Pension fund investment is urgently needed to provide more homes and help tackle the UK’s housing shortage crisis. In return, there is an opportunity for schemes to generate reliable returns while contributing to a solution to one of the UK’s most pressing socio-economic problems.
Pension funds and other institutional investors are being asked to invest in temporary accommodation, while earlier this year Labour MP Siobhain McDonagh wrote to the UK’s 10 largest funds to request financial support for the issue.
Research commissioned by social impact investor Better Society Capital highlights the urgent need for longer-term social and affordable housing for the 104,000 households living in temporary, unsuitable accommodation across England.
This is set against a backdrop of £16.9bn needed to provide social and affordable housing in general. There simply isn’t enough government funding to provide the number of homes needed and private capital should therefore be part of the solution.
We believe the evidence is clear – this is an investment opportunity that offers positive social impact as well as fair risk-adjusted returns.
Financial saving
When it comes to investing in social and affordable housing, one of the investment opportunities is homelessness funds, which use private capital, including from institutional investors, to acquire and refurbish properties.
These properties are then leased to homelessness charities and housing associations, which in turn offer stable, affordable housing with wraparound care and support to those in need, providing a viable alternative to costly and insecure temporary accommodation.
One social property fund manager that uses this model, Resonance, acquired more than 1,000 properties in the decade to 2023. Resonance has housed more than 3,300 people at risk of homelessness, including 1,607 children, during that period.
However, social and affordable housing is not just about shelter. It also gives families in the UK the stability to engage in daily activities that many of us take for granted – cooking a warm meal each night, maintaining secure employment and accessing healthcare.
That’s why Resonance, alongside support services provided by its housing partners, also saved local and central government’s £140m in temporary accommodation and other homelessness costs such as healthcare, mental health and employment support services, according to Alma Economics.
Attractive returns
While the benefits for the UK population are apparent, social and affordable property funds also present a compelling opportunity for pension schemes and other institutional investors.
With an annual requirement of £16.9bn to tackle housing undersupply, there is a significant opportunity for institutional investors to contribute.
The benefits here are twofold: investments in social and affordable housing offer steady long-term returns, while also fostering the positive social outcomes that are increasingly desired by members.
Investors are attracted to social and affordable housing investment because of its potential to deliver long-dated income that has index-like characteristics, along with high levels of rent collection, low voids and high structural demand which creates a steady return.
These investments also exhibit low GDP sensitivity, meaning they are a valuable tool for portfolio diversification.
In fact, figures indicate that during the macro-economic turbulence of recent years, social and affordable housing proved more resilient than other real estate sectors.
Social impact
Trustees know that financial characteristics are not the only factors when making an investment decision on the behalf of members. Increasingly, members desire investment opportunities that contribute to a social good without compromising on their returns.
In this respect, investments in social and affordable housing are highly tangible and many members will appreciate that their savings are contributing to initiatives they can relate to. This is also more attractive for younger savers, who are interested in their long-term savings being invested for social good.
To help measure and quantify impact for investors, we created the Equity Impact Project in partnership with 14 fund managers as a sector-standard framework for measuring and reporting their impact.
Used against our own portfolio, we found that 65% of our investments tackling homelessness are in areas with the highest homelessness pressures.
Challenges of investing in social housing
While investing in social and affordable housing presents promising opportunities, like any investment decision it comes with important considerations. Notably, investors have expressed concerns about reputational risk if their investment is badly executed.
This underscores the need for relevant expertise, an understanding of the social issue and appropriate diligence when investing in properties intended as someone’s home.
We already co-invest with pension funds and other institutional investors in social and affordable housing funds, leveraging a decade of experience in the sector to identify high-quality opportunities.
As trustees increasingly seek investments that reflect the values of their members, the appeal of these investments will only continue to grow.
With careful consideration and strategic partnerships, institutional investors can play a pivotal role in addressing one of society’s most pressing challenges while still delivering reliable financial returns.
Linda Carmody (pictured) is senior relationship manager at Better Society Capital while Gemma Bourne is managing director of property investment.
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