Funding is high on the agenda for registered providers (RPs). Internal resources, public subsidy and private finance must deliver more with less.
Many RPs have highly geared borrowings, so alternatives to traditional debt finance in this low-subsidy environment bear examination.
Real Estate Investment Trusts (REITs) - tax efficient property investment companies - offer one solution, and the Treasury recently consulted on this social housing finance option.
The rules underpinning REITs are technical. REIT companies have favourable tax treatments for income and capital gains on the qualifying property business, although at least 90% of net income profits must be distributed. There is a 2% tax charge on REIT conversion and tax liabilities if conditions are breached.
These points of detail can be addressed with proper advice. Of more concern are the strategic considerations in making social housing REITs palatable to investors.
Yield drives investment choice. Institutional investors typically want stable returns exceeding 5%. Historically, residential property provides returns around 3.5%. Nevertheless, recent market volatility shows a place remains for consistent, if low, returns with solid revenue streams.
Furthermore, tenure mix has an effect. REITs that mix social, affordable and market rented portfolios, or exclude social rented stock, may offer improved yields.
Another tension is balancing investors' drive for returns against RPs' regulatory obligations to protect tenant rights - but this offers opportunities. By retaining management mandates upon conversion, RPs could focus on longer-term strategic community engagement priorities.
At this stage, although some steps are being taken to further develop the concept - and the consultation has brought a considered welcome from the industry - the jury is still out on social housing REITs.
There may be limited interest while debt finance is still available on acceptable terms, and it is unlikely that REITs will ever provide a replacement for subsidy.
Treatment of existing grant funding needs to be thought through - whether it is written off upon conversion, transferred to the REIT balance sheet as unsecured debt, or converted to additional equity in the REIT - and how charitable RPs transfer stock to for-profit REITs needs clarification.
However, the funding landscape has shifted profoundly in recent years. If the technical and operational issues can be resolved, REITs could complement existing funding options and open opportunities for wider affordable housing investment.
RPs and REITs are already aligned as long-term property investors, if the technical difficulties can be bridged. Furthermore, they may provide a catalyst for RPs to move away from the commercial and operational risks of holding and developing stock towards a model built on community engagement and property management.