Thursday’s Evening Standard had an article in the Business section titled “Social Housing REIT Plan” by Russell Lynch. The main points included the UK Government’s launch of a consultation period and how there is a need for social housing investment. The assumption is charities organised as housing associations could offer better returns to investors if they set up as REITs.

I am going to see what I can find out about the consultation. REITs in the UK are 5 years old, for the most part the residential sector has avoided using REITs as an investment vehicle. Even more startling to the US investors is the lack of Multi-Family Residential (MFR) investment opportunities. In the UK there are very few apartment blocks where the building or buildings are owned as one freehold (one title to the whole property with multiple residential units available for rent). The closets the UK has to a MFR investment opportunity is ‘student housing’ where a purpose built property is let for residential use to a specific class of users, students.

For the UK reader, MFR in the USA means a property with 5 or more residential units, all self-contained with no shared facilities other than hallways, outside walkways, parking, etc. A MFR property is valued using the income model which is more or less saying the value of the building is based on the net income stream divided by the yield. Unlike UK residential conversations where the BTL investor uses gross yields, we are talking about net yield to determine price.

A while back a housing leader in one of the political parties asked me to write a paper on how to create the MFR investment class in the UK. I had explained that yield compression and a lack of planning support is the key to the sector. Let’s see how the consultation turns out. Unless there are planning restrictions, the economics will drive the sector and no amount of pass though tax treatment will change that. REITs be a polished solution for pass through tax treatment.