Reminders of water damage can be seen on the side of 177 Pendrith St., a Toronto Community Housing building in Toronto's west end, where a number of apartments are in need of repairs, photographed March 10 2011.Fred Lum/The Globe and Mail
Amid the offerings in the hot Real Estate Investment Trust market, income-craving investors may soon see an unusual new option: A portfolio of social housing buildings in downtown Toronto.
That's one of the ideas thought up by Toronto Community Housing Corp., which needs money to revitalize, repair and replace some of the 2,200 properties it owns in the city. Many of the buildings are more than 40 years old and either need some TLC or to be torn down completely.
The only problem is, catching up on the backlog of repairs is going to cost somewhere in the vicinity of $751-million. To raise that capital, TCH is looking to some unconventional tactics.
With an annual operating budget of $610-million, the not-for profit group that provides homes for 164,000 residents with special housing needs has recently relied on government subsidies for added funding. However, TCH is now looking at other avenues such as bond borrowing, mortgage refinancing and real estate investment trusts to try to drum up the necessary cash. Those were the findings outlined in TCH's report entitled Putting People First: Transforming Toronto Community housing.
This isn't the first time TCH has dipped into the pool of what's referred to as "social finance." Social financial products are those that offer investors returns on their dollars, while also offering the feel-good return of helping a non-profit to diversify its revenue stream. Basically, the system uses cash in the capital markets to invest in projects for public benefit.
TCH first turned to social impact bonds – one area of social finance – in 2007 when it issued roughly $450-million through two bonds with rates hovering a bit above and below 5 per cent. That money was used for repairs, an energy system and most importantly, new construction. As those investments now start to create new revenues, TCH says there might be an opportunity to pursue bond borrowing again.
While TCH is a Canadian innovator in pursuing social impact bonds, it's hardly the first to do so. In some areas of the U.S. where similar strategies have been employed, the governments have agreed to make the bonds tax exempt. And in the U.K., some bonds actually pay more if the social outcome exceeds expectations (for example, if the project involved something measurable such as the sustained behavioural correction of inmates.)
Another suggestion that leaps off the report is TCH's idea of pursuing investment opportunities such as Real Estate Investment Trusts. "With some 5,000 homes rented at market rents within the TCH housing portfolio there is the potential for a REIT to acquire these homes within social housing buildings," it reads. At the same time, TCH would continue to control the management of what they call the "rent-geared-to-income" units.
REITs have been a much-hyped investment this year thanks to a confluence of factors stemming from low interest rates including low debt and mortgage costs, capitalization rate compression and investors seeking yield. That's why Michael Smith, a real estate analyst at Macquarie Capital Markets Canada Ltd. says there is a possibility it could work."We know there's a lot of demand in the REIT space, and it's an asset that could definitely work," he said.
That said, there aren't enough details offered in the report for him to be 100 per cent clear on the plan. Especially since the REIT would need to commit to maintaining the rent-geared-to-income units that are in the current government agreements.
But does anyone actually want to buy into a TCH REIT? "Even though investors have a number of excellent choices in the apartment REIT space, it is definitely an idea worth exploring," said Mr. Smith. The TCH estimates that the transfer could produce an extra $500-million.
An alternative to a REIT, says the TCH, could be passing the units to another kind of institutional investor, such as a pension fund. Revenues would be filtered back into the necessary repairs.
In addition to those ideas, the paper suggests that millions of dollars of extra funds could be found by aggressively renegotiating social housing mortgages early the way the city of Ottawa has done through Infrastructure Ontario. If TCH could achieve a one per cent reduction in interest rates, it would give the repair budget an extra $7-million each year.