ESG-focused private capital can help housing associations achieve what we need to

Comment04 Jun 2020Peter Denton

COVID-19 leaves us further from meeting housing need. Private capital from impact-focused investors, driven by far more than cash return, could provide part of the solution, argues Peter Denton, chief executive of Hyde Group

Peter Denton

Peter became Chief Executive Officer at the Hyde Group in September 2019 after two years as Group Finance Director. He also has 25 ...READ MORE

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ESG-focused private capital can help us achieve what we need to, argues @HydeHousing’s Peter Denton #ukhousing #socialhousingfinance #esg #impactinvestment

COVID-19 leaves us further from meeting housing need. Private capital from impact-focused investors, driven by far more than cash return, could provide part of the solution, argues Peter Denton of @HydeHousing #ukhousing #socialhousingfinance #esg

At Hyde, we care enormously about our charitable purpose: to give affordable housing customers an empowered, compassionate service in safe, energy-efficient and decent homes – and to build more homes to ease the crisis.

The debate concerning the role of private capital in doing this exists because local authorities and housing associations (HAs) have insufficient capital to meet the enormous need. We collectively have good balance sheets, and the ability to borrow, receive grant and generate additional surpluses through the cross-subsidy model.

But ultimately, these resources are rationed. Pre-2017 we already struggled to deliver enough new homes. Grant levels had reduced over time, leading associations to seek cross-subsidy from sales. And bond issues, once considered innovative in the sector, had become more commonplace.

Then, Grenfell changed the building safety agenda for the better. And then, Greta Thunberg and political agreement committed us to carbon neutrality by 2050.

Now, manifesto pledges followed by COVID-19 have capped grant allocations and potentially skewed them away from rental to ownership. We are further away from meeting housing need. And we need more capital.

But the private capital debate also exists because of demand-side economics. There is simply no yield in world markets – evidenced by the incredible bond pricings achieved recently.

Low returns have been a fact of life since 2008, so investors have taken interest in affordable housing, not only because returns (six per cent internal rate of return over 10-15 years) look similar to build-to-rent or student accommodation, but also because the risk-adjusted return is very attractive – lower risk than other residential without materially reduced returns.

However, and more crucially, the demand side is driven by far more than cash return. With more than $2tn of global environmental, social and governance (ESG) capital allocation, the focus on socially beneficial and ethically responsible investment is the largest investment growth area in the world today.

We believe that if there is ownership blindness – that customers get the same experience irrespective of ownership – then we should cautiously welcome private capital, providing the right checks and balances can be put in place.

We already develop, invest and manage 7,000 homes for others but do not own them – which has worked for more than a decade.

“But investors make a return on affordable housing,” I hear you cry. Yes, and so do HAs. We would quickly become non-compliant if we didn’t make a surplus. Equally, access to debt markets would evaporate.

We are not-for-dividend organisations and profit reinvestment allows us to create a multiplier effect in development.

“We already develop, invest and manage 7,000 homes for others but do not own them – which has worked for more than a decade.”

In my experience, many long-term investors want to reinvest profits – they are usually pension annuity funds matching long-term liabilities with assets, rather than looking to take out cash. Even if they did, they would still have had to buy or build homes in the first place, adding to the housing supply regardless.

“But they will leverage up and destabilise themselves” is another objection. HAs are often quite leveraged and our sector doesn’t exactly have an unblemished record. However, most investors are not looking to leverage at all.

“But are they ‘good’ guys?” No one, including HAs, has a monopoly on compassion. Neither do we have a monopoly on the provision and management of affordable homes.

However, the regulation of any future counterparties is a must – ideally by both the Financial Conduct Authority and the Regulator of Social Housing.

In addition, we know that our conscience, our board and the regulator expect us to have considered a partner’s reputation, track record, contractual arrangements, investment drivers and their approach to ensuring that our customers experience no difference in service or terms.

Language also matters. “Private equity” suggests aggression, short termism, the strong taking advantage of the weak. “Institutional investor” immediately conveys a more benevolent, holistic, long-term approach.

For some, a Blackstone-led Sage is different to a Legal & General affordable strategy. We should be extremely cautious of such presumptions. Much of the interest in affordable housing is increasingly driven by ESG allocations, and pension funds agonise far more over their customer approach than money.

I don’t believe many investors see affordable as a short-term opportunity. Most institutions are crying out for a way of measuring the ESG impact of their investments – for this reason we are taking our ‘value of a social tenancy’ research and expanding it with others into an ESG impact benchmark.

Asset-stripping is another potential concern. The value of affordable homes, certainly in the South, is below vacant possession. This comes back to the good guy question. More fundamentally, the presence of planning law, grant conditions, regulatory oversight and investment raison d’être suggest that this is, for the most part, a bogeyman argument.

Recently, the regulator has come down harshly on sale-and-leaseback transactions. My experience is that these have always been a bad idea whether it be pubs, cinemas, hospitals or hotels. We are vocally against such structures.

There is a more optimistic observation: institutional investors have committed billions in build-to-rent and student accommodation, taking full interest-aligned operational exposure. They have also made huge strides in customer engagement and technology that our sector should and must look to leverage.

We believe it’s a fundamental mistake to always look inwards, assuming the only real solution is more grant; we doubt we will achieve 50 per cent grant anytime soon. It is now not just an affordability crisis and the need to build, which itself was difficult enough. It is not just a generational change in social housing investment that has started. It’s bigger.

Consumer expectations, the green agenda, building safety and the simple reality of ageing stock mean we must look to find new ways of bringing in necessary capital. Not to the detriment of grant, but alongside it.

Peter Denton, chief executive, Hyde