Peer-to-peer lenders are waking up to the potential of providing finance for social housing. David Stevenson explores two new offerings.
We could debate why housing is so expensive in the UK until the cows come home. But I think most people by now accept that we’re not building enough affordable (rents around 80% of the market average) or social (rents around 50% of the average) housing, and that we need to get more capital into the sector.
There are already some listed social-housing investment trusts that mostly focus on “supported living” (where typical residents might have learning difficulties and require extra support). Then there are charity operators who aren’t big enough to qualify for loans from the government (via the Public Works Board), or to borrow from big capital-market lenders. Many registered social landlords are in the same boat – they need capital for development projects, where risks are far higher.
As a result, we’re seeing some innovative new funding routes being used. But are they worth investing in?
A new direction for Abundance
Abundance is best known for raising funds for renewable-energy projects, but it is now offering a debenture to fund the development of 30 new properties in the northwest of England. The loan period is three years.
The financial structure behind it isn’t simple. In effect, the debenture holders have first rights over a special purpose vehicle (SPV). The SPV is controlled by a developer called Octevo, which is building the 30 units for a registered social landlord called Finefair.
After the first few years Finefair will sign a 50-year lease and rent out the houses for an average of £500 a month. That rental stream (backed by the local authorities) will then be sold to a big fund or infrastructure investor. The developer reckons that the 50 years’ worth of cash flows on offer should support a valuation of £7m, versus the debenture of £4.25m. But there’s no guarantee that the value in year three – when the debenture is repaid – will be above £4.25m. Also, you are taking on development risk – a lot can go wrong, including things beyond the company’s control, such as adverse changes in government policy, say.
In exchange, investors get 4% a year from the SPV, plus 0.5% from Abundance. There is a secondary market for the debt if you want to get out early, and you can hold it in an individual savings account. Compared with the much bigger social-housing investment trusts – which all yield above 5% – there’s no real diversification, but you are getting access to a specific project, with no other lenders ahead of you in the capital queue. For a three-year term, the yield of 4.5% doesn’t seem too bad.
A longer-term alternative
Belong is a Cheshire-based charity aimed at helping those with dementia. It has seven purpose-built “villages”, with plans for 11 by 2021. Average fees per new customer come in at around £1,000 a week. It is currently raising funds using a retail bond offering. The bond has an eight-year term, and offers a 4.5% yield.
There are plenty of risks. This is a well-established operator with solid cash flows, but occupancy rates could fall and margins could easily suffer in the long run, particularly if interest rates rise (as seems likely). However, the bank of assets seems sensibly priced and there’s a strict rule in the loan covenant that limits the quantity of debt it can take on. The eight-year term does seem long, given how much rates could change over the coming years. Still, there’s a good chance that income-hungry investors will snap up the bonds and push them to a small premium.
News bytes… the EU’s soothing lullaby for insomniacs
► Joe Davis, a senior economist with fund giant Vanguard, has dismissed bitcoin as both a currency and an investment. Writing on ETF.com, he says that there is “a decent probability that its price goes to zero”. The investment case is “weak” too – while blockchain technology has a future, bitcoin is not the way to invest in it. “Bitcoin is an investment in blockchain in the same way that Pets.com [a famous dotcom-era disaster] was an investment in the internet,” argues Davis.
► The US Department of Justice has launched a criminal investigation into whether traders have been manipulating the price of bitcoin and other crypto-currencies, report Matt Robinson and Tom Schoenberg on Bloomberg. Federal prosecutors are working with the Commodity Futures Trading Commission, looking at practices such as “spoofing” and “wash trading”, when traders flood the market with fake orders to drive the price up, or trade with themselves to give an impression of market demand. Separately, the Securities and Exchange Commission (SEC), the US financial regulator, has been setting up fake initial coin offerings (ICOs, where anyone can set up and sell a digital token) to demonstrate just how easy it is to get duped, says Robinson. One, called HoweyCoin, boasts a “sleek website, complete with a white paper, and pictures of made-up celebrity promoters and luxurious destinations”, and offers a return of 1% a day. Anyone clicking the link to buy coins is redirected to the SEC website where they were met with a stark warning of the dangers of fraudulent ICOs.
► If you find the merest hint of the European Union’s new GDPR regulations, which aim to improve the security of individuals’ data, rather boring, you’re not alone. Calm, a smartphone app that aids meditation, has turned part of the 57,509-word document into a 34-minute adult lullaby to help users sleep at night, says Joseph Archer in The Daily Telegraph. “Once upon a GDPR” is read by Peter Jefferson, who for more than 40 years was the voice of the BBC’s Shipping Forecast, the maritime weather report beloved by insomniacs. Alex Tew, co-founder of Calm, is confident that the story will help users sleep: “GDPR could sedate a buffalo”.