Investor appetite for high-yielding social housing funds faces a new test today as plans are unveiled to launch the sector’s fourth real estate investment trust (Reit) in 18 months.
Managers of the Fundamentum Supported Housing Reit are looking to raise up to £150 million following the success of Civitas (CSH), Residential Secure Income (RESI) and Triple Point (SOHO) in attracting over £1 billion from investors since November 2016.
Like the other funds, Fundamentum will target a high, inflation-linked quarterly dividend - starting at a 5% yield - generated from government-backed rents from a UK-wide portfolio of social housing properties.
Unlike its rivals, Fundamentum says it will focus exclusively on the provision of homes for tenants with disabilities and learning difficulties. This is an area of huge demand with the London School of Economics estimating 1.8 million disabled people struggle to find accessible housing, while the NHS says around 2,400 people with a learning disability or autism will require new accommodation when discharged from hospitals next year.
There is also cross-party political support for paying for these tenants’ rent and housing costs through welfare benefits.
Refurbish not build
Rather than forward fund or develop new properties, Fundamentum buys and refurbishes existing homes to ensure they meet the needs of housing associations and local authorities. It has a £140 million pipeline of suitable properties, half of which it is in exclusive negotiations to buy.
The 122 properties it has identified could serve 1,100 tenants, which Christian Forbes, founder of Fundamentum Property, the Reit’s investment adviser, said demonstrated the scale of the demand.
The properties will be managed by registered providers regulated by the Homes and Communities Agency and leased to housing associations and local councils for over 20 years with rents typically rising by 1% over the consumer prices index (CPI), he said.
Gearing - or borrowing - of up to 30% will be used to leverage the net initial yield to around 7.2%, from which a 1% annual management fee and costs will be deducted before paying a 5p dividend in the first year.
Launched five years ago Fundamentum Property claims to have transacted on over 100 properties, 70 of which were in the supported housing sector.
Its main focus has been the KMG Castel Residential Property Fund, a small, non-dividend paying, capital roll-up fund in Luxembourg used by wealth managers and family offices. It has generated an annual total return of 7% since launch, just short of its 8% target.
The €36 million Sicav ran into difficulties last October when it received a large number of sales requests from investors, thought to have been triggered when they learned of Fundamentum’s plans to launch a London-listed Reit.
Castel has suspended redemptions while Fundamentum sells properties to return cash to investors who want to exit. This echoes the problems many open-ended UK commercial property funds experienced after the Brexit vote in 2016, although Castel continues to operate and provide updated valuations.
For Forbes, the liquidity problems of open-ended property funds - in which investment managers are responsible for the money flowing in and out of a fund - underlines the attractions of ‘closed-ended’ real estate investment trusts where managers are not responsible for the price shareholders get for their shares and have a fixed pool of capital that suits the illiquid, physical assets in their care.
‘The open-ended structure post Brexit has a limited shelf life,’ he said.
Aside from the awkwardness around the Castel fund, the launch also comes at a more challenging time for new investment companies trying to get off the ground.
Within social housing, investors’ initial enthusiasm has waned. Civitas, the first to market, raised a total of nearly £600 million through its initial public offer (IPO) and a further C-share issue last November a year after its launch.
However, its ordinary share price has fallen out of favour after the discovery in February of financial problems at one of its housing associations, First Priority in Kent. The shares now trade at a 12% discount below net asset value (NAV) having stood at a premium of nearly 10% above NAV last September.
Residential Secure Income, which raised £180 million last July and has so far invested £100 million, has drifted to a 9% discount as news over its investment activities has dried up. It also suffered the death of its chair, Brenda Dean, last month.
Triple Point, the last of the three to launch, raised £200 million at its IPO in December but has followed a similar arc to Civitas. A follow-up C-share issue in February attracted just £46.6 million instead of the £200 million target. Its ordinary shares remain on a 2% premium over NAV, down from 6%.
Secondary share issues by Reits have also been varied this year. PRS (PRSR), the government-backed rental accommodation fund, and Secure Income (SIR), enjoyed strong demand for their placings in the first quarter, raising £250 million and £315.5 million respectively. By contrast AEW UK Long Lease (AEWL) pulled a £35 million capital raise in early February and Pacific Industrial and Logistics (PILR) last week cut the amount it is seeking in its current fund raising to £20 million from £50 million.
Within the wider investment trust sector there have been signs of investor caution too after the rebound in IPOs last year when 22 new funds listed on the stock exchange raising £3.7 billion following a Brexit-induced drought of flotations in 2016.
There were just four new issues in the first quarter of this year, raising £291 million of new money, according to Numis Securities. While the Baillie Gifford US Growth Trust (USA) did well for an equity fund raising £173 million, it fell short of its £250 million target.
Referring to the problems at First Priority, Forbes said Fundamentum took its due diligence of housing associations seriously. ‘We look at the board of trustees and check that they are independent.’
He said the firm also checked if housing associations received referrals from local authorities. There was no point in using a financially strong housing association that hadn’t received new tenants for three years as that would not be ‘sustainable’, he said.
Sum of parts
In another departure, Forbes said the portfolio would be valued more conservatively than some of its rivals. Its NAV would be the sum of its individual property valuations, rather than the portfolio ‘premium’ applied by Civitas.
The apparently wide discount of Civitas reflects investors’ belief that the NAV is overstated by assuming the portfolio would be sold for a higher price than a traditional ’sum-of-parts’ valuation would suggest.
If successful the Fundamentum trust will be chaired by Hugh Aldous, who also chairs the Downing Strategic Micro Cap (DSM) investment trust.
Investec Bank is co-ordinating the IPO with costs capped at 2% which will ensure the 100p shares start with a NAV of 98p.
The subscription offer will end on 27 April with trading in the new shares expected to start on 2 May. A prospectus will be published this morning.