What Is a Supported Living Investment Actually Worth?

One of the most misunderstood aspects of supported living property investment is valuation.

If a house is worth £300,000 on the ordinary residential market but produces £30,000 or £35,000 a year under a supported living lease, is it still worth £300,000? Is it worth more because of the income? And what happens if the lease has only three years left, but there is a strong expectation that the arrangement will continue beyond that?

The answer is that there are several different factors to consider.

The starting point: bricks and mortar

At the most basic level, there is the underlying bricks-and-mortar value. A surveyor will typically look at comparable residential sales and assess what the property might sell for with vacant possession, taking into account its location, size, condition and local demand.

That value remains important in supported living. If the lease ended, there is still a physical property underneath it which can be sold, re-let or repurposed.

This is particularly relevant to Housemartin because many of our RICS valuations are carried out when the property is first acquired, before the supported living lease has commenced and, in many cases, before adaptation works have been completed.

As a result, the valuation may be focused mainly on the underlying residential value at that point in time. It may not reflect the supported living income that will follow or the value created through subsequent works.

How the lease can add value

Once a property is subject to a lease producing contractual income, a purchaser is no longer simply buying a house. They are also acquiring the right to receive that income.

A supported living property can therefore have an underlying residential value and additional investment value created by the lease.

For example, a property worth £300,000 with vacant possession may be worth more to an investor if it is producing a materially higher rent under a supported living lease. The extent of that additional value will depend on factors such as the rent, remaining lease term, counterparty strength, repairing obligations, rent reviews and break clauses.

What happens when the lease ends?

This is one of the most important questions.

A property may have three years remaining on its lease, but if it is fully occupied, performing well and continues to meet a clear need, there may be a strong expectation that the lease will be renewed, extended or replaced.

A surveyor cannot, however, treat an unsigned future lease as guaranteed.

If there is not enough evidence available to support a renewal assumption, the surveyor may take a cautious view of what the property will be worth at the end of the existing term and place greater weight on its underlying residential value.

That does not necessarily mean the surveyor expects the supported living arrangement to end. It may simply reflect the evidence available to them at the valuation date.

Housemartin may have additional information through its ongoing relationship with the housing association or operator, including occupancy, commissioner demand, operational performance and future intentions. That can provide a more current view of the likelihood of continuation, and we display the estimated likelihood of lease renewal on each property page, but renewal is never guaranteed.

How Lease Terms Affect Investment Risk

Lease length is an important part of assessing an investment, but it does not tell the whole story. A 20-year lease to a financially weak counterparty at an unsustainable rent is not automatically more attractive than a seven-year lease on a well-established property with strong underlying value, a sustainable rent and a high expectation of continued demand.

Investors therefore need to consider the quality and sustainability of the income as well as the headline lease term. The financial strength of the counterparty, affordability of the rent, occupancy of the property, commissioner demand and suitability of the accommodation can all affect how much value investors place on that income.

Break clauses add another important consideration. A ten-year lease with a tenant break at year five should not simply be treated as providing ten years of completely secure income. A surveyor will consider who has the right to exercise the break, when it can be exercised, any conditions attached to it and the effect that an early termination could have on value.

Housemartin can then consider a separate question: how likely is the break to be exercised in practice? If the property is fully occupied, commissioner demand remains strong and the housing provider is satisfied with the accommodation, the practical likelihood of a break being used may be relatively low. If occupancy is poor, demand has weakened or the counterparty is under financial or operational pressure, the same break clause may represent a much greater risk.

The legal right to terminate a lease and the probability of that right actually being exercised are therefore two different considerations.

A separate assessment of risk

These lease characteristics feed directly into Housemartin’s internal risk assessment.

This assessment is separate from valuation and does not seek to put a price on the property. Instead, it considers the risks around the income and the likelihood that the supported living arrangement will continue. Factors include the remaining lease term, break clauses, the strength and track record of the counterparty, occupancy, commissioner demand, suitability of the property, alternative operators and the likelihood of lease renewal or replacement.

That assessment can also change over time. A property may have limited evidence around renewal when first acquired, but after several years of successful operation there may be a much clearer picture of demand, occupancy and the housing association’s intentions.

How Housemartin prices are determined

The RICS valuation and Housemartin’s risk assessment are both pieces of information available to investors, but neither dictates the market price. That is ultimately determined by what investors are prepared to pay based on the information made available to them.

This is why transparency is important.

Investors can consider the original RICS valuation alongside the purchase price, works undertaken, rental income, lease length, break clauses, repairing obligations, counterparty information and Housemartin’s current risk assessment.

We also provide quarterly Hometrack valuations and House Price Index information to give investors more up-to-date information where the original RICS valuation may be several years old.

A Hometrack valuation is an automated estimate of the property’s current residential value based on property and market data. HPI, or the House Price Index, shows how the wider residential market has moved over time. Neither replaces a formal RICS valuation, but both provide useful additional context.

The aim is not to tell investors what a property is worth. It is to give them enough information to form their own view.

One investor may place more weight on the underlying bricks-and-mortar value. Another may place more weight on the regular income, the strength of the counterparty, and the likelihood of renewal.

Those different views are what creates a market.

In practice, the Housemartin Exchange works in the same way as any other market: prices move according to supply and demand. If more investors want to buy a particular loan than sell it, the price may rise. If more investors want to sell than buy, the price may fall. Changes in interest rates, property values, lease performance, counterparty strength and investor sentiment can all influence that balance. This means the market price at any given time reflects the collective view of investors based on the information available to them, rather than a single prescribed valuation.

Bringing it together

For investors, there are several different pieces of information to consider.

The RICS valuation provides an independent assessment of the property at a particular point in time. Hometrack and HPI provide more current information on movements in the underlying residential market. The lease provides the contractual income, while Housemartin’s internal risk assessment separately considers the risks around that income and the likelihood of continuation.

Investors can then use all of that information to decide what price they are prepared to pay.

We are not assuming that a five or ten-year lease is equivalent to a 25-year guaranteed income stream. But neither do we assume that the supported living use automatically disappears on the final day of the lease.

There is an underlying property, a contractual income stream and, in many cases, a strong expectation that the supported living arrangement will continue. If it does, the enhanced income opportunity can continue. If it does not, there remains an underlying property with a recognisable residential value.

Ultimately, understanding what a supported living investment is worth means looking at the property, the income, the lease terms, the risks, and the latest available property and valuation updates — and allowing investors to form their own view on price.

If you are looking to invest in supported living properties and earn a regular income from assets underpinned by bricks and mortar then sign up to Housemartin today.