Atrato – Where private capital in real estate can profit and produce social good

When Adrian D’Enrico first took the reins of Social Housing REIT’s investment mandate fourteen months ago, the sector’s reputation was challenged. As the only listed specialist supported housing vehicle, they had seen others around them such as Home REIT collapse spectacularly, leading to skittish investors and private capital.

D’Enrico however, then a new Director at Atrato, arrived with a track record that commanded respect, with his tenure across the space’s biggest players like Edmond de Rothschild building confidence in the turnaround potential of the trust.

Additionally, Atrato’s work building Supermarket Income REIT into a £1.9 billion business before its management was internalised had established Atrato’s credentials in the listed property space. The question was whether those principles could translate to housing Britain’s most vulnerable adults and delivering competitive returns at the same time.

“The first thing to do of course was to have a look, see what we inherited,” D’Enrico recalls. “Had the former investment manager bought well? Were we happy that the properties were suitable for the residents? Were we happy that they would help deliver long-term income for the shareholders?”

The portfolio comprised 494 properties housing around 3,400 vulnerable adults with learning disabilities, physical disabilities or mental health challenges.

D’Enrico’s team had total freedom to sell anything unsuitable, but instead faced a verdict that was surprisingly positive. “We sold two straight away. Vacant, long-term, wouldn’t support residents,” he says. “And then of the others, the 492 properties, there are 12 that we looked at and we think actually they’re probably not right over the long term. That’s two percent of the portfolio. So I think what we did inherit is a very strong, well-occupied, established portfolio of modern purpose-built or purpose-refurbished specialised supported housing.”

The properties themselves can be often cited as unremarkable from the outside. “You’ll drive past the properties. They just look like well-maintained, safe properties, just typical properties in their local communities,” D’Enrico explains. “What makes them specialised is what happens on the inside. You may just about on the outside see an access ramp, but internally you’ll have ceiling hoists, lifts, ramps, sensory rooms, acoustic baffles, triple redundancy fire alarms.”

These adaptations are critical for residents who will likely remain in their homes for life. The alternative, often inpatient care, D’Enrico argues, clearly imposes enormous costs on the state. “The existing portfolio that we have, 492 properties housing up to 3,412 vulnerable adults, saves the taxpayer £71 million a year,” he says, citing an independent impact assessment by The Good Economy. “That’s using Treasury sources to try and quantify what that saving is to the public purse.”

The structure underpinning Social Housing REIT differs fundamentally from the failed temporary accommodation models that tainted the sector. “Specialised supported housing is looking after individuals who will be there for the long term,” D’Enrico emphasises. “If you look at temporary accommodation and some of the adjacent strategies which did get themselves into a bit of a pickle, they had very short-term occupation. Residents would be in their temporary accommodation for eight to twelve weeks.” In practice this meant taking on the substantial risk of consistent, short to medium term vacancies which undermined the sector’s appeal as a consistent income producer.

Social Housing REIT owns the freeholds to its properties, which are then leased to approved providers, almost all of whom are regulated by the Regulator of Social Housing. “Ninety-five percent of our properties are managed by a registered provider,” D’Enrico notes. These providers manage day-to-day property maintenance, administer tenancy agreements, and, the most crucial role of all, apply for housing benefit on behalf of residents.

“The difference really is some of those failed strategies, I think counterparties just weren’t as robustly scrutinised as they should have been or didn’t actually really have any standing,” D’Enrico says. “The quality of the properties wasn’t appropriate. They had taken existing properties, given them a lick of paint and said ‘we have carried out full refurbishments’.”

Regulation provides essential oversight, and perhaps just as importantly, confidence. “We’re housing vulnerable adults and we want to make sure that our counterparties are doing what they should be doing,” D’Enrico states. “That’s not to say that we don’t trust them, but I think it’s right that we also mark their homework. We’re into the details of their finances. We’re into the details of how they’re operating the properties.”

The Social Housing REIT team is consistently on the road conducting regular property inspections. “In some ways, it’s the nicest bit,” D’Enrico reflects. “It’s the payback of actually going and seeing and speaking to some of the residents and hearing their stories about where they were previously and how it’s working better for them. There is a real wellness benefit of them actually moving into somewhere that they can call home for a long term rather than actually being moved from wherever the council decided they needed to be.”

The demand picture is stark, though under researched. “It’s always hard. It’s a really quiet part of the affordable housing sector,” D’Enrico notes. Estimates suggest around 50,000 specialist supported housing homes exist within the UK’s 4.5 million affordable housing stock. Recent research identifies a shortfall of 27,000 additional vulnerable adults who will need housing over the next twelve years.

“If you gross that up, if you take an average capital value that we see across Social Housing REIT’s portfolio, you’re looking at about £5 billion of further investment,” D’Enrico calculates. “Is it going to touch the sides in the current state of the public finances? No, but every little helps.”

Despite the government’s £39 billion settlement for affordable housing, D’Enrico argues specialist supported housing struggles to access support. “The focus is always, probably because it’s easier, to focus on those very large schemes which can deliver and take up a lot of that grant funding,” he observes. “Some of the smaller, no less important, and I think I would argue even more important areas of the market, like specialised supported housing, struggle to deliver at anything near that sort of scale, in part because our voice isn’t loud enough.”

D’Enrico is clear about where support should flow, arguing; “this isn’t about government handouts for those people doing the investing. Quite the opposite, support should go to the registered providers. They provide an essential service. If we could square the circle and provide just a little bit of support that would actually help bring forward more schemes.”

Beyond additional investors, D’Enrico seeks regulatory standardisation. “Because we are a relatively small market and because it’s quite fragmented, Social Housing REIT alone deals with over 100 local authorities. We have 28 approved providers managing our properties for us. There’s over 100 care providers actually looking after the individuals who are in our properties,” he explains. “Anything that can standardise the rules and the parameters across the market is extremely useful because it gives investors a little bit more certainty, reduces risk, therefore reduces the premium, and ultimately that leads through into reducing rents.”

Explicit government backing would be of great help to the sector. “Just actually some explicit support to say, look, we can’t help deliver a solution for specialised supported housing, but we are accepting the role that private capital is playing in that market and we think that the current approach is a sensible one,” D’Enrico suggests.

The lessons from build-to-rent loom large. “If the build-to-rent sector had got its hands together properly and had a functional trade association leading things and they put together their own regulatory outlook four or five years ago, they wouldn’t be in the position we’re in today with a lot of this unhelpful stuff now being put into Parliament,” D’Enrico argues.

He believes specialist supported housing has reached a turning point. “This is almost specialised supported housing 2.0. We’ve had a bit of a reset. We know what doesn’t work. Some of those parties with misaligned interests have gone from the market,” he says. “We’re now at a pretty good point where we know what works. If we can get to a position, certainly with Social Housing REIT or outside of Social Housing REIT, where we can raise additional capital, I think the quality of what you’ll see coming forward is better physically. I think the alignment of interest between all parties is better.”

Environmental standards present their own challenges. Minimum energy efficiency standards will likely require an EPC rating of C or above by 2030. “Seventy-six percent of our portfolio already does comply,” D’Enrico reports. “The average UK home is a D. Actually, my home’s a D. I should really look at some insulation!”

The government’s decision to scrap the ECO fund and replace it with the Warm Homes scheme created uncertainty. “There’s a whole ecosystem around ECO. By some estimates, 20,000 to 25,000 people are working in that sector,” D’Enrico notes. “We’ve had this hiatus installed into the market. I hope actually, when we see the details of the new scheme, that it’ll dovetail quite well with the previous scheme.”

On governance, D’Enrico has witnessed a fundamental shift in investor priorities. “The G in ESG has gone from being something people don’t really talk about because they don’t understand it to almost the first thing people really want to know about,” he observes. “It’s the bit that makes it work.”

Looking ahead, D’Enrico remains committed to expanding Atrato’s social housing footprint. “There’s a shortfall in SSH, around 27,000 units over the next ten years. There’s a shortfall of accommodation across all of the affordable housing sector, and we’d like to help contribute and deliver something to be part of that solution,” he says.

The first year has delivered tangible progress. “The biggest highlight was actually opening the books after we took over and realising the portfolio by and large is really good,” D’Enrico reflects. Inherited tenant challenges are being resolved, and market reception has been positive, evident in the share price 31% increase in the past year. “People have taken well to our openness in terms of the challenges we’re facing, but also the solutions that we have lined up. There’s a bit of positivity which hasn’t been there for a while.”

For D’Enrico, the social impact justifies the hard yards behind rehabilitating the sector’s reputation. “The longer you’ve been in the sector and you go out and you see these properties and you understand the real tangible benefit and difference it’s making to these people’s lives, to their families, to actually freeing up the capacity in other support providers, you get frustrated when you see some of the challenges that inhibit growth,” he says. The question now is whether the market and government will provide the support needed to meet demand at scale.