Karen NG, Investment Director, Big Society Capital, outlines the investment case and why now is a great time for DFMs to consider social housing funds
Inflection point for impact investment
The belief that capitalism should be less short term and more inclusive of wider society was establishing itself in mainstream investing well before the coronavirus pandemic hit. This trend has most notably been led by the growth in impact investing [recent data shows impact investors’ AUM grew year-on-year by 42%, from $502bn to $715bn in 2019] but for those seeking to make a real-time impact and avoid ‘impact washing’, we’re seeing considerable uptick in the emergence and demand for impact funds. For years considered niche, impact investing is facilitating genuine change in many areas of society and the environment, such as in the area of affordable and social housing, which is attracting significant attention from institutional investors including family offices and pension funds.
Impact investing in social housing funds
Impact investing is about making investments that intentionally seek to contribute to solutions to social and/or environmental issues alongside a financial return.
An increasingly popular area of impact investment is social housing funds. These funds focus on increasing the supply and quality of genuinely affordable homes for people who are unable to access the private rental or home ownership market due to shortage in housing supply or personal circumstances such as low income or care needs. Attractive return characteristics including high demand driven by structural under supply, government backed index-linked income streams and low correlation to broader financial markets are key factors behind investor motivations to allocate to social housing funds.
Social housing funds now account for the largest segment of the social impact investment market, largely driven by growing interests from institutional investors such as pension funds. According to figures from Big Society Capital, they made up 42% of the social impact investment market, which was estimated to be worth £5.1 billion at the end of 2019.
The rapid growth has substantially increased the diversity of managers and underlying strategies that constitute the UK’s social housing funds market, with smaller specialist managers and global asset managers entering the fray.
As well as offering attractive risk-adjusted investment returns, the growing popularity of the market has also been driven by investor desire to have a positive impact on people’s lives and align their investment with their beliefs.
Outlining the investment case for social housing funds
Property and real asset exposure already tend to make up anywhere between 5-10% of the allocations in most balanced DFM portfolios. Social housing funds are in the same bracket, but offer some unique qualities to achieve investors’ return objectives:
- Diversification benefits – Social housing funds offer investors diversification benefit within their real estate portfolios with returns lowly correlated to other real estate such as commercial property and have proven to be particularly resilient during the pandemic
- Structural under-supply – Social housing funds benefit from favourable long-term structural demand drivers. There is an acute shortage of housing in the UK, with over 1.6 million households recorded on the social housing waiting list.
- Secure index-linked income streams – Social housing funds aims to deliver long-term, low volatility rental income that is generally paid for by the local housing allowance: a benefit historically paid for by the government and adjusted in line with the Consumer Price Index (CPI).
- Long-term leases – Additionally, lease lengths with housing providers tend to be ten years or more, which is significantly longer than the traditional private rental sector, and void periods are also relatively low. The low void is largely a result of the substantial unmet demand, as well as the quality of homes and wrap-around support delivered by housing providers.
Who should take note…? Why now?
Last year, we saw greater participation of local government pension funds investing in social housing funds, including the likes of the Greater Manchester Pension Fund, Swansea Local Government Pensions Scheme, and the Merseyside Pension Fund.
Alongside this, we also expect a broader suite of institutional investors to follow suit. Higher Education endowments like the University of Edinburgh is among the high-profile institutions aiming to provide positive social value through its social impact investment commitments, and we expect that there will be more to come, particularly in the way of private wealth and family offices (and their DFM partners) that have greater freedom to deploy their assets as they see fit.
Social housing funds will undoubtedly continue to evolve and the recent legislative announcement in the Budget has underscored this. We hope to see growing interest from private institutional capital and would welcome collaboration with other investors to create solutions to respond to the national urgency of social housing needs.