Blackstone: ‘We are a long-term investor in social housing’

Home07 Dec 2018Luke Cross

Global equity giant Blackstone has stated its long-term commitment to the UK social housing sector and ambition to create a “best-in-class” registered provider.

Adam Shah, managing director, Blackstone (left) at the Social Housing Annual Conference 2018

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“We are a long-term owner and a long-term investor [in social housing]”, says Adam Shah, of Blackstone #ukhousing #socialhousingfinance

Blackstone affirms its commitment to UK social housing #ukhousing #socialhousingfinance

Adam Shah, managing director at Blackstone, was speaking directly to senior housing professionals at the Social Housing Annual Conference in London this week in what marked a sector first.

Mr Shah set out the fund manager’s investment in Sage Housing, a for-profit provider that is looking to grow to 20,000 homes in five years.

At the same event, Sage chief executive Joe Cook revealed that the provider has a committed spend programme of £1.3bn.

Responding to a question from Social Housing about the fund manager’s plans in the sector, Mr Shah said: “There’s no exit strategy at this point; we are a long-term owner and a long-term investor in this space.”

Mr Shah told delegates that Sage will be a long-term holder of regulated social housing.

“We hope to build a best-in-class business that will cater to the needs of our tenants,” he added.

The session was chaired by Peter Denton – group finance director at Hyde Group, with 23 years’ experience in real estate and structured finance – who put questions about equity investors’ appetite for real estate and housing, along with insight about how they operate.

Blackstone, one of the largest real estate investors in the world, has invested across all sectors in its history, said Mr Shah. Sage was formed with private equity firm Regis in 2017 as a social housing platform to attract large-scale equity investment.

“[Given the] uncertainty surrounding the UK’s future relationship with the EU we’re quite understandably focused on residential due to what we perceive as its resilience,” he said.

“I think the most important thing for us is this consistent, secular, long-term undersupply of housing – both at the market rate and affordable homes.

“As a long-term investor… we know it’s very unclear where we are in the cycle, but the undersupply – as evidenced by the number of people on local authority rolls – is so large that we feel that mitigates any sort of short-term risk, in terms of the financial markets.”

As real estate tends to get priced on the interest rate environment, Mr Shah also pointed to the continual expectation for the long run on low interest rates to come to an end having not materialised. Housing is also sheltered to some extent from the “huge amount” of tech disruption going on across other markets such as the retail and office sectors, he added.

“[Residential] is not something that’s fundamentally at risk of being disrupted as an asset class and that’s one of the reasons why, given this uncertainty, we’re excited about residential.”

Sage has focused on the acquisition of new-build affordable housing via Section 106 agreements with the majority of the main house builders in the UK. It is also forming partnerships with housing associations to manage the stock.

Mr Shah said: “Given that it’s a new business, we’ve been very selective about the portfolio we are acquiring – the units we’re acquiring have all been new build, through Section 106.”

He said Blackstone has funded the acquisition of more than 2,000 homes through Sage Housing and that the majority of the exchanged properties are in development or pre-development, with the first tranches of closings of Section 106. The management and operations model puts a focus on technology and efficiency.

However, through its new company Sage Partnerships, Blackstone is venturing into planning and land assembly risk, along with joint ventures with housing associations, the public sector, house builders and private developers on new build and more complex schemes.

Equity risk and return
Fellow panellist Dan Smith of real estate lender Fortwell Capital told the audience that his firm is able to be “quite transparent” on pricing, explaining that the cost of financing ranges from IRR of 8-10 per cent, including a 1 per cent arrangement fee, a 1-1.5 per cent exit fee and a margin that could be Libor plus 6-8 per cent depending on the underlying risk profile.

Mr Smith said part of Fortwell’s focus is to ensure its developer partner has a “good amount of equity in the scheme so they are motivated to finish it”, with the core assessment around what needs to be sold and at what price to cover its debt and interest obligations.

“The pricing points are probably the easy points; the underlying risk analysis is where we spend most of our time,” he said.

Randeesh Sandhu, chief executive of investor Urban Exposure, said his firm does not take planning risk, with the key risk in construction and sales as its lends on a project basis to SPVs.

He said construction is seen as the biggest risk, so the firm is “very conscious of what the developer’s track record is” and looks for a minimum 10 years’ experience on a similar scheme. It also looks for pre-sales, but buyer appetite might mean that is limited to 20 per cent of the homes.

Sage’s immediate parent is Sage Investments Sàrl, a company registered in Luxembourg, with its ultimate parent and controlling company being Blackstone Real Estate Partners Europe V, a closed private equity fund.

After a fifth consecutive raise in summer last year, BREP Europe V and its affiliates had €7.8bn of capital commitments, making it the largest ever dedicated European real estate fund. That fund is understood to seek returns of around eight per cent.

Mr Shah said he could not go into numbers, but that investors in Sage are a global base of long-term institutional LP investors whose money comes from pensions and endowments.

“Over our 25-year history those investors have continued to invest with us, due to performance and our fiduciary role,” he said, adding that the funds are regulated by the Financial Conduct Authority in England and the Federal Communications Commission in the US.

“To date we’ve been shying away from development risk in terms of how we’ve approached the affordable housing sector, and acquiring Section 106.

“As we look at Sage Partnerships and are taking planning risk, land assembly risk, or just the risk that goes with being in a joint venture with people with different time horizons or expectations, we’ll need to set a higher hurdle rate as we look at those opportunities.

“As you’d expect our returns are made up of two things – keep in mind we are buying both shared ownership and social rent – so it’s made up of house price appreciation on the one side, and rental inflation on the other.”

Mr Denton pointed out that Hyde and other housing associations would also have a distinct risk adjustment approach when acquiring Section 106 or investing in new build.

Earlier at the conference, Sage’s Mr Cook told the audience that after meeting with Blackstone and Regis, he “realised that private equity, responsibly deployed, could be a game changer”.