Social housing, as an asset class, has been on a number of investors’ radars for a good few years now, but the Covid-19 pandemic – combined with more structural, longer-term macroeconomic issues within the UK – provides a strong argument for more investors to consider allocating capital to these assets. Following our research into this asset class, this blog sets out the need for social housing and how the right allocation can benefit investors.
What’s the opportunity set?
Social housing strategies look to provide net additional accommodation to those individuals with a housing need, typically the most vulnerable members of society. This asset class is not universally defined, with many sub-strategies sitting under the social housing umbrella: for example, those that provide access to affordable housing or more specialised strategies targeting social issues like assisted living, asylum seeking, homelessness or child services.
Social housing funds can target either a single or a combination of the aforementioned sub-strategies and are responsible for forward funding (i.e. working with a property developer to fund the project) or converting existing assets and sourcing the appropriate lease counterparty.
Why is there a need for institutional capital in social housing?
Having read the introduction, you may be asking yourself why local councils aren’t doing more to provide solutions to solve these problems directly? Put simply, there’s a lack of capital available for councils and a systematic undersupply of affordable and appropriate housing, coupled with increased demand. Hence, institutional investors have an opportunity to fund these housing solutions.
In the 2017 Autumn Budget, the UK government announced measures to combat Britain’s housing shortage by increasing the supply of homes to 300,000 per year by the mid-2020s; but some argued this wasn’t enough.1 Irrespective of the specifics, it was clear that the total supply of housing had historically been somewhat short of demand, and a significant imbalance existed.
Source: House of Commons, Tackling the under-supply of housing in England, January 2021
This imbalance has significantly contributed to the unaffordability of housing: over the past decade, house prices have grown by 266% whilst wages have increased by only 60%. And, at present, the median house price in the UK is 8.2 times median earnings, whilst the average mortgage is capped at 4.5 times salary. As a result, the average earner can only afford to buy in 17 of 317 local authorities.2
Since 2010, central and local government finances have also been squeezed, with council-owned homes reducing by approximately 84,000 during 2013 to 2018 – a reduction of nearly 5% in England alone. This has resulted in approximately 1.6 million households on the waiting list for social housing, whilst only 58,000 affordable homes have been built (see chart below).3
Source: Homes and Communities Agency
Fast forward to 2021, where the Covid-19 pandemic has caused large-scale government borrowing and put further pressure on public sector finances – with local authorities expected to face a financial hit of 13% versus pre-crisis expenditure in 2020/21 alone4 – it’s unlikely that local councils will, in the medium term, have the capital required to make a meaningful difference. Hence, institutional capital can help bridge this gap by building purpose-built developments with amenities such as care and health facilities for assisted living properties.
Does an allocation to social housing make sense to investors?
So, whilst it‘s clear there’s an opportunity to invest in social housing projects, is it a compelling asset class to add to an institutional investor’s portfolio? The answer is two-fold.
Firstly, from a financial perspective, social housing strategies are well suited to long-term investors looking for long dated, resilient, inflation-linked cashflows. Investors can expect inflation-linked returns of c.5-7% with the benefit of the underlying assets being fully – or partially – government funded (by way of grants and lease guarantees). As an investible asset class for institutional investors, the social housing sector is still relatively nascent compared to more traditional property sectors. However, it has a demonstrable track record of generating steady, inflation-linked returns for investors dating back more than 5 years. In addition, over the past 12 months, the social housing sector has proven itself to be far more resilient to economic downturns than some other property sectors, such as commercial property, student housing, retail and hospitality, and therefore can offer some diversification benefits.
Secondly, from an ESG perspective, investing in social housing strategies has the ability to make a tangible positive impact on social issues in the UK. These strategies can either be diversified (i.e. targeting a range of social impact opportunities) or specific (i.e. attempting to solve a particular social problem such as child services). Furthermore, whilst an allocation to social housing strategies helps solve an immediate social issue, there’s also the potential of a multiplier effect: an example of this being an individual who is able to achieve housing stability through affordable accommodation might be more likely to gain employment in the future (granted this is somewhat subjective and harder to measure). As a result, we believe an allocation to the asset class could allow investors to directly map their allocations to the following UN Sustainable Development Goals:
What do you need to consider when selecting a social housing manager?
Given the case for social housing strategies, it’s perhaps not surprising to see that there has been substantial investor interest in the asset class. In 2020, Big Society Capital completed a search for social housing strategies and received responses from 19 managers looking to raise £10bn in capital.5
Source: Big Society Capital
So, what should investors consider when selecting a social housing manager? Firstly, managers should have a deep understanding of the market and display evidence of meeting tenant needs. As mentioned earlier, social housing strategies can be extremely varied, so it’s important that managers are able to clearly articulate and understand the rationale for targeting a specific sector. Secondly, managers require strong relationships with local councils, housing associations and registered providers. This allows them to allocate assets and place tenants more efficiently, which limits vacancy risk.
Should you invest?
The past decade has seen an increasing number of managers explore opportunities to help tackle the lack of social and affordable housing within the UK. With Covid-19 causing large-scale economic damage and government debt at near record highs, institutional capital is likely to be required to fill the void.
Not only does the asset class offer stable and diversified cashflows, underpinned by good credit fundamentals and with low correlation to other sectors, there’s also a real opportunity for institutional investors to specifically pinpoint which social aspect they wish to target. And, in a world where climate change has taken the limelight in ESG, with the right due diligence and manager selection, investing into this asset class can allow asset owners to bring about significant social change and be a force for good.
We’ve recently completed our Social Housing Preferred List, so if you’d like to know more about whether the asset class is suitable for your portfolio or which managers we’d recommend, please get in touch.
1 National Housing Federation (NHF) and Crisis from Professor Glen Bramley at Heriot-Watt University
3 People in Housing Need, National Housing
4 Institute for Fiscal Studies
5 Big Society Capital
Unless indicated, these are the views of the author’s and may differ from those of the firm.