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A new launch Home-ing in on social benefit

Home REIT - Tackling homelessness - IPO

Alvarium Investments announced its intention to float Home REIT this week. Launching a new REIT during a global pandemic may have caused a few raised eyebrows among investors, but this is one we are particularly excited about.

It was quickly apparent from reading the announcement that Home REIT is looking to tap into a sector that is completely uncorrelated to the traditional real estate market, parts of which have been put under severe pressure during Covid-19.

Home REIT, which is hoping to raise £250m, will acquire and create a portfolio of much needed homeless accommodation in the UK. It will let the property to specialist housing associations and registered charities on long-term leases (around 25 years) that are inflation-linked.

The housing association tenant will pay rent to Home REIT from housing benefit it receives from the local authority for each individual tenant. The local authority is funded by the Department of Work and Pensions, which covers 100% of the cost for care and housing.

When you look at the property sectors that have done well during the crisis, government-backed income has proved very durable.

Home REIT is going to target total shareholder returns of 7.5% in the medium term and a dividend yield of 5.5%. Through the annual inflation-linked rent reviews, the dividend should also grow over time. It is likely that the leases will include a cap and a collar, providing an effective hedge in low inflationary environments and ensuring the rents remain affordable.

The first thing to say about this fund is the potential social impact is huge. Homelessness is a major issue in the UK with Shelter, the homeless charity, estimating there are 320,000 homeless people in the UK. Sleeping rough is at the extreme end of the homeless spectrum, which also includes people in homeless shelters and temporary accommodation.

There was an 11% increase in the number of people sleeping rough or in temporary accommodation in England from Q2 2016 to Q1 2019, according to Shelter.

There are myriad of complex causes of homelessness including drug and alcohol dependency; leaving institutional settings like prison, armed forces, foster care; eviction by private landlords; relationship breakdown; domestic violence; and mental illness.

There are clear and obvious benefits, not just to the individuals, but to local authorities, which have a statutory duty to house individuals that are homeless or at risk of becoming homeless under the Homelessness Reduction Act 2017, in housing people in the accommodation that will be provided by Home REIT.

A severe shortage in supply of fit-for-purpose accommodation has meant local authorities have been forced to house people in expensive temporary housing such as B&Bs and guesthouses. Home REIT says its rents will be agreed with the local authority from the outset at affordable levels and far less than (up to 70% less!) than using B&Bs.

Homeless individuals housed in accommodation let to specialist housing associations, as opposed to private landlords, have been found to be substantially less likely to return to homelessness, according to a King’s College London report.

The security of tenure that Home REIT will provide housing associations and registered charities allows them to make a sustained impact on the lives of individual tenants. Security of tenure allows a long-term programme of training and rehabilitation to take place at the properties, to provide individuals with the skills and confidence to find long-term accommodation and to reintegrate back into society.

What gives us confidence in the prospects of Home REIT is that its management team has a proven track record of doing exactly this. It launched a private fund in 2018 that it has grown to be one of the largest social impact funds in Europe, with net assets of £430m.

That expertise in the sector has allowed it to build up a sizable acquisition pipeline of £350m, which it already has under exclusive terms.

We are optimistic about the prospects of this fund and have written an IPO note on it that will be published on our website next week.

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