Environment, Social and Governance investing hit the mainstream this year with a wide range of new investment products being launched. It is expected that ESG funds will outnumber conventional funds by 2025, according to PWC.
Despite the rise in ESG products, the 'Social' element is the most complex to quantify. A BNP Paribas' 2019 Global ESG Survey, found 46% of asset managers found 'Social' the most difficult to analyse and embed in their strategies.
However, a new real estate investment trust, HOME REIT, is turning that on its head, with an emphasis on the 'S' as the first ever REIT focused on alleviating homelessness.
HOME REIT (HOME) recently listed on the London Stock Exchange as the largest UK-based REIT initial public offering in three years, raising £241 million to alleviate homelessness through investing in good quality properties that charities and housing authorities can use to house the homeless for the long-term.
The past year has not been especially kind to investors in UK assets. The FTSE 100 is the worst performing major stock market of 2020, having lost nearly 15.5% as of November 25, 2020, compared to the near-11% gain in the S&P 500, the 8% rise in the Nikkei or the whopping 26% rise in Copenhagen's OMX 25.
UK benchmark bonds yield next to nothing in the short term. Even a five-year gilt barely yields a basis point. But the managers of this REIT expect juicy returns of over 7%.
The state of homelessness in the UK
In the UK, 320,000 people were recorded as homeless in 2018, according to Shelter, the leading homelessness charity. This means one in 200 people in the UK are homeless and either living on the streets or in temporary accommodation, such as hostels and B&Bs.
The pandemic is expected to make this figure worse.
The UK unemployment rate continues to rise and the first national lockdown created a 14% increase in the number of individuals in emergency accommodation in England within three months; almost 100,000 households were stuck in temporary accommodation.
And with COVID-19 creating a drop in housebuilding, it will become increasingly challenging to house the homeless, as new real-estate supply has been in short order.
"The fact that the UK, being one of the wealthiest countries in the world, has such a significant homeless problem is frankly abhorrent and wrong," said Jamie Beale, partner at the REIT's investment adviser, Alvarium Home REIT Advisors.
What is a REIT?
A real estate investment trust enables investors to provide capital for fund managers to go out and purchase a portfolio of properties, often targeted toward specific sectors such as storage or retail.
In return, investors will gain exposure to the properties by receiving income from the rent paid.
Some of the main advantages of REITs is that they are tax-efficient, provide high yield for low entry costs and can add diversification to an investor's portfolio.
How can a REIT alleviate homelessness?
Working in partnership with UK charity Crisis and local housing authorities, HOME REIT will invest in a diversified portfolio of high quality long-term accommodation throughout the UK.
"We are proudto be working in collaboration with Crisis to help support Crisis in ending homelessness," Beale said. "The social impact we provide is a crucial part of this fund. It's not just about investor returns. It's about making sure that we are trying to achieve genuine social impact."
Local UK authorities are required to secure accommodation for people who are unintentionally homeless and in priority need through the Homelessness Reduction Act that passed in 2017. They are also required to provide meaningful help to any person who is homeless or at risk of becoming homeless irrespective of any priority need status.
But with accommodation costs rising in the UK and a shortage of fit-for-purpose social housing available, local authorities often house individuals in temporary accommodation, such as B&Bs or with private landlords, which can be expensive. The short-term nature of the accommodation means individuals often need to move around making it difficult to start a rehabilitation process.
The capital secured by HOME REIT enables them to invest in long-term leases, between 20 to 30 years, that can then be let to regulated organizations that receive housing benefits.
"Early eviction causes a massive amount of destruction to both the charity but more importantly, the individuals who are then often made homeless again," Beale said. "The long term security allows the [organizations] to take ownership of that property, and really gives them time to focus and deliver on their charitable goals to people, which is very much part of the social impact rationale."
Rents are benchmarked at a local authority rate, the lowest level in the market. Whereas alternative temporary accommodation can sometimes be double that rate. The team also aims to provide better quality accommodation through refurbishment works, which adhere to environmental goals.
It's a three-pronged attack to really try and provide a solution versus alternative accommodation, Beale said. He believes they are coming in with a better solution to the problem.
With COVID-19 cases increasing in the UK and further lockdown restrictions being implemented, Beale said, as bizarre as it sounds COVID-19 only strengthens the fundamentals of our fund and demonstrates the need for secure long-term accommodation for the homeless.
Home REIT Advantages
But with so many ESG funds to choose from in the market, what is the advantage from an investing perspective?
Both Beale and Gareth Jones, partner at Alvarium Home REIT Advisors, spent years running a similar fund in the private market for wealthy clients demonstrating a track record in this area.
In addition, the managers also highlight the fund provides strong returns on a risk adjusted basis and that investors can gain access to a growing yield that is backed by government income flows. This provides investors with a low-risk, inflation protected income stream.
"We're in a relatively robust position, during economic downturns the underlying demand for homeless assets will likely grow," Jones said. "And then conversely, in times of economic prosperity, the value of our assets will likely increase. So we have a hedge for both scenarios."
Going forward
The plan is to do an equity raise each year, with the hopes of being "north" of £1 billion in three years time, Jones said.
Even in three years time, the trust will still be a long way from helping the 320,000 homeless people in the country, but it's a step in the right direction combined with other initiatives, such as social housing.
In the case of economic prosperity, the team could sell the assets and return value to investors that way. Beale said you could argue that the property prices could outstrip investment value, so essentially the fund is well positioned in the case homelessness is eradicated.
But in the meantime, investors can look to the fund's potential returns with an expected total net shareholder return of 7.5% per year in the medium term. While also targeting a minimum annual dividend of 5.5 pence per ordinary share, starting from September 2021.
"One of the main attractions of Home REIT is its secure 5.5% dividend, it's government backed income as the underlying rent comes from central government, which is who ultimately pays the rent for this type of accommodation," Beale said. "And it is a fund which does achieve unique, genuine social impact. It's the REIT's long term secure income and achieving genuine social impact, which I think investors are really looking for at the moment."
As the REIT is an investment trust, it is a close-ended fund. Opportunities for investment will come either at the next equity raise or on the secondary market.
"We do deliver very attractive risk adjusted returns, which also allows people to have a positive feeling about it as we are trying to address a major social problem in the UK," Jones said.
