Home REIT, the investment trust marketed as the dream scheme to house 10,000 homeless and needy tenants, and a sure-fire investment alternative in property, is folding with extensive debts and legal claims.
An alternative to investing in a property directly is to put your money into a fund that investors buy and manage property for you. It takes all the hassle out of managing your own properties, and what could be nicer than investing in a company that is helping the homeless?
Well, that was the theory behind investing in Home REIT, the tax efficient property investment model that was to invest in social housing, HMOs specifically aimed at housing homeless people and funded by the eminently safe Government funded housing benefit payments.
It would seem at first sight a “no brainer” and that’s how most of its investors saw it when they forked out their hard-earned cash at the time the company had its initial public offering (IPO).
Home REIT was launched on the London Stock Exchange in October 2020 and tapped investors for £850 million to build a portfolio of HMO properties with some 12,000 beds.
At that time, during the Covid episode, it turned out to be the largest London IPO offering of any investment trust in that year. The company used the capital raised to invest in something like 500 properties, all destined to be let for homeless people around the United Kingdom.
In the UK, a REIT is a company which carries on a property rental business meeting certain HMRC conditions. Designated a real estate investment trust (REIT) it’s a property investment company that avoids the double taxation that can arise when investing through a corporate structure and enables UK tax exempt investors to receive income gross of tax.
Originally conceived in the US in the 1960s, REITs were designed to make real estate investing more accessible to smaller investors who could invest in a portfolio of commercial properties such as office blocks, shopping malls, or apartment complexes as easily as they could by simply buying shares.
Pooling capital from many investors enabled REITs to fund much of American real estate, in ways that few in the public understood due to some complex tax rules.
In the UK the use of REITs continues to grow. Originally the exclusive preserve of the public markets, successive changes to the tax regime since their inception in 2007 has opened them up to a broader category of private investors, including private equity and institutional capital.
Home REIT was floated with the mission of providing social housing to the homeless, but it has since been rocked by one scandal after another over the past couple of years. Investors now feel they have been misled since the start as the scandal-hit social housing firm has now revealed plans to wind down the company in the coming months.
In a statement issued to the stock market last week, the investment trust company that was formerly listed on the FTSE 250 announced that it had concluded that a recovery strategy dubbed a “stabilisation strategy” which was introduced by its investment manager, AEW, was not working and therefore it was looking to offload its entire property portfolio and enter a “managed wind down” process.
Home REIT has said that it had the intention of returning cash to its shareholders after the sale of its portfolio. However, it seems very uncertain as to whether there will be any money left to distribute given the scale of costs involved with several legal challenges and a probe from the Financial Conduct Authority.
Home REIT started by marketing its properties for occupation by vulnerable people, including the homeless with an ambition of taking 10,000 homeless people off the streets and growing the firm to a £1bn fund. The strategy was that the properties were to be quickly bought-up and then let by the REIT investment trust company to charities and property management groups. These would manage the lettings while claiming rents from Government through housing benefits for the tenants.
The prospect attracted city institutions like Scottish Widows and M&G as well as private investors who bought into Home REIT on the premise that there would be a healthy return and a solid “social good” element to the investment.
The formula had been working in the United States which was a comfort to investors, but the UK company was run differently. There is evidence that many of its properties were purchased in a hurry without proper checks and due diligence and many of them have major repair and maintenance issues.
The firm has since been embroiled in an increasing crisis over its (charities and property management) tenants refusing to pay rents because of the diabolical state of many of its properties, and rumours of suspect property deals. The model only works, said one expert, if there is a long-term working relationship with the charities to make sure the tenants are being properly looked after.
One charity, the Noble Tree Foundation run by CEO Matt Fearnley said it was withholding almost £1m in rent and this deficit is growing by the month because of a whole list of complaints including black mould and water leaking through ceilings.
“The model hasn’t worked for the tenants,” says Mr Fearnley, the Noble Tree CEO whose charity manages 421 homes with 1,013 beds across Northampton, Newcastle, Birmingham, Coventry, Wolverhampton and London.
“We’ve got properties that are unfit for people to live in, and we’ve had to shut some of them down because they are just not right for anybody, let alone a vulnerable person,” Fearnley said.
Home REIT’s problems are part of a wider malaise across the property sector affecting shops, shopping centres and offices with the recent hike in interest rates, working from home (WFH) and a flatlining UK economy producing a challenging environment.
But Home REIT’s problems run much deeper. According to The Guardian, Home REIT has been targeted by short sellers, the death knell for many companies in the past. The UK investment research firm Viceroy Research, which is run by CEO Fraser Perring was the firm that brought down the German company Wirecard, the firm having to file for bankruptcy having been consumed by fraud and scandal.
Faced with increasing management issues around the state of its properties, Home REIT had hired a “specialist” social housing property manager. Around mounting controversy, the newly formed company named the Simpact Group was hired to help with the rent arrears situation and to carry out a review of the firm’s property portfolio and tenants. Also, Home REIT had said it was working with its auditor, BDO, to publish its delayed results “as soon as is practically possible”.
Last year Home REIT sold off 40 of its properties at hefty losses as it struggled to pay off debts and raise working capital to keep the business going. To further add to its woes, the company had to announce that two more of its charity tenants collapsed into liquidation.
Ominously, in October 2022 a parliamentary committee had called for a ban on the set-up of “profit-making schemes” using the same model that Home REIT uses.
Yet, despite the implications of that report, the company’s share sell-off did not begin properly until November when Viceroy Research criticised the valuation assumptions behind Home REIT’s portfolio, its management of the business and diligence with its tenants.
Although Home REIT dismissed Viceroy’s claims at the time as “baseless and misleading” this did little to reassure investors who continued to sell their shares.
The company, which counts a former special adviser to Conservative cabinet ministers, among its non-executive directors, faces legal claims from investors as well as some of its tenants.
So, the sorry Home REIT saga appears to be reaching the end stage with Home REIT proposing the shutting the REIT trust's doors using a managed wind-down, after shareholders and advisers supported the move.
But the collateral damage for shareholders, tenant managers and their tenants will likely go on for some time, while legal claims mount.
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