Banking & Finance Alert | March.02.2020
Alternative assets remain very much at the forefront of European commercial real estate investment and lending strategies. These assets are outside the traditional core segments of office, industrial and retail, and are often operational by nature and driven by social and demographic trends. One such asset class is the specialised supported living sector, which is specialist accommodation for individuals with healthcare needs, such as a learning disability, complex autism, down syndrome or acquired brain injury. Demand currently far outstrips supply for this type of real estate in the UK, as medical and care improvements have led to increased survival rates and increased life expectancies for people with disabilities, coupled with an existing shortage of housing and new care homes being built, and a need to reduce pressure on public services.
Specialised supported housing is defined in the Social Housing Rents (Exceptions and Miscellaneous Provisions) Regulations 2016 as a type of housing specifically designed or adapted for people who require specialised services. The accommodation must be provided by a registered provider such as a local authority or a housing association (licensed and regulated by a well-defined system of governance either by the Regulator for Social Housing or the Charity Commission). The model is relatively straightforward. In essence, investors acquire real estate which is then developed to the required specification of the needs involved. The completed asset is leased to a housing association on a 25-, 30- or even 50-year lease, on fully repairing and insuring terms, with periodic index-linked rent uplifts. The housing association grants assured shorthold tenancies to the relevant individuals, with the rent paid for entirely through an enhanced housing benefit, which is not subject to caps as it meets the relevant rent regulation to be classified as ‘exempt accommodation’. This exemption reflects the absence of public subsidy, the specific needs of the individuals being housed in terms of location and adaptations as well as different real estate acquisition and development costs relating to supported living assets. The cashflows are therefore often far in excess of market rents and are government backed, with the cost of managing and maintaining the supported living units entirely paid to the housing association through a housing benefit service charge. The risk of rental voids is also often minimal given the non-transitory nature of the healthcare needs of the relevant individuals. Care commissioning authorities agree care packages with a care operator (which is regulated by the Care Quality Commission) for each resident, which is documented via service-level agreements matching the term of the lease, with the care provider costs being met by local government.
We have seen an uptick in interest from pension funds, private equity investors and REITs vying to invest capital into supported living assets, whether it be via acquiring a package of stabilised care homes and receiving the government-backed rental income via the terms of the leases, or via an operating partner/capital partner private equity real estate joint venture model. We have also recently advised investors on development financings of such assets provided by alternative capital providers at the warehousing stage. As the real estate sector evolves to become increasingly specialised, with capital partners increasingly needing to find the right operator for their investment, and with the supported living sector ‘ticking the box’ when it comes to meeting investors’ socially responsible investment targets, we expect interest in this sector to continue.