COMMENT: Never in modern Britain has there been such an acute need for truly accessible and affordable housing. It was therefore welcome that the government has pledged to commit approximately £12bn to increase the delivery speed and number of new affordable homes.
In a society where there is a political narrative increasingly driven by populism, the need to address social and economic imbalance and the impact of climate change, sustainability and the social impact of development are becoming increasingly powerful forces in influencing where institutional investment in the residential sector is made.
When that macro new philosophy is applied to the residential sector, affordable housing has the potential to emerge as the new darling of institutional investors, measured by more than pure financial return, and offer a new direction for capital previously earmarked solely for build-to-rent.
Mainstreaming of social impact
We’re presented here with two very powerful and complementary forces. Firstly, a chronic undersupply to meet projected demand, and secondly, the “mainstreaming” of social impact investing.
Looking initially at undersupply, in its last published statistics in 2019, the National Housing Federation estimated that 145,000 new affordable homes were required annually but just 49,000 were being delivered, which represents a 66% shortfall. This shortfall has already attracted the interest of major UK institutions, with Legal and General launching a dedicated affordable housing fund in 2019, committing £750m to build 3,500 new homes, and CBRE Investors setting up a £250m fund with similar aspirations.
We then move our attention to the mainstreaming of social impact investing. This rapidly normalised investment philosophy is well documented and is based upon a general consensus that capitalism needs to become less short-termist and more inclusive.
The mainstreaming of this sentiment was perhaps most vividly illustrated by BlackRock announcing in 2019 that “sustainability is at the centre of its investment approach in response to investor preferences”. The change in direction is not unique to BlackRock, with fund managers increasingly marketing and measuring performance against the GRESB benchmark and financial and impact criteria.
Sea change in philosophy
The return profile from affordable housing is not unattractive, banishing any preconceptions that an affordable housing component within a wider residential investment strategy needs to be balanced against higher-returning residential products for investment.
For those long-term funds looking for stable returns from a long-term hold philosophy, affordable housing compares favourably to equivalent asset classes. For example, CBRE Investors, in the commentary to its new dedicated affordable housing fund, predict returns of around 6%. At the other end of the spectrum, Blackstone, through one of its opportunistic funds, saw value in investing in Sage Housing Group against a target return profile for that fund in the region of 15%.
Furthermore, within the affordable housing sector, there is perhaps a greater flexibility to innovate in terms of modular building methods, including the use of alternative materials and the promotion of sustainability.
Finally, and perhaps most powerfully, it offers the opportunity to tailor product which allows an institutional investor to palpably demonstrate its commitment to social impact. Initially, dedicated affordable housing funds may have looked to absorb the, to a degree, unwanted affordable elements of a scheme from the primary developer which were a consequence of planning obligations.
But we are now seeing an emergence of purpose-built tailored product. An example of this shift is BMO developing schemes intended to target key workers but with a flexible rent model that ensures affordability to a range of tenants within that broad employee class. And Patron has pioneered the “Women In Safe Homes” initiative, which offers homes for women who have been homeless or suffered domestic abuse. This is a sea-change in philosophy, with real estate enabling societal change rather than reacting to such change.
With almost a directive being given to the real estate industry to deliver change by its most important consumer, people, the affordable housing sector offers a chance for the industry to be brave, to innovate, and truly impact people’s lives for the better without compromising on financial return. Let’s hope the institutional investors continue to embrace that challenge.
