A recent report from the National Audit Office revealed that an estimated £6.6bn has been spent by local authorities (LAs) on commercial real estate in the last three years — 14 times more than the preceding three-year period. With up these investments often financed by the ultra-low interest loans provided by the Public Works Loan Board, LAs were able to service their debt repayments with their rental income stream, using the difference to fund their service provision in the face of central government budget cuts.
However, the downturn faced in the commercial real estate sector — pre-existing but accentuated by the pandemic — has left LAs exposed. The most high-profile of these is Spelthorne Borough Council, which has built up a £1bn commercial portfolio.
It is not just LAs feeling the pain of the nosedive in commercial property. Pension funds (and other institutional investors), many of whom rely on a steady stream of rental income from these assets have also suffered, with the economic consequences of lockdown leading many tenants to withhold rental payments, and impacting the pension pots of millions of hardworking Brits.
LAs and institutional investors can overcome both their problems by working together to create residential housing; in the words of the Prime Minister, they should be looking to “build, build, build”.
This approach, referred to as a private-public partnership (or PPP) is far more meaningful than one side simply putting up the money for the other. Instead, we are seeing LAs and investors work together from the initial financing of the build through to its life-long operation.
This is being driven by specialist ‘social’ REITs at present. A REIT being a listed property investment trust, which allow investors to access property investment indirectly, and the ‘social’ aspect being that those funds are being channelled predominantly into affordable and social housing.
- MASS Reports aims to speed up development lender due diligence with planning potential reports
- Boris Johnson's planning reforms promise to unleash unprecedented opportunities
- Government urged to introduce further measures to stimulate housing market
The REITs typically buy existing sites or those that are in development from LAs and build a pre-agreed specification of homes — typically to be used as social housing, affordable housing or for specific needs, such as disabled housing. The REIT will then lease the homes back to an LA or housing provider for a fixed-period of, say, 30 years. This approach has a range of benefits for both parties and the wider economy.
While we must be mindful not to slate an entrepreneurial approach to local government that many have called for, it is high time that LAs focused purely on providing for their communities - these partnerships do exactly that.
At a national level, PPPs in social housing are key to solving the housing crisis. It has long been clear that, on their own, LAs lack the resource to build the required housing. Given that the government was nearly 100,000 homes short of its 300,000 yearly target in 2019, and English councils only contributed 2,640 of those, additional private investment to help fill that gap is very welcome.
Institutional giant Legal & General recently committed an additional £100m to its burgeoning social housing arm. Meanwhile, leading alternative investment manager Cheyne Capital has just launched its second social property impact fund following the success of its first — with a 3000-home development pipeline valued at £550m.
Seven Dials, in its recent research into residential investment funds, has observed not only the growth in the number of REITs working in collaboration with LAs, but also a trend for LA pension funds to invest in institutional vehicles specialising in the social housing sector, including DTZ’s newly launched COLIV Fund which has seen investment by both Strathclyde and Merseyside pension funds, supporting the fund’s mission to deliver tangible social opportunities to the people it houses and the neighbourhoods where it invests.
As with many things, the pandemic has brought to light the failings of our current system —and opportunities for the future. A renewed appetite for PPPs, focused at channelling institutional and private capital into local government-backed housing is certainly an opportunity.
For investors — institutional or private — it offers attractive, inflation-linked, risk-adjusted returns in the face of an uncertain future for commercial property; for local authorities, it can re-align their interests with those of their communities and free up much needed capital; and, nationally, it offers a chance to take meaningful strides toward solving the housing crisis.