By Freddie Cowper-Coles fund managers of Triple Point SoHo REIT.
The global economy is slowly emerging from its three-month hibernation. But as it peers out onto the new landscape before it, the view has been transformed. The changes that Covid-19 has unleashed cannot be undone. The clock will never wind back. Even if a vaccination were discovered and given across the world tomorrow, the way we will live, work and consume will never be the same again. And for every winner that this transformation is creating, sadly there is also at least one loser.
Working from Home experiment hits offices and retail
Over the last 3 months, the world has just undergone the largest Working from Home experiment in history. The results are still being gathered and analysed, but indications are that it has worked far better than anyone anticipated. If Covid-19 had hit 20 years ago, slow broadband speeds and unaffordable webcams would have made the experiment a failure. But thanks to this technological progress many companies – and their employees – are now embracing Working from Home on a scale unimaginable only a few short months ago. In January 2020, a request to work from home would have been seen as an attempt to skive. In June 2020, a request to return to the office full-time could be seen as quaint or even troublesome.
It makes sense – when you think about it. It is true that Working from Home can be claustrophobic (particularly if you have no outdoor space), it deprives co-workers of spontaneous interactions, and it further erodes the boundary between home and work life. But it has many advantages, too. Working from Home means no stressful, expensive, time-consuming commute. It means no expensive sandwich bought from the local deli. It means no strip-lighting and AirCon wars. It means no worrying about an ironed shirt and polished shoes. Instead, Working from Home means spending time at home, with your friends or family, and being able to work more efficiently away from distracting colleagues. For bosses, smaller offices also mean less rent to pay. And that means more profits.
Because of this, offices are already morphing into collaborative hubs that don’t need to be visited every day. The demand for office space is consequently reducing. A PWC survey showed 68% of CFOs are looking to adopt remote working in the long-run. Similarly, central office stalwarts like UBS are reassessing the need to have a pre-pandemic presence in city centres. This means that owners of commercials offices will see declining rents and reducing values. Likewise, the retail units built to service the employees of all these offices will suffer. The footfall at local sandwich bars and lunch-time clothes shops will decline. Such changes make for bleak reading for those invested in Real Estate Investment Trusts (REITs) that buy office space and retail. Some UK retail REITs are trading at 35% of pre-pandemic levels, while many office REITs are down by around 30%.
Social Housing REITs offer value in more ways than one
But not all REITs have suffered during the crisis. One property sector whose demand has been sustained throughout the turbulence is social housing, which provides a long-term essential service that is needed regardless of market conditions. And that means REITS which invest in social housing have fared well.
REITs like Triple Point Social Housing REIT Plc (ticker: SOHO) invest in newly-developed homes-for-life in the community for people with long-term health needs like learning disabilities and mental health issues. The rent received for these homes (which is linked to inflation) is ultimately paid by central government, which means that, irrespective of the state of the market, the rent continues to flow. These homes are in demand because they have been shown to improve the wellbeing of the vulnerable people who move into them from institutional care settings (such as care homes and hospitals). But they are also in demand because they save the government money, since the cost of looking after someone recovering at home is less than looking after them in an institution. For these reasons, and because of the rising number of people with long-term health needs, there is a chronic shortage of this type of housing across the length and breadth of the country.
Social housing therefore offers investors an opportunity to invest in desperately-needed new housing that has a meaningful impact on society at the same time as generating stable, long-term, inflation-linked rental income. Indeed, because of the essential benefits that this type of housing provides, social housing REITs have been some of the few REITs that have continued to receive full rent and pay dividends despite the lockdown. Triple Point Social Housing REIT collected 100% of its rent in the first 4 months of this year, and has declared a full quarterly dividend for Q1 2020 to be paid on 26 June.
As the world recovers from the trauma of the virus, the future will start to reveal itself. But it is already clear that, if structural shifts resulting from the pandemic have undermined the value of some property sectors, social housing has shown that helping society doesn’t mean accepting concessionary returns. In fact, the last three months have proved the opposite can be true: investments that meet a social need are often the most resilient precisely because they are providing the services that our society cannot live without.