There has never been a stronger case for continued investment from private capital into the supported living sector, due to the compelling demand drivers as well as the differentiated returns available. With a sector such as supported living, where the most vulnerable are housed and cared for, a very Institutional approach is required; offering proper governance and oversight, being fully aligned to the requirements of the Regulator of Social Housing and adopting a balanced approach between care providers, registered providers and investors.
The demand for supported housing comes from a broad spectrum of individuals who need housing – from young adults to the elderly, and the varied needs they have, from assistance with day-to-day activities to 24-hour care – providing investors with natural diversification across the asset class. In order to deliver the right outcomes for these individuals, the sector needs a fresh approach that allows private capital to work alongside experienced and well-resourced housing and care providers, to complement and expand their existing provision of supported housing.
A fresh approach
To achieve a responsible and long-term investment, the approach has to be properly aligned to the sector’s specific needs; a model which provides high quality, affordable accommodation and optimises the care being provided, whilst appropriately balancing risk between investors and housing associations.
Incumbent long lease models place unfair risk on housing associations by requiring very long-term leases that are not aligned to care contract terms, upon which the exempt rent housing benefit is claimed. This obvious financial mismatch, between a local authority-awarded care contract that is considerably shorter than a 25-year lease obligation, can lead to an unsustainable burden for housing associations if the care contract is not renewed. Simply, housing associations are being left with 20+ year liabilities with ever-increasing inflation linked rents, which are often set at a level far greater than the prevailing private market rents in the area.
The issues created as a result of this imbalance of risk have been highlighted by the Regulator of Social Housing in their regulatory focus on housing associations reliant on the incumbent model. The “non-compliant” judgements, handed down by the Regulator to housing associations operating under the incumbent model, emphasise the need for a new, institutional investment approach. Such an approach has been developed in consultation with key government and housing association stakeholders and seeks to achieve a balanced and responsible lease-based model that can satisfy the extensive demand for increased supported housing.
A more balanced approach requires tailored lease terms that meet the needs of housing associations and align to underlying care agreements. Investment managers need to work with commissioners, care providers and housing associations to create a lasting product, thereby ensuring care agreements, and thus leases, will renew. Leasing properties to high quality and well governed housing associations and focusing on keeping rents as low as possible ensures the best chance of care contract renewal and longevity of the income stream from the asset. This approach is replicated in just about all other real estate asset classes, where tailored term leases have become the norm and long-term income is instead created through acquiring good quality assets to ensure lease renewals and/or speedy re-letting at a market rent.
Setting fair and justifiable rents
Rental levels can be controlled because not all supported housing needs to be highly specialised. Good quality housing that allows for care and independence is a reasonable target for most developments. Supported housing developments can be built at, or close to, vacant possession values with rents set in line with the private market, so long as development margins are appropriate. This facilitates the opportunity to work with Local Authorities to ensure rents, administered by Housing Benefit teams, are truly representative of the additional costs of any adaptations. Setting fair and justifiable rents is a key aim of the Regulator of Social Housing and should also ensure value for money for the Department of Work and Pensions.
A better balance of risk and reward
An evolution of the financial metrics to better balance risk and reward between investors and lessees will lead to a greater number of established housing associations, with deeper and more ingrained governance, operating and participating in this new lease-based private capital model. The goal for the sector should be for investors to ultimately view supported housing through a private rented sector (“PRS”) style lens – housing which is benchmarked against private market rents, in this instance leased and operated by experienced housing associations, with the additional social benefit of providing housing and care for the most vulnerable in our society.
This new model of investing in supported housing will provide investors with a more secure income with leases issued to strong, experienced and well governed housing associations; a model which is aligned to the requirements of the Regulator of Social Housing and private market led rents and valuation metrics, ensuring most of the investment value is in the property.
This will lead to a more stable and sustainable investment proposition, significantly mitigate reputation risk for investors and ultimately create a truly responsible and institutionally acceptable investment opportunity that can seek to meet the tremendous demand for increased provision of supported housing.
