Yorkshire council pension fund invests £20m in social housing REIT
A Yorkshire council pension fund has bought £20m of shares in the UK’s first social housing REIT.
East Riding of Yorkshire Council is joined by a large range of private investors and charities, who have invested £66.5m via Investec Wealth & Investment.
They form the bulk of external shareholders in Civitas Social Housing, which became the UK’s first social housing real estate investment trust (REIT) through a £350m stock market float in November 2016. It had originally aimed to raise £250m through the share offer but was oversubscribed.
Civitas buys and owns operational assets which are leased to registered providers - including housing associations and local authorities – on long-term leases of between 15 and 20 years, with rents linked to inflation.The portfolio will be weighted in favour of supported and extra care housing, although it will acquire some general needs homes.
The REIT - a property investment vehicle exempt from corporation tax on profit as long as its returns 90 per cent of profits to shareholders - has so far invested £80m in two portfolios totalling around 45 supported living properties.
East Riding is not the first local authority pension scheme (LGPS) fund to invest in a new housing company. Lancashire County Pension Fund has invested £300m in Heylo Housing, a shared ownership specialist formed by the team behind Assettrust Housing.
East Riding – which is the administering authority for the £4.3bn East Riding Pension Fund (ERPF) on behalf of over 200 employers and 100,000 members – told Social Housing it is expecting returns of 7 to 8 per cent per annum net of all costs, and a 5 per cent per annual yield, paid on a semi-annual basis.
A spokesperson said the investment forms a small portion of the pension fund’s allocation to property. As at 31 December 2016, the fund had around £500m invested in property, representing 11.5 per cent of fund assets, with £100m committed to social housing investments, of which £85m has been invested to date.
The fund said in its 2015/16 annual report that it expects ‘defensive investments’ such as real estate debt and social housing to ‘perform relatively well’ in the current environment, compared with some other property sub sectors such as central London offices.
The spokesperson added: ‘The investment provides attractive risk-adjusted returns consisting of long-term, inflation-linked income generation with potential for capital growth through ownership of property leased to low risk counterparts.’
The council said ‘extensive due diligence was undertaken, as is the normal practice of the pension fund prior to investment’.
Chris Hills, chief investment officer of Investec Wealth & Investment, said they had bought the shares for ‘a very wide range of private clients and charities over whom we have discretion’.
‘We have been big supporters of both real estate and infrastructure funds in the past five years, to provide good income, the prospect of a rise over time in that income (unlike from bond investments) and with comparatively low sensitivity to any drop in GDP or equity markets. The Civitas vehicle combines these themes.’
Mr Hills said the Civitas prospectus published ahead of its float indicated that shareholders could expect to receive annual dividend income of at least 5 per cent once the funds raised had been deployed and that this income would rise over time with inflation, adding that most of their clients want their portfolio income protected against future inflation.
‘The rental contracts which will lie behind the dividend promise are long-term – sometimes more than 25 years – and we would consider housing associations to be quasi-Government bodies – there has never been a credit default.
‘In previous years we have also invested in the bonds issued by housing associations, so this is an area we know quite well. We expect more funds like Civitas.’
Civitas also has a relationship with Funding Affordable Homes (FAH), which also buys social housing and leases it to housing associations to manage. However FAH aims to fund new build housing primarily rather than buy existing stock. Salamanca Group, a private investment bank, provides advisory services to the REIT and also founded FAH.
Council due diligence & risk
The council pointed out that Civitias will not enter into development of new properties, but does own the operational assets, which are leased to registered housing provider on long-term leases with rents linked to inflation.
The RP will responsible for all maintenance, rent collection, and vacancy management, with their costs met from the surplus created by the RP renting the properties at a higher level than the lease obligation to Civitas.
The council spokesperson added: ‘Therefore, Civitas is not exposed to any of these risks.’
The council said in the event that the RP cannot meet the lease obligations - which they say is ‘highly unlikely given implicit government support via the HCA - the property will revert back to Civitas, who would then look to re-lease the properties to another RHP.
The spokesperson added: ‘In practice, if an RHP is in financial difficulties the HCA will step in and another RHP will take over the properties and associated lease obligations. Therefore, the investment is considered to be relatively low risk but offers an attractive long term return.’
East Riding Pension Fund’s due diligence takes the form of a three-stage process. That includes an internal investment manager looking at whether the fund has the capacity to make the investment and how the risk/return profile compares with other opportunities within the asset class; an in-depth analysis of the key factors that will influence the investment; and a ‘detailed analysis’ as to whether the investment manager is capable of accessing the returns available from the asset class.
The latter involves detailed discussions with the investment manager, existing knowledge of the manager (including analysing their track record) and an extensive review of key documentation including presentations and, in the case of Civitas, the company’s prospectus.
Civitas acquisitions: December 2016
In its first deal in mid-December 2016, Civitas paid £65m for 28 supported living properties in London, the Midlands and Southern England, and one additional property, reporting an initial net yield of 5.8 per cent.
Each of the properties within the portfolio is subject to a 25-year lease arrangement with one of two specialist housing associations – First Priority HA and Westmoreland Supported HA.
Rents are underpinned by the local authority and adjusted annually in line with inflation (CPI) over the full period.
It then paid £15m for 17 supported living properties in Gloucester, Weston-Super-Mare, the reWirral and Durham, with an initial net yield of 6.5 per cent. Each of the properties are subject to a 25-year lease arrangement with one of two specialist housing associations - Westmoreland Supported HA and IKE Supported Housing – focused around supported living.
Rents are agreed by the relevant local authority and adjusted annually in line with inflation (CPI) over the full period.