Are pension funds missing out on the £20 billion social impact property market?

Investment Director John Williams talks to LAPF Investments Magazine and states the case for pension funds investing into the social impact property market.

At its simplest, social impact investing is simply aligning investors with social issues on which they wish to see their investment have a positive impact. Carefully structured impact investment can also provide a solid financial return to investors.

Property is an asset class that has always been popular with investors but has become even more popular in recent years, with many institutions looking for risk adjusted returns, in a well-known asset class, whilst at the same time making a significant social impact. In England and Wales, Local Government Pension Schemes have over £260 billion of assets under management, of which a significant amount is held in property. So, with property already a staple of LGPS investment philosophy, why is now the right time for pension funds to consider the opportunity of investing in property that also has a social impact?

1. Scale of opportunity

At Resonance we have estimated the market opportunity in England alone, to solely tackle the issue of move-on accommodation for homelessness, to be worth over £20 billion. This is based on the alarming fact that currently over 80,000 households are living in inappropriate, temporary or emergency accommodation and require a stable home to rebuild their lives. More than 300,000 people in Britain – equivalent to one in every 200 – are officially recorded as homeless or living in inadequate homes, according to figures released by the charity Shelter, an increase of 13,000 over the past year. Many of these tenants are ready for independent living – good tenants who are rejected by the private landlord market due to lack of information. This is where a social enterprise solution, backed by significant impact investment, can unlock a huge and profitable underserved market.

To meet the scale of the social problem, social impact property funds are also increasing in size. For example, the Resonance impact investment property funds currently stand at around £200 million, and have seen strong growth in funds under management in the past year.

2. “Infrastructure like” return

It is a myth that returns in impact investment always need to be at a discount to good risk-adjusted return levels. For example, the Resonance impact investment property funds are targeting a risk-adjusted ungeared IRR of 5-6% made up of a solid predictable annual yield plus capital appreciation, which is delivered when the fund matures. The lease structure for the fund means that investors are not taking risk on individual tenants.

3.Supports development of a diversified portfolio

Investing in a UK wide residential portfolio, highly diversified across single units all around major UK cities, is something that is not available through mainstream investment managers who tend to focus either on commercial property or, in the development risk or acquiring larger blocks with greater single asset risk. So impact investing can be an important portfolio diversifier for pension funds.

4. Positive impact

Providing someone with a stable home gives them more than just a roof over their head, it enables them to rebuild their lives. For example, by helping them make progress towards employment or training. For six years now, the Resonance funds have been acquiring “ordinary homes on ordinary streets” and leasing them to leading charities around the UK, who then support tenants to re-build their lives as well as maintaining the property on behalf of investors. Interestingly, the factors which make a property suitable for this tenant group, which the impact fund screens for, are strongly correlated with the factors which also preserve and enhance capital values (for example, good access to local transport links).

As an example of the way that a social impact property fund can work, the Resonance funds have been structured as traditional limited partnership real estate funds. The funds purchase and renovate residential properties which are then leased to leading homeless charities, such as St Mungo’s, which then house homeless families and individuals, taking them out of inadequate and expensive temporary accommodation such as hostels and B&Bs, and into more stable, safer and appropriate housing.

As with any property fund, investors receive yield and capital appreciation, but an impact investment fund also reports annually on the impact its investments are having by providing this type of “stepping stone” opportunity to individuals housed in the properties. In this case, an impact investment fund would report not only on the number of individuals and families housed but also on the progress of their tenants towards employment, ability to move-on and how they have improved their resilience against future homelessness.

There are many challenges facing our communities in the UK, but one of the most pressing is the need for good quality housing for people and access to the housing market for underserved groups. The scale of the opportunity and the nature of the assets needed is already well aligned with the needs of institutional investors. We are now seeing impact investment products which bring that opportunity to the pension fund market in a form it can engage with, and which can be an excellent portfolio diversifier. Not surprisingly then, we expect that making a social impact through property investment will remain a growing theme in the decades to come.