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Capitalism’s Rehabilitation Starts With Your Home

Mark Gilbert
Capitalism’s Rehabilitation Starts With Your Home

(Bloomberg Opinion) -- James Brokenshire, the U.K.’s housing minister, wants to let people raid their pension savings to fund a deposit on their first home. That’s clearly not the answer to the country’s housing crisis. But the asset management industry has spied an opportunity to secure long-term income, help plug the housing gap, and even burnish its social responsibility credentials.

The first tenants are poised to take up residence in an award-winning project in Bristol, where about half of the homes have been funded by London-based investment firm Cheyne Capital’s Social Property Impact Fund. In January, CBRE Global Investors attracted an initial 250 million pounds ($318 million) for its open-ended social and affordable housing fund. And Man Group Plc, the world’s biggest publicly traded hedge fund, has just started seeking investors for its first community housing fund.

Fund managers are allocating resources to address a social need and make money, which is how capitalism is supposed to work. England has just 825 homes for every 1,000 families, the lowest ratio since records begin in 1991, according to a January report from the Resolution Foundation.

Almost a fifth of the population rents its accommodation from either housing associations or local authorities, compared with 64% who own their houses, according to the most recent U.K. government survey. Some 8% of the former group qualify as living in overcrowded accommodation, compared with just 1% of the latter. And the supply of additional homes available at reduced rents has been slowing in recent years.

It’s little wonder that the proportion of so-called social renters who expect to be able to buy their own home at some point in the future dwindled to 25% in 2018 from 30% the previous year, according to the government survey.

The 6,463 of additions to the social housing market last year falls woefully short of the 90,000 that Heriot-Watt University reckons are needed annually. Moreover, that study suggests that the U.K. needs to add a total of 340,000 new homes every year until 2031 to keep up with demand. Just 165,000 were built last year and the year before. And where public money is failing, the private sector can step in.

In 2014, Cheyne raised an initial 220 million pounds for what it says was the first fund designed to tackle the shortage of housing for disadvantaged groups in the U.K. Aiming for annual returns of about 10%, it is backed by a wide range of investors including an Australian insurance company, a French pension fund and a U.S. healthcare foundation.

The firm is currently seeking permission to build a 40 million-pound project in Stoke-on-Trent, famed for its pottery industry. The 380 affordable homes will be leased to and managed by the local municipality for 40 years, after which it will have the right to purchase the properties for the nominal sum of 1 pound.

In Bristol, the soon-to-be-completed dwellings funded by Cheyne will be offered with a range of tenure options: Some will be reserved for key workers, some offered at market rent, and others under a rent-to-buy program.

That mixture helps reduce the risk of, say, a government change in funding for a particular group of disadvantaged renters reducing how much they can pay for accommodation, in turn eroding the returns available. And while it adds complexity to the mix of cash flows, that’s the kind of problem asset managers should be experts in dealing with.

CBRE Global Investors, part of Los Angeles-based real estate firm CBRE Group Inc., is seeking returns of about 6% from its social housing fund. By comparison, a 30-year U.K. government bond currently offers a yield of less than 1%. But it’s not just about the money. “The key principle is helping people currently unable to rent or buy,” says Hannah Marshall, head of U.K. funds at CBRE.

The Co-Operative Group Ltd. has allocated 50 million pounds from its pension plan to invest in social and affordable housing, overseen by PGIM Real Estate. Charles Crowe, head of U.K. transactions at PGIM, says the investment will deliver as many as 400 new dwellings. Projects already underway include a 50-home development in Dunbar, Scotland, of high-quality properties that will be offered at a 20% discount to market rents.

The build quality is key to helping to “remove the stigma” from affordable housing, Crowe says. “We shouldn’t be providing substandard homes and charging low rents.”

The stars seem to be aligned, with asset managers able to secure long-term income streams at the same time as delivering social benefits. Fixed-income returns have dwindled just as austerity has reduced government funding available to boost the supply of housing stock. So what could go wrong?

Interest rates could rise, driving bond yields up to levels that make the income available from long-term social housing projects relatively less attractive. But the increased acceptance of the argument that social returns should be part of the calculation when assessing the value of investments mitigates that risk.

In April, the government’s social housing regulator issued a report warning that the business models of some market participants are overly reliant on low-margin leases and are thinly capitalized. The failure of some poorly managed projects could tarnish the rest of the sector.

Councils and housing associations may be reluctant to form alliances with hedge funds and asset managers, given the tarnished reputation of the world of finance. But the presence of Big Society Capital, a foundation set up by the government to make social investments, as a key investor in many of the projects gives comfort that the developments have the implicit support of Whitehall.

The financial crisis revealed the uncomfortable truth that private risk was being underwritten by public money. The provision of social housing is exactly the kind of undertaking capitalism needs to renew its contract with society and rehabilitate itself. What’s not to like?

To contact the author of this story: Mark Gilbert at magilbert@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."

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