Institutional investors to increase allocations to social real estate

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Alpha Real Capital (Alpha), a specialist manager of secure income real assets, says the strong performance of social real estate during the Covid-19 crisis, and a growing and ageing population, will see pension funds and other institutional investors increase their allocation to social real estate. 

This trend is also being supported by growing regulatory pressure, and investors increasing their focus on ESG (Environmental, Social and Governance) considerations. 

Alpha says there is a diverse range of investment opportunities in social real estate for pension funds and other institutional investors to consider because it estimates the sector needs at least GBP50 billion of new funding to address a huge shortfall in modern, efficient purpose-built housing, education and healthcare stock.  

Adrian D’Enrico, Head of Social Real Estate at Alpha Real Capital, says: “A distinctive feature of the social real estate sectors is that demand is driven by long-term demographics patterns, rather than shorter-term economic variables – that stability appeals to institutional investors.

“Social real estate has performed very well during the worst of the Covid-19 crisis. Much of it is essential and underpinned by public sector funding which has been resilient, enabling tenants to continue paying rents in full and on time across our Social Long Income Fund.

“With the UK’s population growing and ageing, demand for public services and the assets they are delivered in is only going to increase. With at least £50 billion of patient capital required, it’s a large opportunity for investors to secure long-term inflation-linked income that provides not only attractive risk-adjusted financial returns, but also societal benefits that deliver on ESG targets.”

Alpha analysis of the social real estate sector highlights a capacity shortfall and a lack of modern, efficient, purpose-built stock. By way of example, the replacement of smaller care homes or those with non-market standard facilities (shared bathrooms, for example) could alone require GBP6 billion of funding. 

Equally, the primary care investment requirement to replace existing GP practices considered not fit for purpose is estimated at GBP17 billion or more before population growth is factored in. 

Homelessness and temporary accommodation solutions could require more than GBP10 billion whilst a day nursery shortfall may be of a similar magnitude. Even based on conservative assumptions, Alpha says this represents a GBP50 billion-plus opportunity across these sectors alone. 

Whilst several specialist REITs and responsible or impact funds have already deployed capital into Social Real Estate, the scale of the investment opportunity is large and remains significantly untapped by institutional investors. 

Anthony Curl, Co-Head of Long Income at Alpha Real Capital, says: “Institutional investors seeking to deploy significant capital volumes over the medium to long-term can be confident of the opportunity to do so across a range of social real estate sectors. 

“Social real estate provides long-term, inflation-linked income streams, which have proven to be resilient in the recent challenging period. The social benefits of investing in housing, healthcare and education are achieved in addition to financial returns, not at the expense of them – underpinning a strong case for social real estate to be a cornerstone of investor allocations.”

Alpha’s Social Long Income Fund invests in real estate assets with the dual function of delivering long-term, resilient, inflation-linked income streams, whilst also providing societal benefits and impacts which assist in building stronger, better communities.

Broadly grouped into housing, healthcare and education, the asset uses range from supported living to social housing, primary care, elderly care and educational facilities. A diverse range of target sectors, the assets reflect the diverse needs of society – but with attractive common characteristics including long-term leases and strong indexation provisions, they collectively represent a compelling, scale investment opportunity.

Underpinned by demographic or structural demand, the assets serve communities and those in need and, importantly, are economically linked to public sector funding (directly or indirectly). This provides important diversification benefits in comparison to more cyclical, traditional commercial property sectors and underpins the resilience of the income stream derived from the assets.

The fund typically invests via acquisition or through the funding or development of real estate assets let on long leases to providers of services such as primary care, elderly care and extra care (assisted living), supported living and high complex care, social housing (including keyworker accommodation and shared ownership) and education (including day nurseries and university faculties).

Phillip Rose, CEO, says: “With over GBP1 billion invested in social real estate, Alpha is actively supporting long term investment in the health, education, care and social housing sectors in the UK and Europe.”

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