New breed of social housing REITs target growth opportunities as the UK shifts care provision for the vulnerable

A fundamental shift in how the UK approaches long-term care for as many as 500,000 people with severe mental health and learning difficulties has spawned a new breed of real estate investment trust (REIT) that is targeting the growth and social impact opportunities in this niche sector of social housing.

Paul Bridge
Andrew Dawber
Civitas Social Housing REIT and Triple Point Social Housing REIT have raised a total of GBP 900 million from the stock market since November 2016 to assemble portfolios of properties that accommodate these highly vulnerable adults. Specialist supported living is a subsector of social housing that is distinct from accommodation and care homes for the elderly. It is also one of the sectors targeted by LXi (long indexed income) REIT, which raised GBP 138 million in an IPO (initial public offering) in February 2017.
The 2014 Care Act and the 2017 Homelessness Reduction Act enshrine the UK’s new cross-party approach to delivering care, which emphasises smaller units for individuals within the local community over institutions or living in the family home where that has become impractical. Research highlights how this provides residents with better care and more independence while it is less costly for public finances and eases pressure on the resources of health care services such as hospitals. Other European countries, including Sweden, have adopted a similar model.
“It’s a new and even more purposeful form of social housing, reflecting a societal move that will take decades to complete,” said Paul Bridge, Chief Executive of Civitas, the sector’s first REIT to list shares. “It’s now regarded as unacceptable for people with restrictions on their lives – who will almost certainly never work – to live in remote institutions or inappropriate accommodation.”
The state funds the cost of care and accommodation for each individual directly or through local authorities with payments ring-fenced to prevent them being directed to other uses, while the private sector pays all initial capital works. In turn, the local authority commissions care and accommodation with registered providers; for housing, this is something it may provide itself or through not-for-profit housing associations. State housing benefit rules prohibit investment in capital works or properties, and so payments solely cover an individual’s accommodation.
Specialist REITs help address the need for appropriate housing by leasing accommodation, often for decades, to housing associations whose rents increase in line with inflation. It’s a private sector response to the strains on the GBP 300 billion social housing sector in the UK, where local authorities lack the capital to build the very large numbers of homes needed to tackle long waiting lists. An estimated 4.5 million people are seeking social housing as a result of population growth, affordability issues and reduced availability after decades of sales to tenants exercising the right to buy their homes. Social housing has declined to 17% of households in England and Wales from about 30% in 1980. Financial constraints and difficulties in sourcing properties mean that few local authorities are investing in more homes, while many others have transferred all their estates to housing associations.
The sector appeals to investors, particularly in the prevailing low interest rate environment, because of its long-term income, attractive yields, insulation from inflation and its large-scale social impact. Civitas raised GBP 350 million in November 2016 in an oversubscribed IPO with a pledge to pay shareholders a dividend that would yield around 5%.
“We have quite a lot of ESG (environmental, social and governance) and social impact investors on our register,” said Andrew Dawber, a Director of the investment advisor that established the Civitas fund. “We began with a wide range of high-quality private wealth management shareholders who were typically looking for income, but many younger generation clients seeking to have their money managed are also a lot more interested in what they are investing in and whether it’s doing harm or good.”
Civitas has invested all of the IPO proceeds. In November 2017, an issue of class C shares raised an additional GBP 302 million, a third of which it has already deployed. The fund has assembled a portfolio of 424 properties, which currently accommodates 2,708 individuals, making it the largest of the new social housing REITs. The fund avoids development risk, preferring to buy existing properties already adapted to care needs, properties that have been converted for supported living use and purpose-built properties for higher acuity care.
“We offer stability, visibility and professionalism. So, while a vendor may not always be able to get the very highest price by selling properties to us, they get security of execution and the opportunity of multiple transactions over a number of years,” said Dawber, adding that this often allows Civitas to buy at below-market prices.
It hasn’t all been plain sailing for the new sector, however. Financial difficulties at First Priority Housing Association, which the Regulator of Social Housing placed under review in January, highlighted the sector’s risks even if funding for the care model ultimately comes from the state. The provider leased 227 individual properties accommodating 759 adults with learning difficulties and mental health problems.
“When you look at it purely financially, it’s not material given Civitas’ diversified portfolio”, explained Dawber, adding that the housing association’s difficulties won’t affect dividend payments. “It’s the first problem that’s happened post the REITs coming into existence in this area, so it’s gained a lot of profile.”
Civitas, which leased 45 properties to First Priority, is responding by ring-fencing its cash flows and continuing to evolve its investment processes. It has quarterly meetings with housing association groups to share best practices and to push for greater and consistent professionalism towards investment.
“It’s a very big market and a very big market opportunity,” said Civitas’s CEO, Bridge. “There’s no reason why we should not be as big or bigger than some of the larger infrastructure funds, provided we continue to deliver high-quality and stable investments. From a social perspective, we have three main objectives: increasing the amount of social housing that’s available, improving its quality for tenants and protecting the public purse by offering value for money.”