With an estimated pipeline of £17 billion of rental stock and a forecasted requirement of some £300 billion more over the next 5 years, Registered Providers (also known as RPs) find themselves facing an interesting strategic dilemma. Are they better off sticking or twisting?
Traditionally RPs have been perceived as “different” from owners of other classes of real estate, but many of the issues that they face are all too familiar to property owners. For example, how can property be utilised more efficiently?
While RPs, as charitable organisations, will not have activist shareholders, they do have numerous stakeholders, including the Government, who want them to be ever more efficient. For example, demonstrating “Value for Money” is among the regulatory standards that RPs need to comply with. As a result, many RP management teams may be reflecting on how they can “sweat” their assets more effectively.
In the past, RPs have borrowed money against their real estate, undertaken sales and leasebacks and looked at spinning off listed REITs as well as establishing OpCo/Propco structures.
These options offer a potential strategy for RPs as other investors acquire social housing units. For medium sized RPs however, the pressing question is whether they could meet their charitable aims more effectively as property managers, rather than owners. The hotel sector, is just one example of how the roles of owner and operator are often split.
Some RPs have already begun to undertake this role. For example, Places for People, one of the largest in sector, has already been expanding its fund management business. Recently, Devonshires advised on an equity sharing structure that would enable an RP to multiply its stock.
Furthermore, there are plenty of “would be” owners to work with;- not only the established investors such as pension funds, but also several other investors poised to move into the sector, drawn to “lookalike” utility returns from an asset class with long-term, inflation-linked income streams.
These new investors may well not have the requisite skills to effectively manage social housing. Meanwhile, RPs have “honed” their unique property and tenant management skills over several decades. RPs will understand, for example, the tension between the requirements of equity investors attracted to theirs asset class, the aspirations of tenants and the approach of a regulator, as RP boards have sought to balance the competing requirements of being both an owner and a manager.
Incidentally, RPs are also well placed to manage investors’ PRS (for example “Build to Rent”) and student portfolios, which could provide additional revenue streams for those organisations looking to “scale up” their management operations.
Medium sized RPs especially need to be clear about their business model and how they plan to deliver it.
For many, the transition to a manager seems logical, so an OpCo model might seem the most effective option. Nevertheless, it would involve a fundamental shift in the way an RP runs its business. Property management teams would naturally assume a greater role in a “management” business model, whereas the land acquisition, development and treasury teams may become less critical. Perhaps they would benefit from moving over to the “PropCo” side of the operation?
For an industry like social housing with a reputation for innovation in meeting the challenges of reduced funding, perhaps the most radical solution will be the most obvious – letting investors to look after their assets, while RPs focus on managing their tenants and communities.
Andrew Crawford is a Consultant at Devonshires
This article first appeared on www.egi.co.uk in June 2017
OpCo/PropCo – Typically, a company (the OpCo) sells its assets to another company (the PropCo) which would then lease it back to the OpCo. The PropCo vehicle borrows against its new property assets and uses the rental income from OpCo to service its debt. In the process, the OpCo obtains a capital sum that it can use, for example to provide additional stock.
Sale and Leaseback – A typical sale and leaseback transaction will involve a company selling a property and leasing it back for a period of, say, 25 years. The key issue surrounding such leases is making out how far the company, when it sells the assets and leases it back, has distanced itself from the concept of ownership with all the associated risks and liabilities. The spectrum of risk begins at one end with a lending transaction where the company retains all the risks associated with ownership and so keeps the real estate on the balance sheet and, at the other extreme, the lease transfers much of the risk and reward to the new landlord.