Global asset manager-backed supported housing fund doubles in size, targeting 10%+ returns

Andrew Dawber, group director of CIM, said: “The clear distinction between the two strategies is the REIT doesn’t forward-finance, the REIT buys built and also can buy new properties on completion but it doesn’t pay for the actual construction itself, whereas the Schroder fund is exclusively designated for forward financing.

“So in effect, it’s not taking development risk, that’s for the developer, but it’s paying for all of the cost of construction, including buying the land through the process.”

This, Mr Dawber says, will support additionality where small and local and regional developers do not have the capital to fund projects on their own.

But the model will also support double-digit percentage returns to investors.

Capital return and inflation-linked income

As is the case with the REIT’s SSH investment model, completed properties owned by the fund will be let to housing association counterparties on fully repairing and insuring (FRI) long-term leases, with annual uplifts linked to Consumer Price Index (CPI).

Mr Dawber explains that the typical lease length will be “20 plus five years”. Meanwhile, where indexation is concerned, rental uplifts will be tied to CPI with a cap – typically at four per cent – and collar in place.

During the initial five-year period, the fund will target a total return of between 10 and 12 per cent net internal rate of return (IRR) to investors, with around half contributed through income and half through capital return, according to Mr Hubbard.

At the end of the five-year lifespan of the fund, investors will then be offered an opportunity to maintain their investment in a second phase.

“Normally in these vehicles you set it up and then you invest in the assets, you do whatever asset management and then you sell them,” Mr Hubbard said.

“That’s not the idea here, so prior to the end of the fifth year we’re going to be proposing to the investors that we’ll convert the fund into an evergreen open-ended vehicle, because the lease lengths are very long and therefore we know that some of the investors would like to… stay with the assets because they do have a very attractive cash yield which is also CPI linked, which is what a lot of them are looking for.”

While returns in the first phase will be supported by “a certain amount of capital value growth via forward funding the properties”, returns in the second phase would be primarily tied to the income element of the investments through the leases. This would see investor returns likely around six per cent, Mr Hubbard said, although he added that it is “a little too early to say”.

Redoubled efforts

During the current phase, the fund will look to double in size again, raising up to £200m-£250m in total. It also has an option to leverage up to 40 per cent of loan to value.

Mr Hubbard said: “The good thing is that, regardless of the size, because of the granularity of the asset [in that] they’re relatively small, you can achieve a good portfolio already even at the £100m size where we are today.”

Investors in the fund to date have been mainstream, direct investors, Mr Hubbard said, and primarily pension funds “who find that the profile of the returns ticks their boxes, the social impact side of it again ticks their boxes, [and] they also like the ESG”.

He added: “Yes, it’s a nice return, that’s not to be sniffed at. No one is taking a discount for doing social good with this particular fund. [But] our aim is to create something that really has social impact and if we don’t do this, it isn’t going to happen. That’s one of the key criteria when you look at social impact projects.”

Mr Dawber said that the forward-funding approach is also supporting local involvement in schemes, with incoming inquiries from local developers as well as many projects coming through “with the backing of the local authorities”.

He added: “In quite a number of cases, the local authorities also have guaranteed the rent for long periods of time, sometimes for up to 20 years, and the reason they’ve done that – it’s a demonstration of two things – it’s a demonstration of the levels of underlying demand but it’s also a demonstration for the quality of these assets.”

Whether such guarantees would support a more sustainable model of SSH in the broader sector in the eyes of the Regulator of Social Housing (RSH) remains to be seen.

Following its special lease-based addendum to its 2018 Sector Risk Profile published in April last year, the regulator has continued to express concern about the rate of progress at some lease-based housing associations within the sector that it has rated non-compliant in addressing viability and governance issues.

Some of the providers with which the regulator is engaging have historically been counterparties to the Civitas REIT, among other investors.

Asked about the current regulatory landscape, Mr Dawber emphasised that Civitas is not itself regulated but that it maintains a “reasonably active dialogue” with the RSH.

He added: “What we have tried to do in this fund is to conduct best practice, so in areas where the regulator has expressed concern, say around rent-setting for example, we have done a lot of work around that to make sure that everybody is signed up in a completely transparent and open way, fully cognisant of what everybody is doing and that actually our counterparties are aware of what they’re undertaking.

“The fact is on the ground there is very significant demand for these properties and the counterparties we signed up with we believe are sensible organisations that evaluate things in a professional way.”