though he highlights that a wider lack of housing compounds the pressure on the social sector to deliver homes to people. He says that “the prices of houses and apartments have significantly increased over the last few years, and it is getting more and more difficult for young professionals and young families to afford to buy a property in many cities”.
Brisack continues that “the public authorities in Belgium, for example, don’t have the financial means and the human resources to increase the supply of social housing. Dedicated social housing REITS can offer an interesting alternative provided they operate within a determined legal framework”.
Bridge suggests that the IMF’s observations apply more to the broader social housing sector, however, and argues that there must be a more specific focus on underserved areas of the social housing market as a priority. He explains that “our sub-sector is specialist supported housing, which is bespoke adapted housing for individuals with a range of complex needs who require high levels of personal care to live within the community. There is a chronic under-supply of this type of housing because it often must be adapted to a specific individual’s needs. That is why the investment and expertise that Civitas brings is so important – it can’t be addressed by the public sector alone.”
The social aspect of ESG is just one element of the overall proposition, however, and while investor minds are paying increased attention to social causes, environmental considerations are just as important. There is a great opportunity to tackle environmental issues within the social housing sector, but it needs policymakers’ encouragement. In the UK, for example, government grants can be made available when making environmentally-conscious improvements to social housing. On the continent, the European Commission has recently published its EU taxonomy scheme, which is meant to redirect investment into more sustainable activities. At the same time, it is working on the Social Taxonomy to further improve access to good quality housing.
Furthermore, in the context of increasing energy costs, it is very important to offer energy-efficient apartments to tenants who can struggle with bills. Brisack makes the point that “special attention has to be paid to insulation, heating systems and eventually the installation of solar panels. At the same time, since rents must remain affordable and are sometimes capped by the operators, it is challenging to allocate sufficient budgets with which to make environmental improvements.”
Both Paul Bridge and Marc Brisack predict that 2022 will be a significant year for the social housing REIT sector. Bridge suggests that there will continue “to be a strong and growing demand for secure housing with care for vulnerable and disabled adults, which Civitas is extremely well placed to fulfil.” This, he predicts, will lead to increased investor enthusiasm for the sub-sector: “Increasing demand for properties will see increased investment in the sector, including a heightened focus on private and public sector partnerships across special supported housing and homeless accommodation.”
Brisack also agrees that there will be a greater investor appetite for social housing REITs. He says that “as we are the only social housing REIT in the Benelux, many investors don’t yet understand the type of contracts that we have the social rental agencies. However, we expect that the market will recognise more and more of our accomplishments.”
With demand for low-cost housing and socially-minded investments looking like it is only set to grow across Europe, few could doubt that social housing REITs will be increasingly popular.