UK residential REITs: the start of a journey

30 Nov 2017 / Corporate research

Until 2016, the only meaningful way to invest in listed housing was Grainger Trust or specialist student funds. Since November 2016, with Civitas Social Housing floating its over-subscribed REIT, £1,282m has been raised via four REITs. These REITs capture sustainable, growing income streams, supporting dividend yields of 5% or more, when floated. This income is a by-product of the real and ongoing need for new housing stock. We assess some of the detailed risks and opportunities that both REITs and their investors have to navigate. We include Build to Rent (BTR) sector opportunities, particularly for two quoted developers, and the PRS REIT.

  • REIT Strategy: Many of these REITs are truly infrastructure investors. Housing Associations (HAs) seek capital for new home building and have already taken on debt. To bring new capital to the asset class, they provide new investors with long and secure lease income-streams.
  • Investment case: Several £bn of social housing is to be sold in coming years: £1bn projected from one HA merger alone. Care providers are selling too. Existing REITs have demonstrated these assets can be purchased (and new-build being forward-funded) and packaged on terms attractive to both parties.
  • Large, growing markets: UK home-owner occupation peaked in 2007. Open market rental and social housing is growing. The latter stock alone is valued at over £300bn, putting the £1.28bn raised so far by the REITs in context. Other opportunities, such as BTR also offer fertile investment opportunities, and should be seen as a catalyst to unlocking large mixed-use strategic sites, adding significant value which can be shared by developers, investors and tenants.
  • Attractive and predictable historic returns: Investability problems around low net yields are now fully resolved by the new REIT lease structures, which support good (5% plus, growing with CPI+) dividend streams.
  • Execution risks: Asset yields are strong (mostly over 5% net initial yield) but in some segments, growth and values at end-lease need exploring. Not overpaying, during this upsurge of money invested, is important: but crucially and supportively, the target sectors are very large. Income security is high.
    Operational risks: Occupancy risks and end-lease valuation risks are important considerations. Long-term interest rate rises might become a valuation issue. Separately, BTR developers should face a steady, substantial, specialist demand. But this is a new market with little UK track record; in the US, c20% of stock is private build-to-rent.