Landlords in talks with investors over equity partnerships to offload risk

Mr Day said Peabody had, in the past, taken all the development risk on its balance sheet, but “there is a limit to what we can do as the investment needs of our existing homes increase. We feel the impact of recent rent caps and high levels of cost inflation and we feel the impact of higher interest rates.”

Ian McDermott, chief executive of Peabody, told Inside Housing earlier this year that “working with the for-profits and other sources of patient capital has to be an integral part of what we are doing, moving forward”.

High levels of spending on existing stock – particularly building safety costs – mean Peabody is focusing on its current contractual commitments for development, rather than entering into new agreements.

“That still means we’ve got just short of 5,500 homes on site at the moment, so they will continue to roll off the production line over the next three to four years,” Mr Day said.

Rosemary Farrar, chief financial officer at Platform Housing Group, said the Solihull-based landlord was also open to equity partnerships with investors.

“I think a mistake the sector makes is not wanting to give up owning properties that we develop. There’s a lot of money that people want to invest in this sector, because we’re safe,” she said.

“Most of these investors want to be property owners in the long term. They want to get a return on their money – if they’re pension companies, for their pensioners. It’ll be exactly the same as owning, but not having that on the balance sheet.”

On the investor side, Peter Merchant, investment director for affordable housing at Octopus Real Estate, said that although this approach was the investor’s central business model, it had taken some time for the social housing sector to get comfortable with the intent behind the investment.

“Whilst there is still a degree of suspicion from the not-for-profit sector, I think that has diminished,” he said.

In September 2023, Octopus, which is an equity investor in social housing through NewArch Homes, its for-profit provider, released a report arguing that equity partnerships represented the “next wave of innovation” for affordable housing.

Discussing the challenges of equity investment, Mr Day said: “There are definitely lots of pools of capital out there waiting to be used. We now need to find the best models for them, and we are having many discussions on this.”

He added that “one of the risks here is everyone across the sector having similar conversations independently. This can’t be the most efficient approach.”

Mr Merchant said the investor was currently working on a partnership with a traditional not-for-profit housing association “that will see us delivering what we view as our core purpose model”.

“It’ll be a combination of acquiring existing homes, as well as homes coming off their development pipeline, and then there’ll be a future relationship for us to work together to deliver homes within the community areas where they work.

“Ideally, where we want to be is over 500 homes with a management partner, so that they get economy and benefit from working with us, and we feel that we’re meaningful to them and they’re meaningful to us,” Mr Merchant added.

“We’re not looking for a sort of joint-venture owning vehicle. The proposition really is about two organisations standing side by side with one another, and effectively us buying services from that registered provider, but wrapping that in a way that means it’s a beneficial, long-term partnership,” he said.

A “dream scenario” could be that a not-for-profit provider funds “100 homes off their balance sheet. We fund and own 100 homes, but they manage all 200 homes.”

Last year, the specialist real estate investor bought 180 homes from Maidstone-based Golding Homes, with Southern Housing delivering housing management services.

While Octopus is looking at other tenanted stock portfolio acquisitions, Mr Merchant said it was largely interested in deals that also deliver new homes.

Since the acquisition from Golding, Octopus has been looking to increase its presence in Kent and East Sussex. In general, its plans are to develop geographically, often to suit the needs of the local government pension schemes that make up many of its funders.

From a rating agency perspective, Michael Brooks, a director in the international public finance team at Fitch, said the concept of equity partnerships had not “changed significantly in the last decade”.

“Most registered providers have explored options to develop without constraining their balance sheet capacity for a number of years, and this is the latest iteration of this endeavour,” he said.

Mr Merchant added that there were two schools of thought around the purpose of housing associations. One thinks they should own homes, and the other sees their objective as aiding the delivery of as many homes as possible.

“The two things aren’t exclusive, though. I think you can do both, and that’s probably the next step for us – convincing some of those really good management partners that they could be really good management partners with us or with other parties like us.”