(Bloomberg) -- The UK’s deepening housing crisis has left tens of thousands of society’s most vulnerable without a permanent home, and their plight has caught the attention of investors seeking new places to park capital.

Home REIT Plc, whose portfolio of homeless accommodation is valued at more than £700 million ($848 million) in February, was among the best performing REITs in the UK over the past year and has been expanding rapidly. Keith Breslauer, a former Lehman Brothers banker turned real-estate magnate, is also making a bet, with a plan to raise £200 million to buy residential property that will be converted into homes for battered or homeless women.

Investors are attracted by inflation-linked, long-term leases and non-profit renters that are backstopped by the government. They say they are also plugging a crucial societal gap after recent decades saw the stock of public housing plunge.

But the influx of big money fuels a long-standing argument of whether government punting such programs into the private sector brings greater efficiency or just allows investors to profit from taxpayer funds. It also strikes at the heart of a debate about whether housing is a human right or an asset class, a discussion set to become all the more heated as a cost-of-living crisis sweeps across the country and pulls more households into poverty.

“The right to adequate housing is a guaranteed human right,” said Surya Deva, a law professor and former member of the United Nations Working Group on Business and Human Rights. “The UK government must ensure that investment firms and other business actors do not hide behind free markets to exploit a vulnerable population.”

Economic commentators are warning of a punishing winter as utility firms ready an unprecedented increase to energy bills in October followed by another hike in January. Waiting lists for social housing, already in excess of 1 million households, are likely to lengthen as more families struggle to make ends meet. 

The UK traces its shortage of low-cost housing back to the 1980s, when then Prime Minister Margaret Thatcher gave families in council housing the right to buy their properties at discounted prices. 

A continuation of this policy, coupled with a failure to build more houses, has led to a significant shortfall. According to housing charity Shelter, the number of social homes has fallen by about 1.5 million over the past four decades, as the housing stock continued to shift into private hands.

The amount of money pouring into the UK residential housing market generally from institutional investors has surged dramatically in recent years, reaching £10.3 billion in 2020 to represent 25% of all new investment in real estate, and up from £450 million in 2006, according to data compiled by CBRE. Firms investing in the residential property sector include hedge funds Cheyne Capital Management and Man Group Plc, as well as the world’s largest private equity firm Blackstone Group Inc.

Investing in housing for the poor or vulnerable allows money managers the added benefit of being able to use the investments to tout their environmental, social and governance, or ESG, credentials.

Breslauer, whose new housing-for-the-vulnerable fund has backing from the Church of England, is best known for running the 4.3 billion euro ($4.4 billion) property firm Patron Capital that mainly focuses on commercial property. 

He said he got involved after a conversation with an executive at Big Society Capital, a UK-based social impact investor, and that he has a long-term interest in philanthropy. Breslauer has also been involved with The Royal Marine Charity and educational charity The Prince’s Teaching Institute, he said.

The new fund plans to buy up to 1,000 properties that will be converted for women who are homeless or at risk of homelessness, a marketing document shows. It’s targeting a net internal rate of return of 5%-7%, according to the document. 

“We did a lot of work on it and concluded it was an investible product because what you could do is buy the property, refurbish them and then rent them fully to these charity partners, who are paid by the government to look after these families,” Breslauer said in an interview. He acknowledges the sensitivities, noting that some charity providers remain skeptical of their motives.

“The problem is most charity partners don’t believe you can do it,” he said. “They look at you as a bunch of capitalist pigs.”

Inflation-Linked Rent

Home REIT, a fund managed by investment boutique Alvarium Investments, says it aims to alleviate homelessness in the UK while also achieving inflation-protected income and capital returns. 

The country’s social housing regulator is watching the sector closely, focusing in particular on the long-term leases that lock in charities and housing providers for years, according to a person familiar with the matter. One concern is that the property owners will reap financial rewards for a disproportionately small amount of risk. 

Home REIT makes money by buying up housing stock which is then let out to charities and housing associations, among others, on leases running for longer than 20 years, a marketing document shows. The charities are responsible for maintaining the buildings and the rent they pay is inflation linked, the document states. 

In the six months through February, the investment trust acquired 874 investment properties and now manages more than 1,500 properties, according to company filings. It had a profit before tax of nearly £40 million over the same period and its share price has risen more than 20% since its listing in 2020. 

One beneficiary of the investment trust’s acquisition spree is Lotus Sanctuary, a company founded in 2018 by Gurpaal Singh Judge who was then in his mid 20s. Lotus, which leases properties from several companies, is one of Home REIT’s largest tenants and paid £4 million in rent for the six months between September 2021 and February this year. 

Since taking on its first lease less than four years ago, Lotus Sanctuary has expanded rapidly from a few sites in Wolverhampton to manage more than 2,000 properties across the UK with a plan to increase this number fivefold by the end of 2023, Singh Judge said in an interview earlier this year.

One of those homes provided a lifeline for Jamie Cooke, a 33-year-old who had been living in a tent until he moved into a building owned by Home REIT and managed by Lotus. He said staff helped him stop using drugs and he is getting his life back on track. 

The accommodation has not only provided Cooke with support, it’s also cheaper than other temporary accommodation like bed-and-breakfasts, where vulnerable people are often housed, a spokeswoman for Lotus said.

But not all reports have been positive. Evidence submitted to U.K. lawmakers this year cited Lotus properties as examples of where accommodation providers failed to safeguard their residents’ welfare. Former employees and residents of Lotus properties have also described a lack of care and poor quality accommodation.

Charity group Women’s Aid said a 40-bed Lotus property for women with complex needs in Middlesbrough in northeast England was located in a dangerous area and unsuitable for the women. It also criticized the level of support the women received at another accommodation located in Huddersfield.

In its submission, Women’s Aid raised questions about expertise in the sector generally. It also said there’s a “pattern among providers to purchase accommodation in cheaper and therefore more deprived areas, which are often remote, and as a result, increase women’s isolation.” 

Singh Judge denied the claims when contacted by email, and said the Middlesbrough property was approved by local authorities. He said the company was not a care provider, but rather a company meant to provide “intensive housing management support which focuses solely on a resident’s ability to manage a tenancy and live independently.” He added that local authorities haven’t given any guidance on where to set up services.

One former employee who spoke to Bloomberg said they were shocked by the lack of qualifications of some staff and the state of the properties in Huddersfield.

Many of the women at the Lotus properties were evicted and some ended up back on the streets, the person said.

Judge said the company wasn’t at fault for the evictions. Instead Lotus bore costs to provide services that local authorities never paid for and the residents were only evicted after the local authority refused to engage with Lotus or pay housing benefit, he said. Kirklees council didn’t provide a comment in response.

“Where poor practice exists, it must be called out,” Farah Nazeer, chief executive of Women’s Aid, said in an emailed statement. “If survivors of domestic abuse are placed in unsafe or unsuitable accommodation, women may return to their perpetrator, putting them at further risk of harm.”

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