Social housing funds have seen their popularity increase among institutional investors, providing risk-adjusted returns to pension funds, which are also able to meet their fiduciary duties with such investments, writes Karen Ng, investment director at Big Society Capital.
There has been unprecedented support to tackle homelessness from the UK government, which has announced a series of financial support packages in the wake of the pandemic, catalysing additional investment from local authorities into social and affordable housing funds tackling homelessness.
With institutional investors, particularly pensions funds, already having started to invest in this sub-set of residential housing fund pre-crisis, we expect to see more of them quickly follow suit.
There is a growing number of social and affordable housing funds that specialise in tackling homelessness that typically acquire (or provide loans to acquire) ordinary homes. Homes are refurbished where required and leased through social landlords and charities in conjunction with wrap-around support to people who are homeless.
These funds provide a clear and tangible positive social impact – and this is of increasing importance to institutional investors as they look to fulfil their fiduciary duties
Steady inflows for pension schemes
The growth in popularity of these funds amongst institutional investors has in part been driven by the attractive risk-adjusted returns they provide, while satisfying their growing search for investment that meets their desire to create impact.
These funds provide long-term, low-volatility yields, which are inflation linked and underpinned by the government. Income is derived from rental income, which is generally paid by local housing allowance, a benefit that is set every five years and adjusted annually in line with the consumer price index.
Tenancy lengths tend to be significantly longer than the traditional private rented sector and void periods low – this is largely a result of the substantial unmet demand, as well as quality of homes and wrap-around support delivered by charity partners.
These funds also offer attractive asset-backed investment and the long-term growth prospect of the UK residential housing market. They invest in ordinary homes on ordinary streets with strong alternative use, meaning they are more resilient to market cycles than other types of real estate assets, such as offices or hotels. Furthermore, given the housing shortages in the UK, there is unlikely to be a reduction in demand for these homes in the foreseeable future.
Funds deliver positive social impact
Crucially, these funds provide a clear and tangible positive social impact – and this is of increasing importance to institutional investors as they look to fulfil their fiduciary duties and provide a level of positive engagement with their scheme members.
Social and affordable housing funds have been proven to effectively address homelessness. Well-managed funds can help reduce local authorities’ reliance on inadequate and often highly priced private rented sector temporary accommodation.
They can also provide a stable basis for charity partners to deliver wrap-around support for vulnerable individuals and ensure they have the best chance of breaking what is often a repeated cycle of homelessness and remain safely housed for the long term. This, in turn, creates wider positive impacts – on local employment levels and on community cohesion.
Resonance, a social property manager, cited in its latest impact report that across its three housing funds employment has increased in the past three years to just over 45 per cent; and 78 per cent of all tenants say their support network and relationships have been positively affected by living in a real lettings home.
With the additional government backing, we would envisage that social and affordable housing funds tackling homelessness are likely to become even more attractive to pension schemes, which want their investments to have a strong and consistent financial return and a positive impact.
Now is the time for institutional capital to play a role in finding a lasting solution to a serious social problem such as homelessness, which has been exacerbated by the coronavirus pandemic, the full effect of which is yet to unfold.
Karen Ng is investment director at Big Society Capital
