Happy New Year!
I hope everyone had a fantastic Christmas and New Year break and I wish you all a prosperous 2019! Our first accounts as a publicly listed REIT were announced just before Christmas (they can be found here: https://somersetestatesreit.co.uk/investors ). Below is a letter from me to our shareholders which I thought I would share, it covers my thoughts on the housing market and what we are looking to achieve as a company.
It has been a year of change for Somerset Estates REIT plc (“Somerset Estates”). We started the year as a private limited company and ended it as a publicly listed Real Estate Investment Trust (REIT) on The International Stock Exchange (TISE).
The business model of Somerset Estates is to buy high yielding buy-to-let properties from landlords wishing to exit the sector as a result of tax and regulatory changes. Somerset Estates provides a platform from which an extensive portfolio of private rented properties can be operated with additional housing stock introduced at low marginal cost.
Somerset Estates aims to achieve a dividend yield in the order of 5%. Achieving these yields involves acquiring properties outside the London metropolitan area and to date has involved building a highly profitable portfolio in Kent. Portfolios throughout the United Kingdom are being reviewed currently for acquisition.
In selecting suitable acquisitions, the board of Somerset Estates seeks high quality properties in locations with strong yields. This leads to a focus on traditional buy-to-let properties where a view can be taken on rental and capital growth over the long term. Over time the aim is to provide investors with high yielding stable income over a diverse residential portfolio with liquidity being available by holding Somerset Estates shares.
Investing in Somerset Estates provides investors with an exposure to such benefits, which over the long term should be fruitful. Investment returns are magnified through the REIT structure where no corporation tax is payable, provided 90% of rental income is distributed by way of dividend. This enables a property portfolio to be established in a vehicle which is inherently transparent whilst reducing transaction costs and ongoing management fees. The current portfolio of Somerset Estates has a gross asset value of approximately £10million.
There is a significant pipeline of acquisitions amounting in total to almost £20 Million. The board is developing innovative ways to increase the acquisition pipeline; including the exploration of strategic partnerships with online marketing and data companies specialising in transacting sales of buy-to-let portfolios. Further announcements regarding these strategic partnerships are to be expected in the near future.
The UK Housing Market
As an investment market, the UK residential property sector is highly attractive due to it being both safe and secure, with a long history of positive returns. However, despite its appeal, residential property has long been viewed as a difficult asset class to deal with. High transaction costs, long purchasing periods, gazumping, issues with tenants not paying rents, repairs, ever increasing tax and legislation, lack of liquidity etc. These are the issues Somerset Estates has set out to solve for our shareholders.
Housing demand massively outstrips supply in both the sales and rental markets. Enough houses are simply not being built in the UK and rents are predicted to rise over the next five years by 15% (RICS).
The Board of Somerset Estates believes that the ongoing uncertainties surrounding Brexit will lead to a period of good buying opportunities. Some commentators are predicting significant house price falls. This may be the case, however Somerset Estates takes a very long-term view to every property purchase and we believe that despite short term negative sentiment over a ten to twenty-year period, house prices in the UK will remain stable with steady growth and strong returns for our shareholders.
In addition, and as mentioned above, the market environment for the buy-to-let sector is changing. Tax and regulatory changes are squeezing landlords who are seeking to exit the sector by selling portfolios. Government initiatives to dampen the role that investors play in the housing market look to be working. Although only a part of the story, the number of mortgage loans to BTL landlords has fallen by 46% between the Brexit Referendum and July 2018 (JLL).
We are entering a period where being a buy to let landlord is going to simply get harder and harder.
The private rented sector is currently highly fragmented and has, therefore, great potential for consolidation. There are currently 2.5 million landlords in the UK owning around 19% of the total housing stock, equating to approximately £1.4trn invested in private rented property. Given market pressures, consolidation of portfolios should gather pace. This enables companies like Somerset Estates to gain margin benefits from scale with capital growth through pricing acquisitions realistically.
Somerset Estates provides an ideal vehicle for landlords seeking to exit the buy-to-let market. Landlords are able to exchange their properties for shares in Somerset Estates, which in some circumstances may include rolling over any related capital gains tax. Those selling properties to Somerset Estates benefit from the high dividend yields made available by companies like Somerset Estates whilst Landlords are relieved of ongoing compliance obligations. Therefore, Somerset Estates appeals to landlords wishing to exit and prepared to take Somerset Estates shares as consideration for all or part of the sale, whilst allowing mortgage obligations in respect of those portfolios to be repaid in advance of a rising interest rate market.
With this in mind, Somerset Estates continues to be actively marketing to third parties and intermediaries the advantages of working with it as a portfolio buyer.
Against this background, Somerset Estates views the future for its strategy with optimism and whilst the current environment of low interest rates looks set to continue, the target total yield of Somerset Estates holds great promise for all shareholders. Total returns include capital growth, and these are expected to outstrip similar returns achievable in other property sectors, in particular because Somerset Estates looks to acquire buy-to-let portfolios and share any capital gains tax savings with the seller.
The Board of Somerset Estates is fully aware that our tenants are its backbone. Somerset Estates can buy as many properties as possible, but without tenants these properties would simply be left empty. It has been well documented in the press that some (very much the minority) landlords have not been looking after their properties and have allowed their tenants to live in dilapidated and below standard properties. This is obviously illegal, and HM Government needs to crack down further on unscrupulous landlords.
Everyone has the right to feel safe in their own home. Whilst Somerset Estates may appear on the title register as the owner of a property, we always remember that it is our tenants’ home. Somerset Estates wants everyone of our tenants to feel safe and secure. With this in mind, we promise that as long as the rent is being paid on time tenants can remain in their home for as long as they wish. We are also working on implementing technology to enable tenants to report any repair issues at the touch of a button so that it can be resolved as quickly as possible.
The Board want every tenant to be happy in their home and to remain there as long as they wish.
The mission of Somerset Estates is to create a diverse and substantial portfolio of private rented properties and to distribute and generate high returns for its shareholders whilst maintaining a high standard of property for our tenants. The fundamentals of excess demand outstripping supply in the sector look set to continue and this is expected to further strengthen the asset values of the properties owned by Somerset Estates. As the share register of Somerset Estates grows, shareholders should expect to see greater liquidity.