With the political narrative increasingly driven by populism coupled with the need to address social and economic imbalance and the impact of climate change, the emphasis on sustainability and the social impact of development are becoming increasingly powerful forces in influencing where institutional investment is made.Right now, Britain is suffering a never-seen acute deficit in affordable housing, poignantly illustrated by the UK chancellor’s budget pledge to commit circa £12 billion (€13.6 billion) to accelerate affordable house-building.
So when we apply an impact investing philosophy to the residential sector, affordable housing has the potential to emerge as the latest jewel in the crown for institutional investors, measuring return beyond traditional financial metrics and offering a new direction for capital previously earmarked solely for build-to-rent. We’re presented with two powerful forces – a chronic undersupply to meet projected demand, and the ‘mainstreaming’ of social impact investing.
In its 2019 report, the UK’s National Housing Federation estimated that 145,000 new affordable homes were required annually, but just 49,000 were being delivered, representing a 66% shortfall. This shortfall has already attracted the interest of major UK institutions, with Legal & General launching a dedicated affordable housing fund in 2019, committing £750 million to build 3,500 new homes, and CBRE Investors setting up a £250 million fund with similar aspirations.
On the mainstreaming of social impact investing, this increasingly normalised investment philosophy is rooted upon a general consensus that capitalism must be more inclusive and less short-termist. This was vividly illustrated by BlackRock announcing in 2019 that “sustainability is at the centre of its investment approach in response to investor preferences”. This philosophy is not unique to BlackRock.
We need only look at the return profile of this asset class to banish any preconceptions that an affordable housing component within a wider residential investment strategy needs be balanced against higher-returning residential products for investment, with it comparing favourably to equivalent asset classes. Secondly, within the affordable housing sector, there is perhaps a greater flexibility to innovate in terms of modular building methods. Finally, it offers the opportunity to tailor products allowing an institutional investor to tangibly demonstrate their commitment to social impact. Whereas early dedicated affordable housing funds had originally been used to absorb the affordable elements of the primary developer’s overall scheme which were non-core and driven by planning obligations, we are now seeing purpose-built tailored product.
The BMO UK housing fund targeting key workers offers a flexible rent model, while Patron have pioneered the Women In Safe Homes initiative, offering homes for women who have been homeless/suffered domestic abuse.
This is a sea change in philosophy, with real estate enabling societal change rather than reacting to such change. Affordable housing offers a chance for investors to innovate and make a sustained difference to society without compromising on financial return. Let’s hope that challenge is embraced.
By Darren Rogers, partner and head of Fried Frank’s European Real Estate Group
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