What is Supported Housing and how does it work? Does the market function efficiently, and why is there a growing need for the provision of private capital?
These are just some of the questions that prospective investors might be asking themselves as they consider a sector that combines exposure to the UK residential market with demonstrable social impact by offering accommodation to those in need.
Interested parties might like to know more about how the sector has evolved, and the ways that it has responded to its share of challenges and what the future of the sector might look like.
Here we explore the Supported Housing market, the way it currently works and the arguments for supporting a newer, more sustainable model.
The government has committed to transforming the provision of care, improving the quality of health and care services to enable people to live and receive support in their communities for longer, rather than go into hospital or a long-term care institution.
Combined with medical advances which are leading to increasing life expectancies among those with care needs, this has led to an increase in demand for Supported Housing.
According to the London School of Economics, between 2015 and 2030, an additional 30,000 units of Supported Housing units will be required.
There is an economic benefit of this transformation in that the cost of provision per resident in Supported Housing is considerably lower than hospitalisation or a residential care-home placement.
There is also a demonstrable benefit to the individual, with the NHS quoting “Supported Housing means a person is supported to live in the way they want; the housing and support is built around them rather than fitting them into a service … It is about living life with the same choices, rights and responsibilities as other citizens”.
Supported Housing is specialist accommodation offered to individuals who need a level of care, support or supervision that goes beyond that which is provided by traditional general-needs social housing. It is designed to ensure that residents can live as independently as possible within their communities.
In practice, Supported Housing takes a variety of forms:
Specialised Supported Housing is housing for adults aged 18 – 65 with a variety of care needs. Housing is adapted to suit certain conditions and a varying level of care is provided on site.
Accommodation offered specially to young people, aged 16–25; as well as tailored care and support, some educational assistance might be provided.
Temporary accommodation, provided to adults in need of support within their community; this can include the homeless, victims of domestic abuse and ex-offenders.
Single-service housing, offered to adults with more complex care needs; these homes might be specifically adapted for residents and will often be designed to provide long-term, possibly life-long, care.
Extra-care housing, offered to adults aged 55+ in need of care and support; these properties tend to be flats with communal facilities, or similar to retirement villages facilitating supported living as opposed to the provision of end-of-life care.
With Supported Housing, local authorities, which have an obligation to house people in need, work with Registered Providers of accommodation and Care Providers, to house the individuals and ensure appropriate care is provided.
Both providers are regulated in order to ensure quality of care and value for money. Rents are paid by way of housing benefit, originating from central government, and are exempt from Local Housing Allowance caps. These are claimed by the Registered Provider on behalf of the resident. Care packages are agreed between the Care Provider and the Local Authority and the provision of both the housing services and care at the property is governed by a Service Level Agreement (“SLA”) signed by the Registered Provider and Care Provider.
Some Supported Housing is provided by Registered Providers who develop properties using their own capital. However due to the breadth of demand for Supported Housing accommodation, there is a role for private capital to provide additional accommodation through a lease-based model.
To date, most private capital involvement in the Supported Housing model has been through issuing long (20-25 year) leases to Registered Providers with no break clauses. Typically, Service Level Agreements are between five and ten years in term and the requirement of Registered Providers to sign long leases has led to a mismatch of liabilities for these organisations.
In 2018 the Regulator of Social Housing (“RSH”) released a statement outlining their concerns with long leases. These included the mismatch of risk attached to the leases as well as the poor governance and poor financial strength of Registered Providers operating exclusively under long leases.
The RSH rates Registered Providers on Financial Viability (“V”) and Governance (“G”) on a scale of 1 to 4. A rating of 3 or below in either of the categories means a Registered Provider is non-compliant in the eyes of the RSH. To date the vast majority of Registered Providers that operate exclusively under this long lease model have been deemed non-compliant.
In the wake of the regulator’s judgements, there is an opportunity to establish a new, sustainable model for best practice in the lease-based Supported Housing sector.
A model that issues leases aligned with SLAs, with appropriate breaks, should be lower risk and aligned with the requirements of the Regulator of Social Housing.
Financial risks for investors should be reduced by avoiding exposure to thinly capitalised, poorly governed Registered Providers. A tailored lease-based model should allow for partnerships with larger, regulatorily compliant Registered Providers and well-regarded Care Providers. Establishing fair rents, benchmarked against the private market, would help ensure that the accommodation offers value for money.
Indexing annual rent increases to inflation, in line with government policy, helps to provide investors with a reliable income stream.
The next evolution of private capital backed leases in Supported Housing, which better balances risk and return for all stakeholders, is a model that should both generate returns and contribute to positive changes in people’s lives.
The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.
The value of directly held property and property related securities reflect the opinion of valuers and is reviewed periodically. These assets can also be illiquid and significant or persistent redemptions may require the manager to sell properties at a lower market value adversely affecting the value of your investment.
Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.