Written by by Peter Morris, Research Director and Toby Lloyd, a housing and regeneration policy expert at Social and Sustainable Capital
Most property investment follows a traditional ‘landlord’ model. For many situations and organisations, this model makes perfect sense, and will continue to dominate. But Transitional Supported Housing is one area where there is a need for an alternative – because the landlord model is simply not able to provide enough of the right homes for the vulnerable people who need this type of supported housing. So SASC has developed an alternative that we call the ‘distributed’ model. The same two parties are involved: namely, investors and supported housing providers who need access to housing. The distributed model simply matches their needs in a new way.
Under the landlord model, a property investor or fund buys properties which it then rents out (leases) to organisations or individuals who need to use them. The investor acts as landlord. Its investment return consists of current income (rent) plus any capital appreciation on the property value. Like any investor, landlords try to maximise their return while minimizing their risk. There is little they can do about the risk of property values, but they do all they can to minimize the risk to their current income. In an ideal world they try to make their rental income as high, as fixed and as long-term as they can.
Tenants are on the other side of the equation in this traditional model. A retailer that rents stores from a landlord is insulated from swings in property prices: the landlord absorbs that risk. But the landlord in turn offloads performance risk onto its retailer tenant. The burden of fixed rental payments over the long term leaves the tenant exposed if its performance falls below expectations. (That’s why leases like this are known as ‘off balance sheet debt’: accountants may not put them on the tenant’s balance sheet, but their effect is similar to debt.)
The landlord model has been around for centuries. It will no doubt continue to exist for centuries more, because the way it parcels out risk and return works well for many situations. But it doesn’t suit everyone – which is why families have spent the last hundred years getting out of renting the homes they live in to become owner occupiers. The security and stability of ownership turned out to suit most households better than renting – and many large investors discovered that letting homes to families exposed them to reputational risks they didn’t much like.
Transitional Supported Housing is another area where a different model can work well for both property investors and organisations that need access to housing. TheSocial and Sustainable Housing fund (SASH) uses the ‘distributed’ model, in contrast to the traditional ‘landlord’ model. ‘Distributed’ means that SASH provides investment and its investors get property market exposure; but SASH delegates many landlord functions to the organisations that need the housing in the first place. It is the supported housing providers who buy, own, manage and control the housing.
Most of the organisations that deliver transitional supported housing are charities, which makes it hard for them to raise the large amounts of equity funding needed to buy property. Even if they can get a mortgage, it usually requires a significant up-front deposit.
The traditional landlord model offers them a way round the lack of up-front capital – and if they’re lucky, they will be able to rent properties of the right quality, in the right location, for the long term, at a reasonable cost, from a supportive housing association that shares their social purpose. But these are becoming harder and harder to find – and the tenant is still taking on most or all of the performance risk, which can become a serious problem.
It’s not only retailers that have gone bust because of their fixed lease payments. Ten years ago, the UK’s largest care home operator, Southern Cross, was housing 31,000 older people when it went bust because of rent payments that were high, fixed rate and very long term.
Transitional Supported Housing is often commissioned by a local authority, which gives the provider some security of income – but even these public commissioners rarely commit to a contract longer than two years. Big landlords typically look for leases that are much longer than this, leaving the provider in the middle carrying an open-ended risk.
One of SASC’s key objectives is to help social sector organisations become stronger and more self-reliant. Imposing open-ended risks onto them is not part of the game-plan.
The traditional landlord model fails to meet SASC’s objective in another way, too. A supported housing organization that expands by renting properties is only growing temporarily. When the lease ends, the property goes back to the landlord and the supported housing organization goes back to its original size. No permanent change has taken place.
Permanent growth in this context means buying properties, not renting them. But SASC’s objectives mean that doing this must not load too much risk onto social sector organisations. Fortunately, investors are more and more interested in finding ways to make a difference with their funding, and have an appetite for the very risks that charities find unpalatable. We saw a way to match the needs of both sides. Our ‘distributed’ model allows supported housing organizations to expand permanently by buying homes, not renting – but doing so in a way that does not overload them with risk.
SASH makes a ten-year loan to a supported housing organization that meets a high bar in terms of track record, governance, management and commissioner relationships. The charity uses the loan to fund 100% of the purchase price of suitable homes. The charity owns the housing; SASH has a first charge over the asset. Instead of a fixed interest rate, the charity passes through a pre-agreed share of the net rental income generated by the housing, turning the current cost from fixed to variable. At maturity in year ten, the charity’s loan repayment is a function of property values at the time. This relieves the charity of exposure to property price risks; and gives SASH investors desirable exposure to a diversified portfolio of lower-quartile dispersed housing across the UK.
The nature of the housing involved has some unique characteristics. It is hard for large investors in the first place to get exposure to dispersed housing of the sort typically involved; and even harder to find and assess a range of social borrowers with deeply rooted local relationships. In effect, SASH delegates sourcing and management to local experts spread across multiple locations, rather than to a centralized single landlord. But the most important feature of the distributed model stems from SASC’s key objective. SASH channels investor capital to help social sector organisations grow permanently – by acquiring assets rather than renting. We believe this gives SASH a unique level of social impact: it identifies established supported housing providers and then helps them become stronger and more resilient.