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HCA urges caution over REIT deals
Housing associations should be aware of the risks involved in taking money from real estate investment trusts (REITs), the Homes and Communities Agency (HCA) has said.
Responding to the recent spate of REITs launching in the social housing sector, the HCA urged associations to be cautious in balancing risk and reward.
Most of the social housing REITs that have so far been announced have been set up with a specific focus on supported housing, because government generally pays all of the rent for tenants in supported housing via housing benefit.
The REITs have been buying up supported housing properties and leasing them back to housing associations, which will then have to pay rent that increases with inflation. Some fear that when the new system of funding supported housing under the Local Housing Allowance (LHA) cap comes into effect, associations could struggle to pay.
This policy is combined with the fact that the rent cut – which came into force for social housing in 2016 and supported housing in April this year following a year-long exemption – is currently driving rents down.
Jonathan Walters, deputy director for performance and strategy at the HCA, told Inside Housing: “Anything that’s got any form of index-linked returns is going to be subject to the complexities of government welfare policy. We would always have concerns if people had too much index-linked finance in their portfolio because as we have now seen, rents don’t always go up with inflation.
“Rents are actually going down. Therefore if you’ve got index-linked finance, that finance is becoming more expensive every year because your rental stream is going down but your interest costs are going up. Investors and borrowers should think about how long the government will pay inflation-linked returns on the welfare bill.”
The housing associations that have been involved with REITs so far have typically been smaller organisations. Mr Walters stressed the importance of business expertise for associations engaging in these transactions, many of which would have been subjected to HCA approval before deregulation came into force earlier this year.
He added: “Boards need to understand what it is they’re taking on and what happens in a stress situation. How will having this form of debt affect them and their organisation, and their ability to cope with distress?
“If they’ve got a grip of that and they understand it and they can stress-test it, that gives us a lot of confidence as a regulator that they understand the risks and can manage them. If they can’t, that gives us genuine concerns about their ability to take on these types of instruments.”
The LHA cap – currently slated to come into force in 2019 – creates substantial uncertainty in the supported housing sector. Under current proposals, supported housing benefits would be capped at LHA rates, with councils having to top-up costs through discretionary funding.
Update: at 10.30am, 14.08.2017 This story was updated to make it clear the rent cut has already come into effect.
