Investment in social real estate delivers three/four fold return
LONDON: A new report quantifies the societal valve of an investment in social real estate as between a 300/400 per cent return.
A new report from Alpha Real Capital (Alpha), a specialist manager of secure income real assets, says Social Real Estate (SRE) investments can deliver GBP3-4 societal value for every GBP1 invested, as well as cashflows at spreads of 5 per cent-plus per annum over index-linked gilts.
The report, entitled ‘Social Real Estate: A GBP50 billion secure income opportunity?’ (Social Real Estate Thought Leadership) also says the sector offers a GBP50 billion-plus investment opportunity in the UK because private capital is needed to support the delivery of SRE assets that cannot be met by over-stretched public finances.
SRE comprises physical assets that accommodate or facilitate social activities or services. They fit broadly into housing, healthcare and education segments and include affordable homes for key workers and the homeless; student accommodation; care homes; day nurseries; and facilities for the disabled and those with special needs.
Alpha says a growing and ageing population means demand for SRE assets and the services they provide will rise significantly over the next 10 years. The UK population is forecast to increase by c3 million and reach c70 million over the next decade (1), placing further demand on assets and services that are already stretched. Additional facilities are needed across the whole social real estate spectrum.
Alpha estimates that the SRE investment opportunity totals more than GBP50 billion and is significantly untapped. For example, at least GBP8.0 billion is needed to meet the 45,000 units shortfall in specialised supported housing(2), GBP6 billion to replace smaller care homes, £17 billion to replace existing GP practices considered unfit for purpose, while solutions for homelessness/temporary accommodation and day nursery shortfalls could each require more than GBP10 billion. Other opportunities also exist elsewhere in the SRE sector.
Adrian D’Enrico, Head of Social Real Estate at Alpha Real Capital, says: “The market dynamics underlying ESG represent a perfect storm of structural demographic demand coupled with inefficient and insufficient stock, all underpinned by an urgent need for capital investment.
“Investments in SRE can deliver quantifiable societal benefits, satisfying investors’ social targets as part of their responsible investment strategies, but they can also deliver high-quality, inflation-linked cashflows.”
Alpha’s paper says SRE assets offer several key benefits:
• Lease terms are 20 to 25-year terms or more, offering longer term security versus commercial property leases elsewhere that average terms of 10 years or less
• Tenants’ incomes are usually provided by local or central government, so leases often have annual CPI reviews, providing cashflows that are protected against inflation
• The presence of government / quasi-government tenants reduces counterparty risk, offering greater certainty of rental payment
• SRE sectors have positive, structural rather than cyclical, supply-demand dynamics and are less exposed to the short-term cyclical changes experienced by many other real estate sectors
D’Enrico says: “Investors faced challenges posed by low interest rates and fully priced equities and bonds even before the uncertainty created by the COVID-19 pandemic made these challenges even greater.
“Looking beyond the main asset classes to find ‘alternatives’ that offer high quality returns is increasingly common among investors but when they can be aligned with socially responsible and sustainable investment aspirations then demand for SRE can only get stronger.”
Phillip Rose, CEO at Alpha Real Capital, says: “Investing in social real estate is one route for investors to make a positive impact on society while at the same time achieving predictable cashflows over long periods of time with significant component of returns linked to inflation.”
