Bringing Private Investment to the Assisted Living and Supported Living Sector
Financial Model
Below we explain how this housing model is funded and why the private sector is vital to meeting the demand for assisted living properties
1. Properties are purchased, built or converted to meet the needs of tenants with 100% private funding by the landlord with no capital contributions required at all by the Housing Association, the Local Authority, the Regulator of Social Housing or central Government.
2. The majority of properties are actually financed at a higher level than 100% often nearer to 120%+ of property costs. This is due to capital works requirements, i.e. refurbishment/development costs (required by housing association due to decent homes standard requirements), furniture and equipment acquisitions, legal fees, stamp duty, sinking fund contributions to the housing association, project management fees and installation of assistive technologies where required. Banks and other high street financial institutions will not fund property purchase or developments at 100%+ as they will require a cash investment from the Housing Association (typically 40%) ahead of any loan (standard 60%). This is the most significant underlying reason why the cost of funding might appear more expensive than traditional bank lending.
3. Historically Housing Associations could have funded the 40% cash investment through public subsidised grant. This is no longer available, so Housing Associations would have to contribute their “deposit” from their balance sheet. A typical supported housing unit costs c.£150,000 per person, which means the deposit required would be c.£60,000 per person. Smaller Housing Associations provide housing to less than 1000 people. Taking an average of 300 tenants, in order for them to fund the acquisition of sufficient accommodation for their tenant base they would have to have over £18M+ of clear surplus funds on their balance sheet to invest in property over the long term.
4. The absence of any cash investment by the Housing Association means that the landlord needs to provide 100%, or more, equity funding which may need to include mezzanine funding also. After equity, mezzanine funding is the most expensive form of finance as the provider of mezzanine only has a 2nd charge on the investment (property) therefore is riskier and thus more expensive to provide.
5. Banks have hundreds of thousands/millions of customers that are depositors of cash enabling them to use this to levy charges and obtain interest therefore providing them with a level of income and ability to offer cheaper finance. Bank debt also has the benefit of 1st charge security over the property so the banks have the most security and therefore their cost of finance is cheaper still. Institutional landlords and other private investment vehicles do not have the ability to generate interest income or the benefit of the additional security.
6. It is acknowledged that the interest rates are currently very low however it should be noted that historical interest rate in the United Kingdom have averaged 7.8% over the last 45 years. It should also be noted that it is reasonable to assume that interest rates will rise to more normal levels of 5%-8% over the next 25 years. It is important to understand that the lease rents will not rise in line with interest rates, so the risk of escalating rent costs tied to increase in interest rates in the future is completely mitigated to both the Housing Association and their sub-tenant
7. The comparison to Housing Associations taking out their own loans to acquire property rather than leasing properties, bank lending is priced at a % above Bank of England base rates, this can be anywhere from 1% to 6%+ above base rates. When interest rates grow to just 5% this would put any loan rate a Housing Association had with a bank at somewhere between 6% - 11%, which the Housing Association would have to cover (on top of their deposit tied up in their property). The Housing Association could only cover this increase in finance costs, by increasing rents which if too high and unachievable would put them in breach of their financial covenants with the banks, and at risk of default. With the leased model, the rent is fixed as per the terms of the lease for the full 25 years, thus giving a much more stable long-term business platform from which to operate and continue to provide the services they do for their tenants.
Our Latest Projects
Heading 4
10% pa Net Yield
Rent Return Yr 1 £15,600
Prices from £156,000
Thirsk
Full Legal Title Ownership
Income CPI Linked + 1% Per Annum
10% Yield from Year 1
Full Repairing Lease
No management Fees
No Service Charges
Income Paid Monthly
100% Passive Investment
New Apartments
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