Blackstone is backing a UK housing association in an attempt to tap into the affordable housing market.
The private equity giant is funding Sage Housing Association to buy Section 106 allocations around the country.
If successful, Blackstone has the firepower to create a multi-billion-pound portfolio and make Sage one of the sector’s biggest players.
The move into the UK’s affordable housing sector by the world’s best-known private equity real estate investor highlights the dramatic changes that have occurred in the past two years.
Alongside more freedom to borrow and build, housing associations have been using a variety of methods to raise new capital and take on the development of massive schemes, with the likes L&Q, Peabody and Clarion establishing themselves as major players in the UK housing sector.
As is typical of housing associations, Sage will buy the affordable segment provided on schemes from developers and will target a net yield of around 5%.
It is looking to buy across the various tenures of affordable housing offered around the country, including intermediate rent, shared ownership and traditional affordable.
While Sage will not build the units, the for-profit registered provider will manage them. A team has already been assembled. It is headed up by Joseph Cook, formerly of Aldwyck Housing Association.
The team behind the investment at Blackstone will use the expertise that founded Invitation Homes in the US.
The single-family home operator built up a portfolio of 48,000 homes between 2012-17 by buying foreclosed homes in bulk.
Its initial floatation in January 2017 raised $1.5bn before it announced a merger with Starwood Waypoint Homes to create a $20bn single-family home rental company last August.
In Europe, Blackstone has residential holdings in Sweden through residential property owner D Carnegie and significant Spanish residential assets, most notably a €6.4bn portfolio of non and sub-performing loans secured against homes in the country which it bought from Catalunya Banc in 2014.
The extent of the opportunity as seen by Blackstone is underlined by the fact its investment is coming from its €7.8bn Blackstone Real Estate Partners Europe V opportunistic fund rather than its new core plus fund, which targets relatively lower returns.
There has been increasing institutional appetite to access the residential market in the UK, with a number of different models emerging.
On the social side, Heylo Housing launched in February last year with a model looking to take on shared-ownership assets, while two REITs – Civitas Social Housing and Triple Point Social Housing – also launched.
The premise is that while social housing rents are relatively low-yielding and cannot grow as quickly as in the private sector, they are government-backed, giving them considerably more security.
Buying up S106 allocations can be done on a scheme-by-scheme basis or in bulk deals.
If Blackstone is looking to scale Sage quickly, it may look to buy multiple contributions from builders. Some housing associations are already attempting this approach as assembling portfolios of scale can take years.
The advantage of the model for housebuilders is that by selling a chunk of homes earlier on in the development process they receive a substantial upfront payment which can be used for building out the broader scheme.
Early delivery of the affordable housing element of a development also helps provide a greater sense of place, with more people populating schemes at the outset. However, many developers currently leave the delivery of the affordable element of a scheme to the end as it is the least profitable.
In making its investment into the sector, Blackstone will be entering a world still open to major government interference.
Housing associations are increasingly independent but are still regulated by government, as shown in 2015 by the enforced 1% drop in rents per annum enforced by the last government and the extension of right-to-buy to housing association tenants.
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