With public/private partnerships expected to do much of the heavy lifting in the UK's levelling-up agenda, and billions pledged this week to boost infrastructure, we spoke to managers of a real estate investment trust that is delivering impact and steady returns in a niche sector.

As the pandemic has put more focus on the “social" component of ESG and infrastructure projects are seen as one way out of the crisis, Civitas Investment Management is one UK firm at that crossroads.

The group runs the Civitas Social Housing Trust, a London-listed real estate investment trust (REIT) that specialises in providing supported housing for those with severe disabilities and mental health conditions.

Civitas tested the sector as a viable asset class four years ago when it launched the trust, and has raised around £900 million ($1.26 billion) since from long-term institutional investors.

“We are the biggest type of private owner of this type of housing in the UK,” Paul Bridge, chief executive of Social Housing for Civitas, said. The investment firm brings together multi-disciplinary teams across healthcare, real estate, and social-housing finance and investing “to meet an enormous and continuing demand,” he said.

“The point of our investment is to increase the amount of social housing, improve its quality, and make sure there is value of money for the taxpayer,” Bridge said.

For those looking for a consistent income, trusts are a popular choice. There are around 390 registered in the UK worth £235 billion and they have largely performed well in a difficult year. They provide exposure to small-cap growth stocks and to alternative investment areas, including private equity. Investors can also use them to funnel patient capital towards individual sector interests, such as infrastructure, renewable energy, healthcare and life sciences.

REITS were introduced in the UK in 2007 to bring more money into the sector. REITs distribute most of their taxable income to shareholders. Since then, the sector has grown to around 60 funds but some have been trading at discounts to the value of their assets in recent years because of a lack of equity investor interest.

At an industry panel in January, Colin Godfrey, CEO of warehousing REIT Tritax Big Box told the sector that it needs to grow bigger to gain the sort of traction the US REIT market enjoys. (The US sector is worth more than $1 trillion.) More specialisation is needed, he said, to deliver the kinds of returns that would attract more investors. "Specialisations are key to value delivery in your field," Godfrey said. "The real estate sector is just too broad. You can't be a master of all those areas."

Civitas is one of those businesses that has taken a specialist market approach. The fund has returned around 7 per cent annually since inception, the bulk paid in dividends that currently yield around 5.3 per cent. Its board has told shareholders to expect an additional 1.9 per cent payout for 2021 based on infrastructure deals lined up with the NHS and pledges from the government to step up social and healthcare spending. There was, however, little mention of this in this week's Budget statement.

But the Treasury is launching a new "infrastructure bank" this Spring, with £12 billion in capital investment and £10 billion in government-backed loans to attract more private investment into infrastructure as part of the UK's recovery plan.

Civitas has invested £500 million in new developments over the past year and currently manages around 1,000 properties. As Bridge explains: “There are tens of thousands of people waiting for this type of accommodation.” The group says its REIT was initially 75 per cent held by private client firms, such as Rathbones, Tilney and Investec, and others. But that segment has dropped to around 40 per cent as more institutional investors have arrived. Investec remains its largest investor.

Disability charter
Demand for the housing broadly stems from a European Union charter that says disabled people must have the same rights as able-bodied people, including the right to live in their own communities.

“We are part of an all-party movement to re-house anyone in an institution (or living with parents) that will never be able to support themselves physically or mentally,” Bridge said, who spent three decades running social housing for institutions before joining Civitas.

Those parties include local authorities, local housing associations and local care providers working together to get new buildings into service. Rental on the properties are 100 per cent met by local authorities, and ultimately covered by central government under its 2014 Care Act obligations.

The UN and World Bank estimate that a quarter of the world’s population is affected in some way by disability; but the way societies have historically dealt with the issue, “a grotesque failure” in Bridge's view, has left community-based solutions in short supply.

These are not 80-bed elderly care homes, but small-scale bespoke units designed around individual service users needs, Civitas said. The average age of clients in the homes is 32, and many are in their early 20s needing life-long care.

It is hard to dispute that investing in housing for societies most vulnerable is delivering impact. But as trusts have not typically been sought out for their ESG credentials, how does the firm measure impact?

"When we set up Civitas originally, we wanted to be impact led and test ourselves on an ESG basis and economically to deliver two different channels of returns,” Civitas group director Andrew Dawber said.

They worked with ESG metrics provider The Good Economy to come up with four measurable outcomes: increase the number of social homes; increase the quality of those homes; demonstrate that the project is saving the state money; and ensure that it is not introducing any additional risks. “We were keen to look at these direct measurements rather than the positive knock-on effects,” Dawber said.

The property sector took wider action along these lines in November when banks, housing associations and others in the space, signed up to new industry standards to draw more institutional money into increasing UK housing provision. Lloyds, LGIM Real Assets, M&G and NatWest were among the group.

Housing
Civitas and others in the sector, including Triple Point, have attracted headlines in the past for leasing accommodation to housing associations, who have then come under fire from regulators for not complying with fair rent rules. Specialist-supported housing is exempt from rent caps (fair rents instead are agreed between Civitas and the 15 or so housing associations the group works with) but it does mark out more broadly how REITS are exposed to regulatory risks in the sector. Private capital sloshing around the social sector does stoke tension. But more public/private partnerships will be needed if the government is to stand by its "build back better" objective.

“At its broadest level it is about the state providing the income side of this and the private sector coming in and saying that is fine. If you, the State, will pay a reasonable rent, we will build it. We will deliver the capital to you,” Dawber explained.

Separately, the group is working with a number of NHS trusts to build what it calls “step down” accommodation to reduce the burden on acute care beds. These are proposed facilities close to NHS hospitals that can provide low-intensive care for patients for several weeks before they are discharged home.

“If there is no community provision, a short-stay in [an] NHS [hospital is] going to cost somewhere between £5,000 and £10,000 a week, depending on where you are, and that is seven or eight times the cost,” Dawber said.

Last March, when councils were ordered to house all rough sleepers, Civitas offered newly refurbished premises to Islington Council to help mobilise the response. The firm said that costs of around £180 a week for its high-spec shelter were more favourable compared with £100 a night councils could incur using local hotels or B&Bs.

“It is important we keep presenting these metrics because you will always get someone who says, “I don’t like the private sector. No one should make any money from health,” Dawber said.

Civitas recently closed £100 million with Schroders’ Private Social Supported Housing fund to bring more properties online for adults with severe disabilities.

Schroders' head of real estate Robin Hubbard said the strategy has proven "highly resilient to COVID-19 and the government-backed, strong cash yield on the long-term leases, as well as the clear social impact." All of these factors “are proving popular with institutional investors," he said.

Dawber believes demand lies in developing this more granular infrastructure that comes with a lot of additionality.

"These are large markets worth tens of billions of pounds of built assets today. They are often just not visible to people unless they have a relative or they have personal experience of the system,” he said.