Aviva Investors mulls equity investment, but remains committed to debt

Mr Shafi also reveals that while Aviva Investors will continue to invest in debt investments in social housing, it is also looking into the for-profit investment model that is “developing very fast”.

 

He says: “We are managing assets on behalf of investors which are all very different, giving us flexibility in our investment style and how we go about providing funding to the sector. There’s not just one route, and it’s not about just debt financing or just the non-profit sector – you have so many different possibilities.

 

“We expect our investment approach can evolve alongside the sector. There are various possibilities, for example providing funding to registered providers, entering into partnership agreements alongside them or acquiring or setting up our own.

 

“Ultimately, we are going to invest where we see strongest relative value and where we can create the best outcome, both for the association in question and our clients.”

 

When pressed, Mr Shafi confirms that options being explored include partnerships with housing associations and investing equity with for-profits.

 

He says that the asset manager has scale in the market and is active in the real estate space, so sees plenty of opportunities and is approached on many, while also being familiar with the risks.

 

Mr Shafi says that certainty has grown in the for-profit sector, with more providers receiving compliant, higher regulatory grades.

 

“So it’s not that we are short of opportunities or not familiar with the opportunities,” he says.

 

“What is also important is the financial discipline, to help provide a return to our investors from their investments, alongside being able to support communities and provide funding for further projects.

 

“When the for-profit sector opened, there was a lot of uncertainty around how the regulator will approach the new entrants, and we have seen variations in outcomes since.”

 

In February 2023, Legal & General Affordable Homes became the first standalone for-profit provider to receive compliant grades from the Regulator of Social Housing, an achievement since followed by Sage Housing in December for its three registered providers. However Heylo Housing, another large for-profit, was given non-compliant gradings of G3 and V3 in December 2022.

 

Mr Shafi says: “What we are now seeing is more clarity about which structures the regulator likes and what the direction of travel might therefore be.”

 

He adds: “We are cautious around those considerations. We don’t want to move into newer segments of the market with our eyes closed and create sub-optimal outcomes. We have been following the market very closely.

 

“More recently, the commercials have been a bit more challenging when the equity hasn’t repriced much, but the cost of debt has significantly increased. So, as and when the market dynamics change, we will be revisiting our strategy.”

 

Mr Shafi says that, given the more recent macroeconomic outlook, Aviva Investors’ aspirations have not lowered in this area, but it has been “a bit more difficult to make some commercial and financial sense in some of these new structures”.

 

“If and when the market corrects, or we find a good opportunity, we have all the right skill sets and appetite to progress those opportunities,” he says.

 

“[It’s] too difficult to say at this stage whether we will do anything different to what we have done in the past, but we are exploring all options.”

 

Any foray into equity investment in the sector would not be a first for Aviva Investors. It signed a number of sale and lease-back agreements with housing associations starting in 2011, and in the years immediately following, including deals with Derwent Living (now part of Places for People) and GreenSquare (now GreenSquare Accord).

Debt investment through economic cycles

 

In recent years, Aviva Investors has been most conspicuous within the social housing sector as a debt investor, with a flow of deals since summer 2020, including what was understood to be its first deal with a Welsh housing association, in July 2020.

 

Mr Shafi says that social housing remains an attractive asset class and, while housing associations face high inflation and macroeconomic volatility in the short term, Aviva Investors takes a long-term view.

 

“All sectors go through these cycles and, in the current environment of high interest rates and inflation, the social housing sector is no exception. However, that is not to say our appetite to support the sector is limited or has diminished,” Mr Shafi says.

 

“We are managing investments on behalf of various pension schemes and insurance companies and what our investors are interested in is long-term, predictable cash flows, which very few sectors can provide.

 

“What we are trying to do is back very long-term liabilities, such as people’s pensions, with more predictable long-term cash flows. So sectors that are regulated or that have natural monopolies or monopolistic structures are the right sectors to support and back those long-dated liabilities with.

 

“Social housing is a great example of this. The funding we provide is long term, as the registered providers are well regulated. It also has a strong social purpose. Being able to invest with organisations that can have a positive societal impact is really important to us. The sector ticks all those boxes, which is why we like it.”

 

However, Mr Shafi says that Aviva Investors needs to be mindful of the challenges, assess how the sector is evolving and therefore where best to focus.

 

The asset manager is a “bit more cautious” and a “bit more selective” with where it lends, he adds, but overall, there is “no reduction in the size of our commitment to the sector”.

 

The investor has a good appetite to continue lending to the sector via debt investments over the next 12 months.

 

“Our appetite for debt investments is not reducing, but we are selective in where we lend,” Mr Shafi says.

 

Lending decisions

 

Mr Shafi says that Aviva Investors looks at a number of factors when considering lending to a housing association.

 

The asset manager looks at the ESG metrics of the housing association and for the right mix between tenures, with some, such as shared ownership, seen as more challenging than others, like social housing rents.

 

Mr Shafi says that Aviva Investors is focused on looking at the quality of the provider’s management and how it has managed the stock in the past, as well as the margins produced.

 

“A higher margin is a reflection of there being enough headroom if things change, and that you will still be financially viable in your business,” he says. “So, profitability is an important consideration.”

 

Aviva Investors also looks at the landlord’s development pipeline and past experience of development, Mr Shafi says. This is because the asset manager sees development as a risk in the sector.

 

Aviva Investors looks at the size of the development plan compared with the size of the housing association and how experienced the management team is when it comes to managing development risk, he adds.

 

This does not mean the asset manager would not lend to a housing association with a strong development plan. It just depends on the association’s risk appetite and size of the development pipeline in relation to the balance sheet and track record.

 

“We do follow a flexible investment approach when it comes to assessing which housing associations we are able to support,” he says.  

 

“We assess risks on a holistic basis rather than focusing on any one in particular, because we do feel there are several ways through which they can be managed.”