In response to the growing homeless crisis in the UK, private capital is needed more than ever to help deliver a solution.
There are a number of reasons behind the issue. Unintentional homelessness can be a result of factors including mental health, leaving foster care, domestic violence and drug and alcohol abuse. Home REIT is aiming to help solve the problem by addressing the lack of suitable housing and providing good value, high-quality homeless accommodation for Local Authorities – who are legally required to house the homeless.
Since its IPO in October 202, the investment trust has acquired over 700 properties, representing over 3,800 beds, throughout England for individuals and families that were homeless or threatened with homelessness. Importantly, these properties generally provide much cheaper and more appropriate accommodation than other types, notably expensive and sometimes sub-standard bed-and-breakfasts or hotels.
The managers, Jamie Beale and Gareth Jones of Alvarium Home Reit Advisors, work with charities that specialise in tackling homelessness in particular areas, such as women fleeing domestic violence, those leaving prison and those exiting the armed forces.
Once purchased and refurbished, the Trust leases a property to an appropriate charity, which collects a statutory housing benefit from the relevant Local Authority and provides the required care and support to tenants. The properties are leased in good condition and any repair and maintenance required is taken care of by the charity. The buildings, generally small apartment blocks or large houses converted for multiple occupancy, are located in areas where there are suitable amenities, transport links and access to jobs in order to provide opportunities for end users and to minimise carbon footprint.
The rents collected by Home REIT are long term and broadly linked to CPI inflation. The managers state there is an average yield at acquisition of 5.85% with the resultant yield to the investor reduced by running costs but boosted by low-cost debt (modelled at 35% loan to value) to produce a higher target.
The properties themselves have multiple possible uses and are well located in major cities and towns, meaning they ought to retain value in line with general market trends. Thus, there is a decent underpinning to shareholder capital, albeit the modest level of borrowing increases risk compared with owning the properties outright. The portfolio is diverse and spread across 21 tenant partners and 81 local authorities.
As always, there are risks involved. The reliability of tenant partners, as well as any changes in the regulatory landscape in the area, are potential hurdles. However, the managers believe that by providing good value, high standard accommodation to established charities in an area of pressing need Home REIT is well placed. It should also be noted that as a primarily income-generating investment there will inevitably be some sensitivity to interest rates and bond yields.
Shares currently trade at a premium to net asset value, lowering the income yield available to investors, which on an historic basis is 4.8%. All yields are variable and not guaranteed. Reflecting strong investor interest, as well as a pipeline of further properties to add to the portfolio, there is currently an offer for subscription at 109p, for existing and new shareholders, which is below the market price at the time of writing. The proceeds of the offer will be used to acquire further homes, with advanced legal negotiations already underway on around £400m of properties with an average yield at acquisition of 5.95%.
Home REIT has the attractions of government-backed income, inflation protection and measurable social impact. There are clear differences from other specialist residential income vehicles through a statutory underpin to revenues, as well as most of the value being in bricks-and-mortar rather than leases. It is not a constituent of our Foundation Fundlist, primarily owing to its specialist nature. However, our Collectives Investment Team has a positive view on its prospects, and it could be worth considering as a means of diversification in a portfolio aimed at income generation, especially for those wishing to invest responsibly.
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