Simon Chisholm, CIO at Resonance, outlines why housing can be an excellent fit for LGPS investors looking to deliver positive local impact.
The Good Economy defines Place Based Impact Investing (PBII) as investments made with “the intention to yield appropriate risk-adjusted financial returns as well as positive local impact, with a focus on addressing the needs of specific places to enhance local economic resilience, prosperity and sustainable development.”
In short, PBII is essentially an investment that makes a societal impact in a specific community, whilst also generating a return for investors. This impact could potentially be across sectors ranging from housing, infrastructure, clean energy, regeneration through SME Finance, but currently only 2.4% of the total value of £320 billion LGPS funds are invested in these key sectors, of which only 1% of total assets is “clearly identifiable as directly invested in these sectors within the UK.”¹
Despite this current low level of investment, we have seen first-hand at Resonance a growing interest from LGPSs considering social housing as a key area of consideration for part of their wider ESG and PBII strategy.
Increased place-based impact investment in social housing would enable local government pension funds to invest in the geographical area of the UK they operate in, where their members live, work and socialise, making a regional social impact whilst generating a risk-adjusted return and, through some fund structures, still achieving broader national diversification.
Impact funds, such as our own Homelessness Property Funds, that operate in this sector focus on providing quality, safe and secure homes for tenants who have previously been in inappropriate accommodation or homeless. There are many different types of tenant groups across the homelessness spectrum, and this differentiation is key as each group has differing needs and requires different levels of support from leasing partners. At Resonance we currently focus on three tenant themes – Homelessness, Vulnerable Women and Learning Disabilities, and work closely with specialist housing and support providers who not only lease the properties from the fund, but also house and provide support for tenants, enabling them to become part of the community, helping them rebuild their lives.
The demand for social and affordable housing is significant
Across the UK, homelessness is at critical levels. 1.16 million households are on the social housing waiting list² and 2,688 people were estimated to be sleeping rough on a single night in autumn 2020³. There is a national shortage of decent housing with almost 100,000 households living in temporary accommodation. We have calculated that the cost of solving the housing situation of those in temporary accommodation would be circa £20 billion. We know from experience that being forced to move into temporary accommodation – which often consists of inappropriate or poor living conditions – has a huge impact on people’s mental and physical health, their wellbeing, access to support services, employment prospects and social networks, often finding themselves living away from their families and communities. Whereas living in a decent, safe, settled and affordable home is a first step for many people in helping them rebuild their lives and to start to create positive and meaningful futures and fulfilled lives.
Within the existing Resonance Homelessness Property Funds, properties are purchased, refurbished and leased to housing partners, including housing associations and homelessness charities. These partners support tenants who typically move into a property for two to three years allowing them to settle into a community, find employment or training, and save for a deposit to move into the private rental sector in a more stable position, freeing up the property for another tenant in need.
Why place-based impact investing in housing makes sense
Traditionally the main focus for investors in real estate was primarily in commercial property, but the pandemic and subsequent lockdowns have meant that many people were forced to work from home, and have now adapted to hybrid working practices, which has impacted on the attractiveness of certain types of commercial property. This has been combined with the well documented shift over many years in the retail real estate sector, where online shopping has often taken away the appeal of shop fronts. This has meant that commercial property investment opportunities have become more selective, at the same time as interest has grown amongst institutional investors in gaining exposure to the UK residential property market, given the substantial UK wide demand for more housing, particularly social affordable housing.
There are significant advantages to investing in social and affordable housing, often not experienced in the private sector, including long term income with inflation correlation because of the way the rent is structured and because these tend to be stable tenancies. Social and affordable housing rents are often paid out of Housing Benefits, including Local Housing Allowance, and therefore rents can be considered to have an element of Government backing.
However, it is always important to consider the detail in comparing alternative investment structures. For example, Resonance has linked rental payments in the leases for its Homelessness Property Funds to Local Housing Allowance since this matches the underlying revenure streams of the lease partners. This is good for impact, since lease organisations do not find themselves with a mismatch between revenues and lease liabilities, but also good for long term investment since it represents a more sustainable long term arrangement whilst retaining good inflation correlation over time. It also addresses some concerns the Housing Regulator has expressed over certain forms of very long term and inflexible leasing structures, making investment less exposed to policy risk.
Another key factor in the success of this form of place-based impact investment is the quality of housing and support organisations with which the fund partners. It’s important that the manager conducts due diligence on its partners – not just to assess governance and financial viability, but the extent to which those organisations are experienced in, and committed to, the progression and outcomes for their tenants. This is then continuously assessed over time through impact reporting for the fund. Again, this is not just good for impact, in selecting partners who have tenants interests at heart, but also for investment since it reduces reputational risks which might arise in other forms of residential property investment, even in the private sector. This form of investment can therefore offer a good diversifier in a portfolio for an LGPS, delivering diversified long-term exposure to UK residential price appreciation, and risk adjusted returns in a sector where there is a high demand for affordable housing across the UK.
To conclude, more local authority pension funds could do well to consider investing in social and affordable housing, when considering their PBII strategy, recognising that it can have both attractive long-term investment characteristics, be a good portfolio diversifier with risk-adjusted returns, and produce significant social impact, addressing a growing a social issue in the areas in which they operate.
² National Housing Federation: https://www.housing.org.uk/resources/people-in-housing-need
³ Ministry of Housing, Communities & Local Government: https://www.gov.uk/government/statistics/rough-sleeping-snapshot-in-england-autumn-2020/rough-sleeping-snapshot-in-england-autumn-2020#:~:text=was%20first%20introduced.-,There%20were%202%2C688%20people%20estimated%20to%20be%20sleeping%20rough%20
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Resonance Limited is a company registered in England and Wales no. 04418625
Resonance Impact Investment Limited, a subsidiary of Resonance Limited, is authorized and regulated by the Financial Conduct Authority (FCA). Firm number 588462.
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