Never has the need for the government to support housing and social care been so pressing – or its proposed solutions so controversial. Long-awaited social care reform and tax hikes have sparked a backlash, as critics question why young people, who struggle to find affordable accommodation, should foot the bill for an ageing population that has benefitted from house price rises.
The two challenges are complex and intertwined, and the solutions beyond the sphere of public funding. But Canadian asset manager BMO Real Estate Partners believes it has an answer to both.
BMO aims to raise £250m in the listing of its Responsible Housing REIT at the end of this month to fund the provision of supported housing. The homes will support care sectors including adults and children with learning disabilities, mental health issues, physical disabilities and addiction. The REIT will offer a minimum yield of 5% and NAV returns of at least 7.5% over the medium term.
Responsible Housing REIT will sit alongside BMO’s UK Housing Fund, which launched at the start of 2020, with a mandate to plough £500m into rental accommodation for people on low to middle incomes.
“Demographics are at the heart of what we are trying to do,” says Guy Glover, lead manager for the REIT at BMO. “The REIT will be more in the vulnerable space, where we know there is an increasing need, be those mental or physical, [looking at] life expectancy more generally and extra care.”
The sector is well established, even more so than BTR, which is estimated at just 93,800 completed homes. In contrast, the number of supported homes was estimated at 650,000 in 2015, says BMO, with demand expected to rise with a need for 845,000 by 2030.
Government strategy is driving much of that uplift, particularly the Transforming Care Agenda, which aims to move people from inpatient care into the community. Income is inflation-linked, supported by benchmarked rents that are ultimately funded by the Department for Work and Pensions through registered providers. Some other established providers of supported housing are also on the public markets, such as the £600m Civitas Social Housing REIT.
BMO is well-versed in the listed space, and currently manages 10 REITs. The company also has £8bn of assets under management as part of its wider “responsible” branding and £1bn dedicated to residential.
“There are existing peer group funds out there and we wanted to do it differently, in a way which we feel shares the balance more evenly between the fund and the investors and also the registered providers who will be signing the leases,” says Glover. He is referring to the shorter leases that the REIT will offer, catering to a wider group of prospective operators with large capital bases. He adds: “Because we are so well known in the investment trust world, to come up with a fresh offering made sense and it gave something where people get some diversity. For us, a new REIT entering the market is a sensible way forward and it plays to the strengths of each part of the business.”
Complementary capital
Almost two years ago, BMO REP made its UK housing debut with the first close of the BMO UK Housing Fund. It raised £100m to use to demonstrate the concept of the fund, with a £250m investment pipeline and a partnership with housing association Home Group.
Fund manager Peter Lowe says: “The structure is key. It is semi open-ended, the point being that we have a preference for longer term patient capital.” The fund is backed by investors including Big Society Capital and Swansea LGPS and acquisitions will be via forward funding or forward commitments on new developments of typically 100-plus homes with GDVs of between £20m and £50m.
Last month, it bought its first site, with a £40m forward funding deal securing 258 homes in Liverpool. The fund is also closing in on two family housing schemes, Lowe describes these as a “decent diversifier” to the city centre high-rise in Liverpool.
“We have sufficient dry powder at the moment to pursue our immediate pipeline,” says Lowe. But capital raising, specifically with new investors, has been more of a challenge during the pandemic. Lowe anticipates BMO could hit the £500m target in the coming years.
The BMO UK Housing Fund targets a 4.5% annual distribution yield and returns of more than 6%. Rents will be tailored against income, making it inflation-linked, and the fund has a target to deliver a proportion of discount market rent. BMO’s flex-rent model also means if the scheme income increases above inflation it will offer up a greater number of discounted units. “Most of our pension fund clients, our patient capital clients are looking at this market for a form of inflation linkages and on that basis forgoing that potential top slice, but in the interest of ESG objectives, is something that our investors are prepared to do,” says Lowe.
Ethical investing
What ties the two strategies together is those ESG values – and although the social focus may be more obvious, environmental priorities will be important when it comes to building new stock.
BMO will work closely with developers and operators to direct design, materials and even consumption and waste. “We like to get close to the occupier. As a landlord you are then in a position to impact outcomes, rather than leaving that to the operator,” adds Lowe. “That stretches beyond leases and rents, in our opinion, to accountability on the ESG agenda.”
The REIT’s schemes are expected to be smaller, but there is also an opportunity for converting old commercial space, adds Glover, including former offices, department stores or in-town retail. “We will have a small amount of development, but in reality most of it will be quite granular,” he says. “It will be small refurbishments up and down the UK, with the exception of the extra-care space, which we are looking at forward funding, which by their nature take a little more time to come out of the ground.”
On larger sites there could also be an opportunity to bring the two together. “If we can do that, it will be good for [the fund] and good for our strategy – integrating people into the community is what it is all about for the Responsible Housing REIT,” Glover adds.
Could this holistic future also include a BTR listing at any point? In a year of private equity takeovers, a recent failed IPO, and with BMO launching one REIT already, it seems unlikely. But Lowe says: “I see no reason why not.” The REIT set up is not always suitable for large capital outlay, but there have been a variety of structures in residential and the opportunity is big enough for all types of new entrants.
Downing Street has hoisted the flag for the private sector in the prime minister’s “investment big bang” and BMO is ready to play its part. Lowe says: “If public capital is not willing or able to enter the space to create new homes then private capital could definitely be welcomed.”
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