The EG Interview: Home REIT on using private capital for public good

In a world crying out for good news, the stock market listing of Home REIT last month offered the right message at the right time. The £240m deal was not only a lift for London’s lacklustre initial public offering market, but also a reminder of the difference that the real estate industry can make to society when it is most needed. Home REIT buys and builds properties to alleviate the UK’s homelessness crisis, leasing its buildings on long-term contracts to charities, housing associations and community interest companies, which in turn receive funding from local or central government. “Seeing the homeless problem in the UK, one of the wealthiest countries in the world, is abhorrent,” says Jamie Beale, partner at the REIT’s investment adviser, Alvarium Home REIT Advisors. “There is no reason why we and others can’t use private capital to do social good while also delivering sensible returns to investors.” Within days of completing the IPO, the company had announced its first acquisitions, spending £9m on five properties – four to house women fleeing domestic violence, the fifth to house people leaving prison. “Sixty-seven percent of people who are released from prison without a home reoffend within one year of release,” Beale says. “Twenty-four thousand victims of domestic violence were made homeless last year. These are huge economic and social statistics that aren’t just statistics, they’re real people. We’re trying to provide sensible, cost-efficient solutions.” For Beale and Gareth Jones, chief financial officer at the investment adviser, the issue is personal as well as professional. “How we designed this and how it works in the market means that we are able to deliver really good risk-adjusted returns while making a social impact,” Jones says. “That does really make a difference to both of us on a personal level.” Secure lease, secure income Beale, a former lawyer and partner at LXI REIT, says the inspiration for Home REIT came from the Homelessness Reduction Act 2017, which placed a duty on local authorities to prevent and relieve homelessness. “That really was a game-changer from a legal point of view and from a social point of view in terms of the statutory obligation that was placed on local authorities to house individuals who are homeless and those at risk of becoming homeless,” Beale says. “That was really the government finally recognising that there is a huge, huge problem with homelessness in the UK and it needed statutory support.” Working with charities and local authorities, Beale set out to structure leases that would have inflation linkage with CPI and therefore give investors long-term, secure income, but also give charities their own security. “One of the main grievances of the charities that we work with was they never had security of tenure on any of the assets that they were utilising,” Beale says. “They would create a house where they would look after people, but then after one, two years, the private landlord would [say] ‘I’m getting rid of you because I can get a higher rent in student housing or in private housing’.” As the Covid-19 pandemic worsens, the problem Home REIT aims to address will only become starker. “Homelessness is, unfortunately, only going to get even worse than the 320,000 people that are homeless in the UK,” says Beale. “Our mindset was, ‘how can we go and raise more capital to meet the ever-growing demand in this space?’ We put our brains together and that’s why we went down the path of IPOing a REIT.” The REIT launched with a board led by non-executive chairman Lynne Fennah, chief financial and operating officer at Unite Student Property. Beale expects the company to have built a portfolio with a net asset value of more than £1bn within four years. IPOing over Zoom Getting an IPO done and dusted in 2020 is no simple task. As the economic damage of the coronavirus pandemic and government’s policy responses have become clear, equity markets have swung wildly. Gauging investor appetite for a market debutante is not easy. On 8 October, the same day that Home REIT announced its listing was successful, Tellworth British Recovery & Growth Trust, a new investment fund set up to invest in public UK companies, scrapped its £100m IPO plans. The fund had announced its intention to float days before Home REIT did the same, in early September, but said a month later that investor demand for its shares was “insufficient”. More recently, Buffettology Smaller Companies Investment, a fund drawing inspiration from Berkshire Hathaway chief executive and investment legend Warren Buffett, pulled its own £100m London listing due to lack of demand. And the first listing on the real estate-focused IPSX market, a REIT set up to float Birmingham’s Mailbox property, has been delayed not once but twice. Credit to Beale and Jones, then, for getting Home REIT’s deal away on time in such tough market conditions. Beale describes it as an “exhausting” process and posits that the listing is the first IPO for which all communication – all 130-plus meetings, from pre-IPO marketing in May through to road show pitches – was done via Zoom. Investors’ reactions to the IPO pitch were “exceptionally positive”, Beale says – “unusually positive, especially given the fact that it was in the hardcore period of Covid and the markets were hardly performing well”. What were the most common questions from investors as they got to grips with Home REIT’s proposition? “None of it was doubting the model, none of it was doubting the funding and none of it was doubting what we are going to achieve in terms of the social impact side of it,” Beale says. “It was more: how are you going to defend yourself from some journalists who say you’re profiteering from homelessness?” The question is valid, Beale acknowledges, but he is adamant that it is easy to answer. “We are proud of what we are doing,” he says. “We are proud that we are using private capital to give and provide a genuine, cost-efficient solution to tackling homelessness that otherwise would quite simply not be there.” Beale talks of seeing first-hand the kinds of properties some homeless people are offered and the urgent need for private capital to help improve the situation. “And what is currently happening, prior to our investment, [is that] individuals are being housed in slum landlord accommodation, which is abhorrent for the UK. It’s short-term bed and breakfasts where people aren’t given a permanent address and they’re kicked out at will. They can’t apply for jobs in that type of accommodation. It’s inferior accommodation for a country of the status of the UK. Whereas what we’re providing is low-cost, low-rent – set in line with the local housing allowance – good-quality, long-term housing that people can actually create a home in.” Off to market Shares started trading on 12 October and have hovered around their 100p listing price since. “We have seen volumes go through – we saw an uptick in the share price from just below a pound to back up to about a pound,” says Jones, a former director at Civitas Housing Advisors. “I think people were pleased with us getting money into the market quickly across a few different regions and addressing a couple of different sectors of homelessness. We are also pleased with how the share price has stood up to quite a lot of volatility in the last two weeks since we had our first day of trading.” The company’s first acquisitions were announced just a week after the listing – a user on a share trading chat forum noted “the company isn’t hanging around” when it comes to dealmaking. The deal saw Home REIT pick up five properties rented at an average of £75 per person per week, on 25-year leases to specialist registered homeless charities. The rents are subject to annual upward-only reviews, index-linked to the Consumer Prices Index. “I think that shows that our pipeline is robust and we hope that carries on over the next few months and we are able to get the money into the market at the type of pace that we wanted to,” Jones adds. “We will get a return for investors as soon as possible but also, really importantly, make that social impact as quickly as possible for people putting the money in.” Beale expects the REIT to have deployed most of its money within the next six months and all of it within nine months. Once the money is spent, the REIT is targeting a minimum annual dividend yield of 5.5%. The company is likely to head back to the market to raise fresh funds next year. Beale and colleagues have their collective eye on assets valued at more than £300m. “In the current economic climate, we are able to take advantage of some really good pricing on some really interesting properties across the country,” he adds, including “some opportunities even in London that we never thought we would be able to get our hands on”. As an industry, is real estate getting better at showing that doing good in the world can go hand-in-hand with profits and returns? “I think it is trying,” Beale says. “I think there could be more real estate investments out there [that] make genuine [environmental, social and governance] differences. “It’s probably harder to do in commercial real estate, let’s be honest, but in residential, there are definitely moves to try and tackle various ESG matters.” Beale and Jones hope Home REIT’s focus on the S in ESG will inspire other fund managers and founders to push the agenda. “We’re very proud of that,” Beale says. “Hopefully we will set a precedent for others to try and create a product that achieves social impact while also giving investors secure returns.” To send feedback, e-mail tim.burke@egi.co.uk or tweet @_tim_burke or @estatesgazette Homeless picture: Alex Lentati/LNP/Shutterstock