With the demand for housing far outstripping supply, the UK is facing a severe issue of the housing crisis. Affordable social housing projects can make a useful contribution, but it's not the ultimate answer to the crisis.
Legal limitations associated with grants and bank lending demand alternative sources of funding for property development investment.
Some social housing providers can obtain funds by issuing bonds to the private sector. While progressive service providers are looking for a time when reaching the bond market is challenging. There won’t be 100% funding for commercial property investment as loans (bank or bond) are likely to be restricted by loan-to-value requirements.
Is Social Housing Real Estate Investment Trust an alternative we can use?
The government has now realised the need for finding an alternative source and is studying social housing Real Estate Investment Trust (REITs) is an affordable project to deal with. It is evident that few changes are needed before REITs can offer a significant increase in the key worker or social housing.
The finance act contained provisions to promote REITs to fund in the market-rented property. For instance, the entry charge was two per cent of gross real estate assets but now it is free. In addition to this, it is expected that institutional investors and start-ups will get enough support for property development investment.
Most probably, one or two social housing REITs will be emerging soon to give a reasonable return to commercial property investors. Rather than a proposed development where construction hasn’t started, a portfolio with a known track record would be more convenient. But the return must be comparable to commercial property or at least they should be equal to market-rented residential property.
How would Social Housing REITs affect the return?
To develop and nurture the return investment, the Government can flex the current REIT regime to reduce costs. The government can take measures to decrease irrecoverable Stamp Duty Land Tax (SDLT) costs. Now, a buyer of a cleared site will not benefit a reduction in SDLT whereas a buyer of a portfolio will get a 1 per cent reduction in SDLT, based on the average value of the portfolio. SDLT sales are arising when a landowner or local authority contributes land into a REIT in exchange for shares.
Landlords cannot charge VAT on rents but spend 20% VAT on repair costs which is actually irrecoverable VAT. Hence a reduction in the VAT rate on repairs would increase returns.
Though REITs require a financing ratio of 1.25 income cover, the consideration of substantial maintenance makes it challenging. A financial ratio of 1.25 is required for REITs which will be impossible if there is substantial maintenance. When a REIT spends more than 30% of the acquisition price on an asset and sells within three years, the three-year development test would be helpful.
An acceptable dividend yield on shares held in an affordable social housing REIT should be given to Investors. But this needs to be generated by sales of property at the margin. The strategy is acceptable to the government only and only if the purpose of any social housing REIT would be to develop, not shorten. And such distribution to shareholders would be charged as income. Rent is expected from the shared ownership properties like when the tenant buys a portion of a property and pays rent on the balance. Such properties offer more benefits as they create long-term income streams. Besides that, a tenant is likely to maintain the property as he has a financial stake on its value.
What issues should we be aware of?
There are some fundamental issues to take into consideration. When tenants on housing benefit make their payment delayed, rent arrears would become an issue. However, registered housing providers would be expected to present a track of low voids.
The future of Social Housing REITs
The government will take care of dealing with housing grants. The cash generated from this initiative must be converted into new housing, given the intention is to increase the supply of let property.
There are different forms of Social housing REITs – registered housing providers or just an intermediary landlord through a sale and leaseback. Anyhow, REIT is a way for registered housing providers to recover capital to grow the sector.
The government appears to be focusing on affordable social housing REITs. The investment returns have to increase for social housing to work on a grand scale. To improve returns, the government must consider the special models of shared ownership and occasional sales of assets while upfront costs need to be reduced.
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