‘2013 will see first social housing UK-REIT’

Published by 24publishing for 24dash.com in Housing and also in Central Government, Communities, Local Government

Housing bosses have welcomed the Government’s plans to consult on housing associations being able to convert to Real Estate Investment Trust (REIT) status – with experts predicting that 2013 will see the emergence of the first social housing UK-REIT.

It’s being viewed by the sector as another way to plug the gap in grant funding – allowing providers to raise new capital to recycle into housing provision.

REIT status would spare landlords from paying corporation or capital gains tax on profits made from property investment thus allowing them to pay higher dividends to investors. For providers, a REIT offers the prospect of raising funds from equity investors.

It would allow them to raise equity instead of, or in addition, to debt to fund development and is seen as a way for them to spread risk between bank debt and bond issues – the latter becoming the most attractive way for providers to raise finance.

Providers could put some or all of their portfolios into a REIT spin off – whose shares are publicly traded – allowing investors to invest in their portfolios. Alternatively, they could club together in a consortium to develop and manage a REIT.

Another option is where an institution – such as a bank – would set up and market the REIT which investors would put money into. This would then be invested in stock, which the landlord would manage for a fee.

There is strong interest from larger housing providers - some of whom already operate in larger group structures with charitable and non-charitable arms.

In March, accountancy firm BDO surveyed 60 senior executives from registered providers.

Over half of respondents to the survey said they were interested in looking at converting to a UK-REIT. However, the rented stock of many housing associations is likely to be too small, hence why the figure went up to 78% from social housing providers with more than 10,000 units.

Of these, 67% said they would consider putting housing into a REIT and retaining a proportion of the shares and 29% said they would consider launching a REIT in conjunction with other landlords to spread risk.

One finance director told BDO: “Pension funds need investments that deliver Retail Price Index (RPI) plus something and social housing rents are structured to do just that. The demand would be enormous.”

Following the announcement of the consultation in the Budget last week, 63,000-home Places for People and 50,000-home Home Group welcomed the move, as did 13,000-home Knowsley Housing Trust (KHT), which now operates under the unregulated parent company First Ark group.

KHT chief Bob Taylor said: “The First Ark Group, the unregulated parent company of Knowsley Housing Trust, has been created to allow us to tap into more commercial funding streams such as this, and a social housing REIT could be one option to open up new private investment to provide the homes so desperately needed.”

David Cowans, chief executive of Places for People, said: “We are in a housing drought, and are not building enough homes to keep pace with demand.

“If we are going to get Britain building again and deliver the 230,000 homes that are needed every year, then we need to look at new sources of private finance (such as REITS and bonds), to fund large scale development and infrastructure works.

“We know there is appetite from institutional investors, as we have been developing models with them which would allow us to build thousands of new homes, boost local economic growth and sustain jobs directly and indirectly in the supply chain.”

Models and concerns

It is understood providers could set up new trading companies registered with the regulation committee inside the Homes and Communities Agency (as an intended profit-making arm) with the provider transferring homes into the REIT spin off.

As also mentioned, they could set up consortiums, where, using the investors’ money they could build new homes and transfer them into the REIT with rents and sales (tax free) being used to cover investors’ dividends and provide funds for further developments.

Decisions also need to be made about what stock is transferred – with market rented giving best returns – and whether it’s new or existing stock being invested in, with both holding potential. The question of whether grant funding would need to be repaid on a transfer of housing association stock to a REIT would also need to be addressed, experts have warned.

However, there are concerns – despite in the previous Budget, the Government taking great strides to make the REIT regime more flexible and attractive. These proposals, which should come into effect this July, include abolition of the 2% entry charge, relaxation of the diverse ownership rule for institutional investors and introduction of a three-year grace period for REIT start-ups.

Although the proposed changes are designed to reduce costs of a REIT conversion, 27% of social housing providers in the BDO survey indicated that these remained a concern.

The biggest challenge, though, was likely to be that of achieving adequate shareholder returns – a drawback identified by 51%.

According to a briefing by law firm Devonshires, any ‘spin off’ and the prospect of it ‘floating’ on the AIM comes with a raft of “practical, legal and regulatory issues” and hinges on a number of commercial issues.

These include reviewing existing bank debt and bond facilities and the implications of moving security to the new “vehicle”. According to Devonshires, “loan and bond terms may well be the critical factor concluding whether a spin off is viable”.

Analysis

‘The dawn of a new era’

Tracy Dossett, tax director, BDO

"The Government announced in the Budget that they will be consulting on the role that UK-REITs can play in supporting the social housing sector.  It is anticipated that this will lead to new legislation in Finance Bill 2013 with the hope that this will be followed by an influx of social housing providers into the UK-REIT regime.

"One of the key motivating factors for the introduction of the UK-REIT regime was to encourage institutional investment in residential property and there is now a genuine push to see this goal achieved.  The Government are keen to understand and address the barriers that stand in the way of social housing UK-REITs and the consultation should help them to understand what needs to be done.

"There are clear opportunities for social housing providers from using UK-REITs as an investment platform. One benefit could include access to institutional equity finance at a time when Government grants and long term debt financing are increasingly hard to secure. UK-REIT status may also provide an alternative joint venture vehicle to maximise returns and share risk in a tax-efficient manner.

"The barriers faced in creating a successful social housing REIT are twofold. The first, and more manageable, relates to the current UK-REIT regime. The second relates more to current institutional investment sentiment.

"It is hoped that the former challenge may be addressed through the consultation process.  Key issues to resolve include ensuring that social housing UK-REITs are able to churn properties without these being treated as “bad” assets generating “bad” income, clarifying the treatment of Government grants on the transfer of any properties into a UK-REIT, ensuring that the interest cover and distribution requirements do not make social housing UK-REITs commercially unviable and ensuring that social housing providers can retain a significant investment in the UK-REIT without penalty.

"The second challenge is more difficult to overcome as it requires a change of mindset.  In our experience such investors are generally cautious to invest in residential properties preferring instead to invest in other property classes which yield higher returns.

"Notwithstanding the above, given the interest that social housing providers are showing in UK-REITs and following the recent announcements, we predict that 2013 will see the emergence of the first social housing UK-REIT with more to follow."