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Analysis | Wirecard Short Seller Meets the Housing Crisis in the UK

Remark

In a country with an acute shortage of real estate, offering homes to tenants whose rents are held back by the government may seem like an investment on impregnable foundations. The plunge in Home REIT Plc shares following a critical report from a short seller is a reminder that there is no such thing as a risk-free bet.

Home REIT fell as much as 31% in London trading on Wednesday after Fraser Perring’s Viceroy Research released a 27-page document questioning its financial health and governance. The stock recovered about a third of that decline after the company called the comments “inaccurate and misleading” and based on “wrong assumptions, misinformed comments and questionable allegations.” The real estate foundation said Viceroy was not working on it before it was published, adding that it will provide a fuller answer later. It was up 5.5% at the start of trading on Thursday.

The trust’s business model is easy to understand. There are more than 270,000 homeless people in Britain and more than 1 million people on social housing waiting lists. Local governments have a duty to house the homeless, and in the absence of suitable accommodation, they are often housed in bed-and-breakfast hotels. These are expensive, costing an estimated weekly average of £245 ($296) per bed, according to a Home REIT filing in May.

Think of private real estate companies that buy and renovate homes and then rent them out to charities and housing corporations. Home REIT’s average weekly rent was £95 per bed in the six months ending February. This is a considerable saving for municipalities, which will also (at least in theory) receive higher-quality and purpose-built homes. For their part, the real estate investors get customers with low risk and assured returns. The community housing providers sign long-term, inflation-linked leases (average 24 years in the case of Home REIT’s properties). They are also responsible for maintenance, insurance and other costs. Their tenants, meanwhile, usually receive rent allowance or other state aid. It’s starting to look like sweet business for the landlords.

Investors on the stock market certainly bought into the story. Home REIT raised £240.5m in an IPO in October 2020, a further £350m in September 2021 and then £263m in a placement in May this year, the latter two both increasing in response to demand. The company has grown at lightning speed, using proceeds from its first two share 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 nearly £1bn in August and has since fallen by half to £492m at the end of Wednesday. The stock began falling sharply in September, when revelations followed by Bloomberg showed that hedge fund Oasis Investments was shorting the stock. Viceroy joining the party has renewed the downward movement. The company questioned Home REIT’s accounting practices, the quality and diversity of its tenants, and its compensation arrangement with investment boutique Alvarium Investments, which marketed and manages the trust.

Perring was an early critic of Wirecard AG, the collapsed German payments company, and has bought shares in companies from Australia to Sweden, though his bets haven’t always paid off. Whether Home REIT shares can fully recover depends on the strength of the company’s rebuttal. That has occasionally happened with Viceroy targets, most notably in the case of Capitec Bank Holdings Ltd in South Africa.

Look at Home REIT’s financing model and you might conclude that it would take a heroic effort for this company to fail to make money. The trust pays a flat rate of 2.53% on its £250 million debt through two facilities with terms of more than ten years. Meanwhile, the average net return on its property portfolio was 5.87% in February. The 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 Britain’s policy of using private companies to tackle the housing crisis, an approach that has sparked controversy. The case for profit-oriented solutions is more efficiency, although some providers have faced poor quality complaints. Funneling taxpayer money into private hands to solve a problem rooted in state policies dating back to the 1980s also raises questions of social justice.

Crisis situations call for crisis measures and investors cannot be blamed for reacting to the incentives presented to them. But when we talk about governance, let’s not leave out Westminster. That’s where the problems start.

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This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.

Matthew Brooker is a Bloomberg Opinion columnist on 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.

More stories like this are available at bloomberg.com/opinion

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