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Why Institutional Investors are Paying Attention to Social and Affordable Housing Funds

Anna Shiel, Head of Origination, Big Society Capital, highlights how social and affordable housing funds can help investors achieve a positive financial and social impact return.

Contributing to positive social impact is becoming increasingly important to financial decision-makers – and this focus is growing as the drive to support recovery of the economy and society from COVID-19 takes shape. With 17.5 million adults in Britain left without a safe or secure home, one of the most critical social challenges that needs addressing is the UK housing crisis.

Social and affordable housing funds offer investors the dual benefit of attractive risk-adjusted financial returns and potential to create positive and tangible social impact. These funds predominantly provide equity-like finance to acquire or develop housing – and commit to delivering high quality, safe and affordable homes for individuals who are not served by mainstream home ownership or rental markets, including people living with disabilities or those at risk of homelessness.

A market with momentum

Social and affordable housing funds now account for the largest segment of the UK social impact investment market. According to figures from Big Society Capital, they make up 42% of the social impact investment market, which was estimated to be worth £5.1 billion (US$6.7 billion) at the end of 2019.

This represents significant growth from a market that didn’t exist in 2012 to one with over £2 billion investments to date, and multiple products and fund managers offering a range of options to investors. Last year, we saw greater participation of local government pension funds investing in these funds, and we expect a broader suite of institutional investors to follow.

Tangible social impact

Social impact is of growing importance to institutional investors as they look to fulfil their fiduciary duties and provide a level of positive engagement with their scheme members.

Last year, the Greater Manchester Pension Fund invested £10 million into a fund managed by social housing fund manager Resonance that aims to tackle homelessness. A Man Group housing fund recently secured investment from three pension funds towards a target raise of £400 million: the London Borough of Hammersmith and Fulham Pension Fund (LBHF) and the Swansea and Strathclyde Local Government Pension Scheme Funds. The fund aims to deliver housing for people earning below median income, including young families and key workers.

Well-managed social and affordable housing 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 in areas such as education and employment for tenants, ensuring that they have the best chance of breaking repeated cycles of homelessness.

In turn, this can create wider positive impact on local employment levels and community cohesion. Across its three housing funds, Resonance states that employment has increased in the last three years to just over 46% of tenants. Some 76% of all tenants of its Real Lettings Property Funds — developed with homelessness charity St. Mungo’s to provide more than 800 properties to people at risk of homelessness — say their support network and relationships have been positively affected.

Opportunities for investors to collaborate with public sector

Last month, the UK’s Ministry of Housing, Communities and Local Government announced their partnership with Big Society Capital to invest £15 million into a collection of these funds that specifically aim to tackle homelessness managed by specialist impact managers: Social and Sustainable Capital, Resonance and Bridges Fund Management. This was the first support from central Government for funds like these – which could set an exciting precedent for further public sector collaboration.

The investment case

Social and affordable housing funds offer a number of potential diversification benefits to investors’ portfolios driven by two contributing factors:

  1. Low correlation to economic growth driven by structural under-supply of affordable housing and the regulated nature of the sector, insulating against sharp price movement.
  2. Low correlation with the broader real estate sector including commercial property and private housing, as income levels are set by government policy.

In addition, these funds target long-term, low-volatility rental income that is commonly generated through lease terms that are stable and index-linked, with rent underpinned by the Government through housing benefit. Tenancy lengths tend to be longer than the traditional private rented sector and void periods are generally lower. The low void period is largely a result of the substantial unmet demand, as well as the quality of homes and wrap-around support delivered by charity and housing association partners.

Next steps for investors

There is now a wider recognition of the positive role that social and affordable housing funds can play for investors to achieve both a financial and social impact return, and they are also likely to play an increasingly important role in helping communities with the post-Covid recovery and the ‘build back better’ agenda.

To find out more, get in touch with Anna Shiel or Katie Fulford-Smith or head to the Big Society Capital homes section on our website.

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