Real estate investment trusts (REITs) are tax efficient property investment vehicles. They are common in the commercial property investment market and more recently there have been launches in relation to English PRS and social housing. With investor appetite for housing at a high there is now scope for a Scottish social housing focused REIT.
In principle the model is straightforward. A REIT is launched and registered on a relevant stock exchange. It raises investment from pension funds, life companies and similar. At the same time a club of registered social landlords, including possibly housing associations and local authorities, comes together. They agree to sell or lease housing assets to the REIT. Further stock is acquired from care providers, housing developers and investors. The REIT then leases the housing back to the RSLs on a long term basis subject to inflation –linked rents. Facilities management of the housing stock is retained by the RSLs utilising their in-house expertise
From the perspective of investors, the REIT model offers an attractive investment into an alternative asset class which is underpinned by a secure income stream, predicable/low levels of tenant churn and high levels of demand. They also critically benefit from an inflation-linked rental income. English social housing REITS forecast a 5% yield indexed by reference to CPI.
From the perspective of participating RSLs, the REIT structure offers an alternative means of raising finance beyond traditional debt and capital markets, fuelling their ability to meet development and investment aspirations. In terms of value for money, the test for participating RSLs would essentially be whether a REIT structure provides an equivalent or better overall cost of money compared to bank debt or private placement/bond issue.
In terms of housing type, the current social housing REITs have focused on supported housing but there is no particular reason why they would not be suited to general needs housing.
There are potential challenges for RSLs including buying into inflation risk, ensuring that the structure works from an accounting perspective and securing Regulator engagement. However, the REIT model potentially offers an attractive alternative means of securing finance and tapping into investor demand and by clubbing together there is an opportunity for a pool of ambitious Scottish RSLs to take the initiative in this regard.
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