It has been a turbulent few weeks for the social housing sector, with the biggest fund Civitas Social Housing being aggressively targeted by a short-seller. Not only has this hit the share price of Civitas (down 27.5% since 5 August) and its listed peer Triple Point Social Housing REIT (down 17% since mid-August), but it also seems to have put paid to the initial public offering of Responsible Housing REIT.
BMO Investments had announced in August its intention to float Responsible Housing REIT, looking to raise up to £250m, but has now postponed the launch. Timing is everything, and it was unlucky in this regard with the noise created by ShadowFall.
Shadowfall published an open letter to the board of Civitas in September criticising the transparency of some of its deals and the “viability and quality” of its rental income. We are still awaiting a full response from Civitas on all the points made in the letter, and we are expecting this will be made shortly. The board has so far said that it believes “the letter is based on factual inaccuracies, incorrect assumptions, erroneous comments and assertions which are not grounded in fact”. We await the full response before we make an informed comment on this.
Doubts around the leasing model were first cast by the Regulator of Social Housing, which was launched as a standalone body in 2018. Rents are funded by central government, via local authorities, to registered providers of accommodation, who in turn rent homes from the funds.
The registered providers enter into a contract with a care provider that is often far shorter in term length than the lease they sign with the likes of Civitas. The regulator has expressed its concern that the difference in the length of the care provider terms and the rental lease term could put the registered provider at significant risk if void rates increased.
The regulator would like them to have stronger balance sheets to mitigate this risk, but the registered providers are often non-profit-making and thinly capitalised. There is no magic money tree to conjure up such funds and no logical rationale for them holding vast pots of cash earning no return.
Responsible Housing REIT had looked to appease the regulator by offering shorter-term leases with registered providers, in line with the care providers. We believe this will make minimal difference to its risk profile relative to the existing funds. If anything, the length of the care provider contract should come up to be aligned with the lease length, rather than the other way around. The underlying tenants, adults that have physical or mental challenges and require day-to-day care, and their families want security of tenure. So it makes sense to make this arrangement longer-term rather than shorter-term. Civitas has been working on this within its portfolio and now has around 40% of properties with leases and care provider contracts aligned at a long-term duration.
In any event, the reality is that if one registered provider runs into trouble, another steps in to take its place. The occupant of the property needs to live somewhere, the government knows it needs to fund this, and there is a nationwide shortage of suitable accommodation, especially adapted to the specific needs of the occupant, so there is nowhere else for them to go.
For the funds, the properties stay occupied and bad debts are rare and de minimis. This is evident in the track records of Civitas and Triple Point.
The response of Civitas to the short-seller allegations will be crucial. What is obvious is that there is a real and urgent need to create more supported living accommodation in the UK, so families can be closer together and less money is wasted on hospital stays, which are considerably more expensive. It makes sense that the sector expands and Responsible Housing REIT would have been a welcome addition. Whether it attempts to come to market again remains to be seen.
QD view – IPO hits the buffers