1 May 2012
It is with great anticipation that we await Royal Assent to the Finance Bill which will mark the final stages of preparation for the first social and special needs housing trust. Billed by myself as the most unexciting investment opportunity of 2012, the SAF Housing REIT has traded huge gains for predictability, sustainability and low risk.
Last week, three things made me prick up my ears.
1. Our banks are talking about the amount of leverage we will use in our fund
2. Reports of exposure to downside risks within the English housing associations to the swap market which has already claimed the biggest Dutch social housing provider
3. Expert opinion in response to the arrival of our Real Estate Investment Trusts that much will depend on the spread of risk within the REIT itself
As the manager of a fund that uses the money of investors to provide affordable social and extra care housing, my responsibility is significant. Clear rules must be followed. The first of these is to keep things simple and transparent. The second is that I must recognize that we are responsible for two of the most important resources our society have: our homes and our retirement income. Consequently the “trust” should therefore be worthy of its name and adopt a policy of total risk aversion.
This leads us to a set of core principles which we breach at our peril:
- To keep all leverage out of the Trust. Sure our operation requires a leveraged banking strategy. However, the intention is that it is used to prepare stock or portfolios before it is transferred to the REIT, and that it is removed once the stock in question passes into the trust. Of course this makes for an unexciting investment opportunity since, by removing this feature, the upside gains are reduced. So, however are the risks in favour of predictability. As part of an investment strategy this part is crucial.
- To not make any speculative investments. This is not a tool for developers but an investment backed housing provision. The objective is to achieve sanctuary in sustainability and this starts from the very beginning. Consequently all our developments must accord with the strategic plan of local authorities – ensuring that issues such as varying demographic trends at a local level are addressed. This ensures sustainability of use in the long term.
- To ensure evey single development stands on its own feet. I have been investing in and managing other people’s property investments for more than 15 years. In this time I have not once failed to deliver the predicted return. This is because I refuse to cross subsidize or offset. Each development/property has its income stream assured before the investment takes place, and this only happens when I am satisfied that each purchase stands up financially; properly protected from adverse conditions.
- To ensure sustainability through affordability. The needs of investors and of the tenants living in the properties are complimentary. One receives a predictable return, the other a place to live in return for a reasonable rent. The key is sustainability. Tenants must be able to support the payment of rent and, failing to do so, the rent must then lie within the scope of the housing benefit system. This means that the development must fall into the affordable housing framework (80% market rent), or if not, be able to do so within a reasonable timescale. With a moderate return rate the only mechanism that can be used to affect rental price is the capital cost of the property itself. Consequently, we buy and build to a strict formula. If the formula is not satisfied we do not build. And it also means that the retail market is excluded in all but extraordinary circumstances.
- To look to the future. All of our developments have to have a future life of at least 40 years – this is something we test for. In cases of specialist accommodation we have to be satisfied that there is an enduring need and that the property has alternative social housing use once this need has been exhausted. This is one of the reasons we only produce accommodation in response to a strategic local authority plan: we are addressing current need and continued future from the outset.
- To use the regulated sector. We only supply housing to registered housing providers in recognition of how regulation protects the assets and ensures continued good management. Landlords must adhere to financial monitoring and performance standards set out by the Tenant Services Authority (TSA), and these are very much in the interests of both investors and tenants. If an association fails to perform, the TSA will intervene.
As you can see our REIT, I hope, will be one of the more unexciting investment opportunities available. As a consequence it will be stronger. In creating a social housing REIT, all risks must be mitigated and removed – not hedged as with a commercial REIT. We have considered the impact of every conceivable risk including the collapse of society as we know it. This is what drives our philosophy of achieving sustainability by building it right and keeping it simple. That way, everybody wins.
By Phil Shanks