Q&A with Resonance Head of Property Funds John Williams
First published on Room 151 on 19 April 2017
John Williams, Head of Property Funds, talks about the Resonance property funds that help provide homes for those in temporary accommodation or at risk of homelessness. In a Q&A with the editor of Room 151 Peter Findlay, John explains the opportunities for local authority investors to become involved.
Q: You’ve launched a fund which aims to benefit the homeless and generate returns for investors, including local authorities. Tell us a little bit about how it works?
John Williams: We first developed our ground breaking social impact investment property fund back in 2013, in response to the lack of private rented accommodation accessible to rising numbers of people living in temporary accommodation, or otherwise at risk of homelessness. These funds can take investment from a wide range of investors including local authorities investing directly, as well as local authority pension funds.
Residential property portfolios are acquired and refurbished in key cities across the UK and then leased to leading homelessness charities, including St Mungo’s, who then house homeless families and individuals who are ready for independent living but struggle to access private rented accommodation. The benefits to tenants are measured in terms of (i) improving their housing options (including eventually moving on to other stable
accommodation), (ii) achieving progress towards work, and (ii) developing greater resilience against reverting to homelessness. A recent social impact report on the first fund shows encouraging results across these areas.
Q: What about the investment profile…where does the return come from, how stable is the income and what does the risk/return profile look like for investors?
JW: Investors receive their financial return from both a cash yield during the life of the fund plus some likely capital appreciation on the property portfolio at the end of the fund, when there will be a sale of the portfolio (at market value, and most likely to a follow on impact fund). Rent into the portfolio is underpinned by the Local Housing Allowance (LHA) for each individual property and a set percentage of this rent is retained by the partner homelessness charity in order to finance their operations, which include covering the operational maintenance of the property and taking any risks on tenant voids.
Once the portfolio is acquired, rental yield from the leases is distributed to investors on a quarterly basis, thus providing the cash yield element of the return. The capital appreciation element of the return is based on the likely future increase of the property portfolio over the life of the fund; a portfolio which will be well diversified across a number of UK cities and areas.
Our first London fund is now fully invested and currently distributing a cash yield in line with projections (c 3% pa) and is on target to deliver its targeted total return (IRR) of c 6% to investors over the life of the fund. The return is “ungeared” (i.e. without the additional volatility which debt introduces into some property portfolio returns), and backed by the leases which further reduce risk. In addition, central to these funds is the positive social impact that is also being created (in addition to a stable financial return) and investors into these funds very much look for and value the findings in our Social Impact Reports, which show this model is having real positive outcomes for individuals and families who are on the journey to independent living.
JW: Local authorities invest on the same terms as any other investor and receive a financial return in the same way. However, in addition, a local authority can work with the local partner homelessness charity to form a commercial agreement to nominate people into the homes owned by the fund, which the local authority has a duty to house. These people are typically living in inappropriate and expensive temporary accommodation (hostels, B&B etc) and by moving these people into these homes the local authority (i) makes significant savings on temporary accommodation costs, (ii) is able to discharge their duty to house these people and, crucially, (iii) will be able to house people in a support structure that will be far more likely lead to positive progression as opposed to a potential negative outcome leading to a “revolving door” of need.Q: Are there any wider benefits for local authorities besides the return they would hope to get on their investment?
Q: Which local authorities are already investing with you and have they seen a positive return to date? What sort of time horizon should investors be thinking of with this and how liquid are investors’ assets?
JW: To date six local authorities around the UK have invested into this innovative fund structure, including Bristol, Croydon, Lambeth, Milton Keynes, Oxford and Westminster. All investors recognize that the investment is relatively illiquid, given the structure of the fund is a traditional Limited Partnership which has a life of 7 years, and is a typical structure for property investment at this scale. Investors will remain invested until the end of the life of the fund, at which point the portfolio will be sold (at market value, most likely to a follow-on social investment fund) and all investors can receive their capital back at that point, plus any value appreciation that has built up in the portfolio over the life of the fund.
Q: Does the fund operate in the geographic areas of the local authorities that invest in it, or is development driven by where the greatest need for temporary housing is across the UK?
JW: There are currently two funds open for investment. One, the Real Lettings Property Fund 2, focuses just on London, whilst the other, the National Homelessness Property Fund, focuses on any other cities in the UK. The latter fund can operate anywhere within the UK and looks to focus on areas where (i) the need for this intervention is high, (ii) there is a leading homeless charity successfully operating in the area and (iii) the local property market allows for a sound investment strategy, which balances both the yield available on property acquisitions plus any likely potential capital appreciation on the property over the life of the fund. For such areas we have found that there is a very good synergy for the local authorities to invest (alongside other investors) into this fund structure given this will help to catalyse investment by the fund in their area whilst having a stake in the UK wide portfolio.
Q: So Resonance currently has £134m of assets under management across three of these funds. What’s your ambition for investment opportunities with a social value?
JW: We are now in discussions with selected institutional investors in order to expand this model further across the UK. This includes local authority pension funds, for whom this provides large scale exposure to a diversified residential portfolio at good risk adjusted return, as well as local authorities directly (who also benefit from significant savings on their temporary accommodation costs). We will be expanding this model from London and the South to other areas of the UK during 2017, to at least £200m, which will create a residential portfolio of c 1,000 homes across the UK, which can support over 4,000 individuals over the life of these funds.
John Williams is head of property funds at Resonance.
To see a video about the Resonance national property fund click here.