Providing homes to tenants whose rents are backstopped by the government in a country with an acute shortage of property might seem like an investment built on impregnable foundations. The plunge in Home REIT Plc shares following a critical report from a short seller is a reminder that there’s no such thing as a risk-free bet.
Home REIT dropped as much as 31% in London trading Wednesday after Fraser Perring’s Viceroy Research published a 27-page document questioning its financial health and governance. The stock recovered about a third of that drop after the company called the comments “inaccurate and misleading” and based on “mistaken assumptions, misinformed comments, and disputable allegations.” The real estate trust said Viceroy didn’t engage with it before publishing, adding that it will issue a fuller response later. It rose 5.5% in early trading Thursday.
The trust’s business model is simple to understand. There are more than 270,000 homeless people in Britain, and more than 1 million on waiting lists for social housing. Local governments have a duty to house the homeless, and in the absence of suitable accommodation often put them into bed-and-breakfast hotels. These are expensive, costing an estimated weekly average of £245 ($296) per bed, according to a May filing from Home REIT.
Enter private-sector real estate companies, which buy and renovate residential properties, then rent them to charities and housing associations. Home REIT’s average weekly rent was £95 per bed in the six months ended in February. That’s a considerable saving to local authorities, which also (at least in theory) get higher-quality and purpose-built accommodation. For their part, the property investors get low-risk customers and assured returns. The community housing providers sign long-term, inflation-linked leases (averaging 24 years in the case of Home REIT’s properties). They’re also responsible for maintenance, insurance and other costs. Their tenants, meanwhile, are usually on housing benefit or other state support. It starts to look like a sweet business for the landlords.
Stock market investors certainly bought the story. Home REIT raised £240.5 million in an initial public offering in October 2020, a further £350 million in September 2021 and then £263 million in a placement in May this year, the latter two both enlarged in response to demand. The company has expanded at breakneck speed, using up the proceeds of its first two equity sales to reach 2,239 properties by the end of August. Home REIT was added to the FTSE 250 Index in July.
The company’s market value peaked at almost £1 billion in August and has since fallen by half to £492 million as of Wednesday’s close. The stock began declining steeply in September, when disclosures tracked by Bloomberg show hedge fund Oasis Investments started shorting the stock. Viceroy joining the party has renewed the downward lurch. The firm questioned Home REIT’s accounting practices, the quality and diversity of its tenants, and the compensation arrangement with investment boutique Alvarium Investments, which brought the trust to market and manages it.
Perring was an early critic of Wirecard AG, the collapsed German payments firm, and has roiled shares of companies from Australia to Sweden, though its bets haven’t always panned out. Whether Home REIT shares can recover fully will depend on the strength of the company’s rebuttal. That has happened with Viceroy targets on occasion, most notably in the case of South Africa’s Capitec Bank Holdings Ltd.
Look at Home REIT’s funding model, and you might conclude that it would take a heroic effort for this company to fail to make money. The trust pays a fixed rate of 2.53% on its £250 million of debt via two facilities that have terms exceeding a decade. Meanwhile, the average net yield on its property portfolio was 5.87% as of February. Net asset value was £624 million prior to the May placement, so leverage is relatively modest.
Beyond the fortunes of a single company, the attack on Home REIT draws renewed attention to the UK’s policy of enlisting private companies to address its housing crisis, an approach that has stirred controversy. The argument for profit-driven solutions is greater efficiency, though some providers have faced complaints of poor quality. Funneling taxpayer funds into private hands to solve a problem that has its roots in state policies stretching back to the 1980s also raises questions of social equity.
Crisis situations call for crisis measures, and investors can’t be blamed for responding to the incentives placed before them. But if we’re going to talk about governance, let’s not leave Westminster out of the conversation. The problems begin there.
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Matthew Brooker is a Bloomberg Opinion columnist covering finance and politics in Asia. A former editor and bureau chief for Bloomberg News and deputy business editor for the South China Morning Post, he is a CFA charterholder.
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