Croydon Council is seeking ‘a better deal for taxpayers’ on three blocks of flats it leases as temporary accommodation for homeless families after they were acquired by Cheyne Social Property Impact Fund.
The council is now looking to negotiate longer-term leases on the Greater London Portfolio, which had been marketed for sale at £51.8m.
Hedge fund Cheyne Capital, which has approximately £1.6bn of assets in its real estate funds, launched the social property fund in 2014 with support from a range of investors including Big Society Capital. Its fund manager said it is committed to being a ‘long-term owner and holder’ of social assets.
The latest acquisition marks the fund’s first investment in London, following previous deals in Sheffield, Luton, Derbyshire and Gloucestershire. Cheyne completed its first transaction with a housing association - an off-balance sheet deal with South Yorkshire HA - in July 2016.
The Croydon portfolio includes 338 units providing a mix of studio, one, two and three-bedroom flats, originally developed under a general consent order allowing conversion from office to residential.
As temporary accommodation, the tenants have agreements under the council’s homelessness provisions.
London-based management company Rooms and Studios continues to manage the buildings ‘to ensure continuity for the residents’, the council said.
A council spokesperson said initial benefits of opting for the three buildings as temporary accommodation were based on the rental costs compared with housing these tenants in other short-term provision such as bed and breakfast (B&B).
A report to the council’s cabinet in December 2016 said Croydon spent more than £4m on providing temporary accommodation, compared to £1.8m in 2010/11. It housed 2,918 households in temporary accommodation at the end of March 2016, with around 800 in emergency bed and breakfast (B&B).
A council spokesman told Social Housing: ‘The council welcomes Cheyne Capital as the new landlord of three buildings we lease to provide much-needed temporary accommodation for homeless families.
‘We are now negotiating with Cheyne to get a new longer-term lease that gives a better deal for both the council and our taxpayers.’
Leases and rents
Under the current agreements, the rents across the three buildings are fixed for the first five years and are then reviewed to market rent, less a discount, which varies with each lease.
The weighted average lease term was marketed at nine years, but is understood to be a little below that. Cheyne has typically offered longer-term leases, such as in Luton, which are structured on an index-linked basis.
The council’s leases were previously negotiated with the former owners through Rooms and Studios, including a £1.49m lease on Windsor House with Silver Maple Properties; an £1.33m agreement with Moonlit Properties on Concord House; and a £0.68m deal with Polly Properties on Sycamore House.
The council said the full–year income forecast for the current financial year is £2.87m. The marketing had said the portfolio has a gross passing rent of over £3.5m per annum and a net operating income of almost £3.2m per year.
The freehold for the buildings, covering 100,000 sq ft, were marketed by Brookfield for offers in excess of £51.8m. It said a purchase at that level, assuming purchaser’s costs of 6.78 per cent, an investor could expect a gross yield of 6.4 per cent and net initial yield of 5.73 per cent.
Brookfield pointed to it being leased ‘directly to the undoubted covenant of a major local authority’. It also came with planning consent to add another 26 units.
Buy and hold
Shamez Alibhai, head of the Cheyne Social Property Impact Fund, said the deal ‘represents a further milestone for the fund’s aim of investing £700m into social property in the UK’.
He said the fund has purchased the properties ‘with the intention of keeping them in the social sector over the long-term’, adding that they ‘were impressed by the quality of the portfolio and the council’s intention to ease the pressure on housing in the area in the short and medium-term’.
Mr Alibhai told Social Housing that Cheyne has no plans to churn assets.
‘Our intention is not to sell these assets. Our intention is to be a long-term provider of social housing assets; a long-term owner and holder.
‘I think that differentiates us from some of the other people in this sector.
‘We do like this idea of buying [units] used as temporary accommodation by the council, leasing them and moving them from the private sector into the socially responsible sector, so we can ensure long-term availability for these councils.’
He pointed to the ‘social story’ around the latest acquisition, with homes accommodating a number of single-parent families at affordable levels and in the context of major regeneration in the Croydon area, where average private rental inflation is around 6 per cent per year and house prices are rising on average by 13 to 14 per cent.
Mr Alibhai said he could not comment on the specific value of the transaction, or the level at which the rents are discounted.
However, he said net yields would be ‘above 3 per cent’, while confirming that Cheyne may look to introduce a longer-term lease, in line with its other schemes, which are done on an index-linked basis.
It was reported last year that Cheyne is seeking leveraged returns - including debt financing - of 10-12 per cent.
Cheyne had originally talked about plans to invest £900m when it launched.
Mr Alibhai said this has been revised down to £700m, after they took a ‘long, hard look’ at the market and decided £900m was not achievable.
‘We wanted to come up with a number that’s aspirational, but still achievable,’ he added.