Are we going the REIT way?

The London Stock Exchange is beginning to see a surge in investor interest in UK housing stock through investment in tax efficient vehicles known as Real Estate Investment Trusts (“REITs”).

In November 2016, Civitas Social Housing PLC launched the first residential REIT dedicated to social housing, raising investment of £250m, whilst Sigma Capital has just announced an intention to float The PRS REIT Plc, a real estate investment trust for the purposes of investing in the Private Rented Sector (“PRS”). Sigma is also targeting a fund-raising of up to £250 million and the UK Government’s housing regulator, the Homes and Communities Agency (“HCA”), has agreed to make a direct investment of up to £25 million representing an interest of 9.99 per cent. in the company.

Sigma notes that the PRS market has grown substantially since the 1990s and is now the second largest housing tenure type at 19 per cent. of the market. By 2020, the PRS market is projected to grow further to approximately 25 per cent. of all households, fuelled by restricted access to other tenures, with affordability and mortgage availability limiting owner occupation and social rented funding constraining development and supply. Indeed, Sigma is not the first to spot the attraction of the PRS market to investors; in March this year housing association Places for People (“PfP”) launched PfP Capital, set up to acquire 1,379 private rented sector units from PfP valued at £150m.

As private investor interest in UK rented housing assets remains buoyant, how might this impact the way forward for UK social housing stock? Registered Providers (“RPs”) have always benefitted from long-standing support from banks and are also no strangers to the capital markets in the form of fundraising through listed bond issues. However, against a backdrop of constraints on government grant, the imposition of affordable rent reductions, and in some cases the lack of availability of sufficient security in the form of existing housing stock, the willingness of RPs to consider new sources and providers of finance – essential to meet the growth ambitions of many RPs and indeed to meet the demands of a growing population for whom private housing is unaffordable – is increasing all the time.

There has in recent years been a widespread acceptance of the need for RPs to operate as property development and asset management businesses, across a wide range of commercial activities, in furtherance of their charitable objectives and social purposes. Many RPs are now beginning to consider a shift towards a focus on the development of new homes and the management of existing stock as their core activities, without necessarily requiring asset ownership. The recent deregulation measures introduced by the Housing & Planning Act 2016 may now provide even more flexibility and opportunity for RPs to dispose of some of their stock (without requiring the regulator’s consent), including disposals to private investors (eg institutional funds and/or REITs), not only meeting the appetite of the private investor market but also permitting and enabling RPs to retain management of housing stock and the development of their core activities through sale and leaseback transactions by way of example.

Interesting times and opportunities lay ahead both for RPs, and for institutional investors attracted by a steady rental income stream and yield. REITs will also look to generate investor returns through sales whereas RPs have, at least traditionally, been long term owners of housing. The REIT model has gained traction in recent years not only in the UK but also across Europe, but a word of caution: Whilst it is interesting to note that a significant proportion of German residential real estate is now owned by listed companies in Germany, the German government has nonetheless previously sought to exclude all residential property from REITs amid fears that investors will seek to impose an increase in rental rates across the country. As the housing ownership landscape in the UK may evolve in the coming years, it is clear that all stakeholders will continue to have a role to play to meet the challenge of providing, and maintaining, an increasing amount of good quality affordable housing.

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