In focus - Markets
Uncovering value at the top of the real estate cycle: UK social supported housing
With yields in global commercial real estate at all time lows, investors are looking for areas that still offer value. We discuss the compelling opportunities in UK social supported housing.
Total returns in the UK and European commercial real estate markets are expected to weaken over the next five years. Prime yields are at an all-time low across many sectors and rental growth is starting to slow. This is pushing investors to consider investment opportunities in alternative, non-mainstream sectors where returns may be more interesting.
However, given concerns that we are close to a cyclical peak, investors are also seeking sectors supported by long-term structural trends that render them less sensitive to the economic cycle. These sectors should be relatively defensive in a downturn and offer portfolio diversification.
Some such segments – like student accommodation and build-to-rent residential – have already seen significant interest from institutional investors and yields have compressed. But several segments remain underappreciated, offering not just attractive risk-adjusted returns today, but the potential for future yield compression as they become more mainstream.
We believe UK social supported housing (SSH) is being overlooked, benefitting from robust and uncorrelated returns, favourable demand dynamics and government backing. In addition, we expect the sector to have a strongly positive social impact.
The investment case for SSH
The key aim of social supported housing (SSH) is to provide professional support for a vulnerable adult community without inhibiting the independence of its residents. Importantly, as real estate investors, the sector is exposed to structural trends we expect to support sustainable returns and low correlation with the economic cycle.
Demographics - Increasing population requiring SSH
We anticipate demand for SSH to rise over the next decade as survival rates at birth and life expectancy for dependent adults increase due to advances in technology. Projections suggest that the number of people with learning difficulties that qualify for public sector support will rise by between 1.3% and 1.8% per annum versus growth of between 0.4% and 0.7% for the UK population as a whole.
Limited SSH supply
The number of NHS beds for adults with learning disabilities or mental illness has fallen by 80% in 30 years. This is despite explicit public sector targets to close the health gap between vulnerable adults and the wider population and to promote community care. The charity Mencap estimates that there are around 22,000 – 30,000 SSH units in England versus 250,000 to 300,000 adults with moderate or severe learning disability.
The overall cost of an individual in SSH is around £1,569 per week. This compares with a cost of around £1,760 per week for an individual in a registered care home and £3,500 for an in-patient place. The government could meet its policy requirements for less money.
The UK Care Act 2014 gave local authorities a legal responsibility to provide vulnerable adults with long-term, safe accommodation. The department of health also promotes independent living over in-patient facilities.
Positive social impact
SSH residents generally have life-long and complex conditions which make them vulnerable and in need of care. Residents in modern, purpose-built properties benefit from an improved quality of life and reduced care requirements. SSH alleviates the burden of care on family members, with whom 38% of people with learning disabilities currently live.
High quality, secured, long-term and inflation-linked returns
Planning permission for SSH developments is obtained before capital is committed, and units are let to regulated housing associations or other non-profit organisations which reclaim each residents rent from the local authority, who in turn receives funding from central government via the Housing Benefit system. This structure effectively eliminates planning consent and occupier risk. Lease agreements average 25 years in length and are inflation-linked.
SSH is not an easy market to access, especially in size, given the small asset sizes involved (~£0.5-5.0m). However, such a fragmented and immature market represents an exciting investment opportunity for those with the network to source appropriate transactions and the experience to manage these assets and harvest the income while mitigating the sector-specific risks.
To read our full paper on social supported housing in the UK, please click on the PDF below.