Earlier this week, Independent Living REIT plc announced its intention to float on the London Stock Exchange with some £500 mln (€576 mln) of supported living assets currently in the pipeline. In late summer, PropertyEU spoke with two key figures at Atrato Partners, investment adviser to the new company, about its approach to a sector that has sadly suffered from overly-aggressive long leases.
Things seem to be brewing at Atrato Partners, the London-based private investment firm and advisor.
In May this year, it hired David Blakeborough, Tom Still and Michael Carey to spearhead a push into social housing.
Blakeborough is responsible for investment across the company’s social housing strategy and Still is a director.
Prior to joining Atrato, Blakeborough was at Henley Investment Management, the private equity real estate firm, and also had a spell at AEW UK Investment Management. Still worked with Blakeborough and Carey at Henley and had a stint at CBRE Investment Management.
Atrato Partners is a firm that focuses on investment via alternatives. According to the website, its strengths lie in structuring, governing and capital raising.
In real estate circles, Atrato is best known as the investment advisor to Supermarket Income REIT, which it launched as a public property company in 2017 via an Initial Public Offering (IPO) on the London Stock Exchange. It is now a member of the FTSE 250, and currently owns 47 UK supermarkets and has joint venture ownership of another 26 assets across the UK. Tenants include the likes of Tesco, Sainsbury’s, Morrisons, Waitrose, Aldi, M&S, and Asda.
Other Atrato-advised companies include Atrato Onsite Energy, a closed-ended investment firm which focuses on commercial rooftop solar.
Atrato is led by principals Ben Green and Steve Windsor who co-founded the company in December 2016. Both are ex-bankers. Green is a former director of Barclays Capital, head of European structured finance at Goldman Sachs, and MD of commercial banking at Lloyds Bank. During his career, he completed over £5 bn of real estate deals.
Windsor was also at Goldman Sachs for 16 years, becoming head of European debt capital markets and risk management from 2010 until 2016 during which time he helped and advised several FTSE 100 companies.
Supported living
In an interview, Blakeborough and Still explain they learned much about the supported housing sector while at Henley Investment together. Henley had an existing fund to invest into the sector. However, the ‘dream’ of launching a fresh investment vehicle did not quite happen for them.
However, they spent a considerable amount of time – around three years - considering ways to create a partnership model with Housing Associations which addresses the Regulator of Social Housing’s concerns. These centre around long leases that have put Housing Associations under financial pressure.
Typically, UK Housing Associations struggle with being poorly capitalised and they do not always have the best risk management and governance either.
Indeed, five key concerns have been highlighted by the sector’s UK Regulator which published a report. Basically, what the Regulator could see is that long leases were a huge burden to the Housing Associations.
Says Blakeborough: ‘I think there is an opportunity to fix the five key concerns. There is massive demand in this space, and there are also a lot of really good Housing Associations that want to fix these issues. That’s what we think needs to be done.’
His colleague, Still, points out that supported living is meant to give people a greater ‘lease of life’ as well as stability. Private capital has rightly been drawn to the sector from a business and societal angle.
Some real estate investors have been successful at making money from the supported housing sector, but Blakeborough and Still reason that this has come at a high price to the actual sector and indeed, to the UK taxpayer given the government is essentially the rent payer.
Supported housing is a sub sector of social housing. It encapsulates any type of residential accommodation that has an element of care or support to it, perhaps for those with severe autism or down syndrome for example but who can live more independent and fulfilling lives if given the right support.
Blakeborough and Still believe they have built a very good relationship with the Regulator and a number of large, credible Housing Associations.
Says Blakeborough: ‘The Regulator knows that investment firms have to make a fair economic return. And Housing Associations themselves have to make an economic return. So, there's no issue with people making money in the sector. The issue is people making unjustifiable money out of the sector. The way to get around that is to make sure that everything you do is on an open book basis, so it's totally transparent so that everyone can see exactly what everything costs and you can see exactly why rents are what they are. And if you do that, then the Regulator of social housing has got no issue with it.’
He adds: ‘The problem is when you have got one person who sells a site to someone else for a profit of 20%. They sell to someone else for another profit. They sell it to a contractor for another profit and no one actually looks down the chain at how much money is being made. And that's what used to happen. And that needs to stop.’
He has more to say. ‘If you look at a conventional real estate fund, the focus is on buying the right property. The fund makes sure it acquires the right property at the right location, and that the rent is at a sensible level. That means you actually get tenants coming in and you start earning your income and that's great. The social housing sector historically has ignored all of those things. And what it has done is focus on the length of the lease to often very small Housing Associations. And because they have arguably got a very long lease, which is backed up by government income, people disregard the property fundamentals. And we don't think that's the right thing to do.’
‘We think the focus should be more like a conventional real estate fund. You focus on getting the right property at the right location, and you focus on getting that rent at a sustainable level. And then you don't actually need a very long lease - you can have a shorter lease which means you work with much better housing associations.’
‘That means the lease is much more likely to renew. Some of the housing associations we work with have got lease renewal rates of higher than 95%. So actually, we could have a 5-10-year lease and if that lease renews 95% of the time that's actually pretty credible. You end up with long term income, but you just haven't had to engineer a very long lease.’
It could be that there now exists a large opportunity. According to Blakeborough and Still, it seems there are private investment firms whose assets are trading at discounts and who can no longer raise money. Developers have large stocks and pipelines, but Housing Associations can no longer sign long leases. ‘Someone needs to step in pretty imminently.’
FACT FILE
Independent Living REIT to float
On Monday, a new UK real estate investment vehicle announced its intention to raise £150 mln (€173 mln) via issuing ordinary shares as a REIT on the London Stock Exchange.
Independent Living REIT’s investment advisor will be Atrato Partners, while RBC Capital Markets is the sole bookrunner. Commencement of share dealings is slated for 4 October.
In a statement to the market, Independent Living REIT said it had a £500 mln investment pipeline and would invest in a diversified portfolio of fit-for-purpose supported housing assets let to compliant tenants.
It stated: ‘The company's investment objective is to address the shortage of high-quality supported housing, delivering capital growth and inflation-linked income returns for its investors whilst providing a fair deal for society through savings for the UK taxpayer, and improved outcomes for residents.’
Specifically, the company is focussing on three subsectors.
The first is specialised supported housing designed for adults with learning difficulties, mental health issues or physical disabilities and who require specialised services or support to enable them to live independently within the community.
The second is larger blocks of flats, primarily for adults aged 55 and over where extra care is an alternative to care homes with the care typically provided by a specialist third party provider.
Thirdly it will focus on homeless accommodation for people with an immediate and unexpected housing need, including victims of domestic abuse and asylum seekers.
Laying out ‘impact objectives’, it is aiming for ‘fair leases with high-quality partners’. It also revealed a board of three non-executive directors chaired by Fiona Miller Smith, CEO of Barts Charity.
David Blakeborough, MD, Atrato Partners, said: ‘Well-designed and appropriately priced supported housing delivers capital growth and inflation-linked income returns for investors, savings for the UK taxpayer, and improved outcomes for residents.
‘Following our discussions with the Regulator, we are excited to have built a model that will help address the significant shortage of high-quality supported housing in the United Kingdom.’
