Social care is in crisis, with MPs on the Public Accounts Select Committee warning that adult social care in England has been brought “to its knees” due to years of underfunding, short-staffing and neglect, writes Dr Richard Goulding. With almost half a million people on waiting lists for residential care, and Labour failing to commit to additional funding in its plans for a national care service, pressures will likely continue to fall on some of the most vulnerable in society.
For Labour as an incoming government reluctant to increase public spending, the temptation is to rely on institutional investors to inject private capital into social care. However, the record of private finance in the sector shows the need for caution, with the entry of real estate investment trusts (REITs) and other funds into supported housing for disabled adults associated with poor outcomes and financial instability.
A REIT is a type of corporate vehicle established to own real estate, allowing investors to gain exposure to property without having to gain in-depth knowledge of the underlying assets. Originating in the US in the 1960s, REITs gained in popularity and began to spread from the 1980s, gaining legal recognition in the UK through the Finance Act 2006. REITs are exempt from corporation tax on the condition that they distribute 90% of their profits as taxable dividends to shareholders, the logic of which is to avoid double taxation. Since 2013, REITs and other fund managers have targeted social and affordable housing, with 19 active as of 2022 and managing £3.8bn of finance, according to the impact investor Big Society Capital.
Supporters argue that the entry of asset managers into social housing is beneficial in that it allows investors to mobilise capital for a social return, providing homes for the vulnerable while saving costs to the welfare state. A dominant strategy developed by REITs in achieving this has been through the development of a sale and leaseback strategy in specialised supported housing, specially adapted accommodation for people such as adults with learning disabilities. In developing this strategy, REITs such as Civitas typically acquire supported housing properties and lease them back to be managed by housing associations and other not-for-profit organisations. Such finance has allowed rapid growth within the sector, with the number of specialised supporting housing units increasing from 5,000 in 2014 to 20,000 today, according to the Bureau of Investigative Journalism.
The key to this model lies in the ability of investors to capture high rents underpinned by housing benefit, a means-tested benefit paid to help cover housing costs. Specialised supported housing is not subject to local caps on housing benefit applied to general needs social housing, allowing much higher rents to be charged than in mainstream social housing. The logic is that higher rents subsidise supported housing’s greater costs and complexity. However, surging investment has also exposed significant risks in this model, with the housing association First Priority announcing that it was on the verge of bankruptcy in 2018 after entering into multiple lease-deals offered by REITs.
Regulatory investigations into the aftermath of First Priority’s near-insolvency have identified three key risks in lease-based finance. First, leases offered by REITs are long term, typically lasting at least 20 years and with most lacking break clauses. Housing associations are therefore responsible for covering any unanticipated costs and cannot easily exit an agreement. Second, leases are often linked to the inflation rate, exposing associations to long-term price rises. Finally, local authorities typically commission care packages on a three to five-year cycle, not the 20+ year cycle preferred by REITs. If available properties are unsuitable, then housing providers can be left with high void rates of unlettable properties. Such voids were high at First Priority, reaching 26.5% of its available homes at the time of its collapse.
Added to these inherent risks were murkier dynamics shaped by ‘aggregators’, private firms who acquire, adapt and sell specialised supported housing properties to REITs. Aggregators quickly assemble portfolios of specialised supported housing, helping REITs achieve economies of scale. Nonetheless, investigations by Inside Housing have uncovered conflicts of interest, with many aggregators sharing senior personnel with associations’ governing boards. Such incentives to take on unsuitable properties are exacerbated by many REITs offering bonuses for new contracts, a common practice in commercial real estate.
Faced with these risks, it’s unsurprising that regulators have expressed alarm. In 2020, the Regulator of Social Housing claimed it would be “more vocal” in challenging problems, and new legislation gives local authorities more powers to license properties. Civitas has also announced a 4% cap on rents for new leases, though these won’t apply retrospectively. Court documents nonetheless suggest REITs are unwilling to introduce break clauses except in exchange for accelerated interest payments, limiting the ability to exit onerous contracts.
In a recent academic journal article, I argue that the entry of REITs should be seen as an example of “financialisation”, the dominance of financial markets, actors and metrics since the 1970s. However, risks exposed by this entry also reveal limits to financialisation, generating tensions that undermine social housing’s appeal as a reliable asset for shareholders. For example, shares in social housing REITs such as Civitas fell by almost 10% in the aftermath of First Priority. While Civitas weathered this storm, investors ultimately sold their controlling stake in the REIT in 2023 to a Hong Kong investor at a “disappointing” 27% discount.
The work of the feminist writer Emma Dowling provides insight as to what generates these limits in adult social care. For Dowling, care isn’t an ethical goal that stands outside of capitalism, but rather a collective practice by which our existing social structures and systems are reproduced, and subordinated under capitalism by the need to generate a profit. Dowling thus describes the entry of finance into social care as a “care fix”, with private capital seeking out new profits through the erosion of welfare states in the aftermath of the 2008 financial crisis.
Crucially, risks generated by the entry of REITs into supported housing show how financialisation through the creation of a care fix shouldn’t be seen as an inexorable, inevitable process. Rather, instabilities as revealed by cases such as First Priority show how financialisation is in reality a high-risk strategy, with the treatment of housing as an asset unable to be neatly disentangled from its role as a collective means of social reproduction. If a new government fails to defend that welfare state, it will be left to others, such as care workers and people living in supported housing, to find new ways of repairing and protecting social care.
Richard Goulding is a lecturer in the University of Sheffield Management School
