Last week we held our first virtual ‘afternoon tea’ hosted by Pensions for Purpose which brought together pension funds and other professional investors to discuss an increasingly popular impact asset class: social and affordable housing...
We kicked off proceedings by explaining our role as an investor and market builder and how we’re exploring ways that we can support other investors in allocating capital to scalable and proven impact investment opportunities, such as social and affordable housing.
We recognise that the scale of the UK’s social problems is far larger than the capital we have to address them. For example, tackling the shortage of housing for homelessness has been estimated to require £24 billion, while we have just £600 million of proprietary capital to invest across issue areas. Therefore, we need to work with others who have capital at scale to invest alongside us if we are to move the needle on some of the biggest social issues facing the UK today.
We see pension funds as important allies in this mission and we’re excited by what can be achieved together
Our host and Chair of Pensions for Purpose, Karen Shackleton, shared data published by Public Interest Research Centre (PIRC) on Local Government Pension Scheme’s average asset allocation which showed that at end of March 2020, Real Estate Assets had grown to c10% of average pension fund allocation. Within that, residential property investment has become increasingly popular - driven by its diversification benefit and overall strong return opportunity versus other traditional asset classes. Social and affordable housing is one of the sub-sets of residential property which has been shown to offer the twin goal of delivering impact and financial returns which a growing number of pension funds are seeking to achieve.
The growing market and £10 billion + opportunity
Anna Shiel, Head of Origination at Big Society Capital, shared some of the trends that we’ve seen over the past eight years’ investing in social and affordable housing: a market that’s grown from zero in 2013 to more than £10 billion at the end of 2020. Its financial and impact benefits are now well documented. However, social and affordable housing is a growing, specialist market, so once an investor has decided they want to allocate to it, they are then faced with the challenge of unpicking its complexity. We experienced this complexity first-hand when we ran a £50million request for proposal for impact housing funds in March 2020 – for which we received 19 submissions that presented a broad range of impact strategies, manager expertise, fund structures and target return profiles. We want to help others explore this growing market that is far from homogenous.
An example - homelessness property funds
Investment Director, Karen Ng, took a deeper dive into one of the key sub-sectors driving growth in social and affordable housing market: homelessness property funds. These funds acquire or develop properties for people experiencing homelessness and typically invest directly into high quality, dispersed residential properties that are scattered throughout a community. They are not blocks or hostels – but ordinary homes on ordinary streets. Moreover, rent is affordable due to the fact that it is based on Local Housing Allowance. What that means for investors is a long-term exposure, typically more than ten years, into residential assets that have strong alternative use and strong resale value, as well as inflation-linked rental income underpinned by government-supported revenue.
In the past year alone, Big Society Capital and partners invested a combined £60 million of additional investment into these funds in direct response to coronavirus pandemic. Local authority pension funds, such as Greater Manchester Pension Fund and Teeside Pension Fund, were among the investors who committed capital alongside us.
This has demonstrated that by working together, we can provide the much-needed capital that is required to address homelessness and other housing issues, while targeting sustainable risk-adjusted financial returns.
We finished the event by breaking out into a group discussion to hear from other investors about the opportunities they’re exploring and the challenges they’re facing. One investor described how, alongside Northern LGPS, they have recently committed to a UK-wide affordable housing fund managed by PGIM. Another shared that they were particularly interested in social and affordable housing and with specific interest in the Greater London Area. Challenges shared amongst attendees included: reputational and political risk of getting it wrong; how to incorporate environmental impact and performance; and what is a suitable return.
What next and how can we work together
Having committed over £100 million in this space across more than ten funds to date, we want to help make it easier for more investors to invest more capital at scale into high impact housing. We’re open to exploring new ways of collaborating with pension funds and other professional investors to move the needle. We would therefore like to invite investors to get in touch to discuss some of the ideas for product development that we’ve been working on.