Social Housing Speed Read – Real estate investment trusts
21st August, 2017
The Homes and Communities Agency (HCA) wants Housing Associations to be conscious of the risks in using real estate investment trusts (REITs).
Social housing and the rise of real estate investment trusts
Earlier this month, private equity investor Henley announced its first acquisition of supported housing units following the launch of a £400 million fund targeted at supported housing.
Henley’s focus over the next six months will be on the “under-served but fast-growing supported housing sector”.
It plans to acquire properties from housing associations in which the rents are met by housing benefit.
In its first acquisition, Henley purchased the freehold interest of 49 properties across the UK, each of which will be leased to housing associations (registered with the HCA) on a long term, inflation-linked basis.
Henley is not alone; recently we have seen a number of equity investors seeking to move into the sector and operating in a similar fashion to Henley.
Upon taking a lease of a property from a REIT, a housing association is likely to have to pay rent that increases with inflation.
However, rents are currently being driven down as a result of the rent cut which came into force in April 2017 for supported housing (following a year-long exemption).
A further consideration is the Local Housing Allowance (LHA) cap which is expected to come into force in 2019.
Under current proposals, supported housing benefits will be capped at LHA rates and councils will be required to use discretionary funding to top up the costs.
The cap creates further uncertainty in the sector and could result in housing associations experiencing difficulty paying increasing rent to REITs once the cap comes into play.
The deputy director for performance and strategy at the HCA, Jonathan Walters, highlighted to Inside Housing that “anything that’s got any form of index-linked returns is going to be subject to the complexities of government welfare policy. We would always have concerns if people had too much index-linked finance in their portfolio because as we have now seen, rents don’t always go up with inflation”.
Mr Walters emphasised that “rents are actually going down”. This means that if a housing association has index linked-finance, then this finance will end up being more expensive each year as their rental stream is going down whilst their interest costs are going up.
Mr Walters also wants those on the board of organisations to understand “what it is they are taking on” and how having this form of debt will affect their organisation.
It is clear that the HCA are not discouraging associations from utilising REIT’s, but rather asking associations to be aware of the risks and to ensure that they can manage such risks going forward.
Any housing association considering using REITs should ensure they have the necessary expertise to engage with the transaction and weigh up the risks and rewards.
If you have any questions on the above and how it will affect social housing providers, or any other questions as a social housing provider, please do not hesitate to contact John Murray or a member of our expert Social Housing Team.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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