Sage closes in on £1bn affordable portfolio
Equity-backed for-profit registered provider Sage Housing is closing in on a 7,000-home portfolio worth £1bn.
Picture: Getty
Sharelines
While it had 200 social and affordable rented homes by early January 2019, it has exchanged on 4,800 properties worth £700m, with another 2,300 worth £325m in negotiation.
Its five-year plan to reach 20,000 homes by 2022 would require billions of pounds in capital funding – and equity for the acquisitions is committed by Blackstone.
The initial proposition for the business model came in 2017 from property investor Regis, which then purchased an existing for-profit provider, put up the working capital, and persuaded Blackstone that the idea has “scalability”.
Joe Cook, chief executive of Sage Housing, told Social Housing that the new initiative came amid “frustration” at a housing association (HA) build-and-borrow model which is based “on an ever diminishing circle where you can never fund to 100 per cent”.
“The question I was asked was, ‘What do you think you can achieve if you had unlimited funding?’ And that was what excited me about the proposition.”
Blackstone came on board in December 2017 with a 90 per cent stake in the company. A global base of long-term institutional LP investors, whose money comes from pension and endowment funds, are investing via Blackstone Real Estate Partners Europe V, a closed private equity fund. Money is channelled into Sage’s immediate parent, Sage Investments Sàrl, a joint venture company between Regis and Blackstone, registered in Luxembourg. Social Housing reported last year that the fund typically seeks an eight per cent hurdle rate, but plans to raise debt in the short-to-medium term might suggest a higher, leveraged return.
Read more
Mr Cook revealed: “Investors know there is a period of ‘no return’ while the business stabilises. The numbers we’ve committed to – the 7,000 units – will be enough to see the business stabilise once they’re all built out.”
Investors in its sister company, Sage Partnerships, will expect higher returns, with equity drawn via the joint venture but from a separate funding line.
Section 106 market
Sage Housing uses its cash to buy Section 106 packages, predominantly from the country’s top six builders. The registered provider’s (RP) tenure mix is typically around 30 per cent shared ownership and 70 per cent rent, and Sage has appointed Places for People to manage the majority of its rented portfolio.
Affordable rent properties will be capped at the lowest of either Local Housing Allowance levels or 80 per cent of market rent, and Sage will provide properties for social rent based on target rent levels.
Mr Cook said Sage is offering a “very vanilla approach”, where it does not try to change the Section 106 mix, is subject to council nominations and seeks to sell shared ownership to people with local connections. While originally excluding London from its plans, it has homes in peripheral boroughs and some as central as Camden.
Mr Cook added: “Our ability to acquire smaller developments – units of 15 or less – puts us in a position where most RPs and HAs won’t look. And that’s something local authorities look at particularly favourably – that we have no particular size of acquisition.”
The CEO said the group has bid on £7bn of Section 106 deals and come away with 14 per cent of that.
“Section 106 has always been competitive… It goes through peaks and troughs. It’s very competitive at the moment, probably because a lot of RPs are heading towards the end of their financial year and have got uncommitted capital. It’s not true that we’re buying up large amounts of Section 106 or driving up costs.”
Mr Cook added: “[HAs] all have massive long-term debt and they pay interest, so somewhere along the line someone takes a dividend out of the loan. The way we are approaching it is similar, but using equity instead of long-term debt. We have the same commitment to our tenants… and are committed to giving them the best resident experience we can, so there will be no reduction in standards because we pay a dividend to investors.”
It also has no plans to pursue government grant funding, saying that “reputationally, we don’t think it’s a good idea to be taking public subsidy”.
Mr Cook added that most councils see the injection of new equity “as a positive”, despite other ‘for-profit’ RP models having given some councils “some cause for concern”.
He also maintained that the focus on new build, efficiency and a digital-by-design approach is what delivers returns. While all of its residents have signed up to its ‘digital-by-design’ approach to tenant management, its business model accounts for 10 per cent of residents not being able to.
Despite talks of Brexit chaos triggering a potential housing downturn, Mr Cook said the Sage model “would be stable enough to provide returns to the investors”.
Mr Cook said: “I wouldn’t expect the switch-off on production, borne by the collapse of the sub-prime market. Brexit is a different circumstance. I don’t think we’ll see the same reaction from builders.”
He added: “We’ve stress-tested the business model and are at the point in terms of committed numbers where we could stop an acquisition and that business would be stable.
“It would be stable enough to provide returns to investors. We underwrite on an individual offer basis and not across the portfolio.”
RELATED
- © Social Housing
- All rights reserved