Octopus eyes £1bn+ affordable housing investment with ‘forever’ fund

‘A dozen deals’ in pipeline

Rather than pursuing the acquisition of Section 106 properties – although Mr Davis acknowledged there “might be some” – the lion’s share of investment through the strategy would see Octopus forward funding properties. These would primarily stem from the current development pipelines of its partners, as opposed to land-led origination, but could include accessing grant funding through its registered provider.

“There may be some land that we have access to and source and we’ll bring those deals to housing associations, but I think the bulk of what we’ll do will be sitting down with housing associations, looking at what they want to bring to market. So we’re effectively forward funding what they want to do in the areas in which they want to invest and deliver homes.”

While Rex’s existing handful of properties are in the East, under Octopus, the provider’s kingdom is likely to extend further “across England”.

“We don’t have a focus on a particular area,” Mr Davis said. “The fund’s aim is to have a UK-wide model.”

Asked whether Octopus would be appointing a panel of housing providers as partners and managing agents – as has been seen, for example, with the likes of L&G – Mr Davis said Octopus would look to work in a long-term framework with providers on repeat transactions.

“I wouldn’t necessarily call it a panel. But I would hope that there will be housing associations with which we do multiple deals over multiple years. That’s the vision.

“For instance, we’ve got about a dozen deals in our pipeline at the moment, at various stages. I would describe those as relationships with housing associations that we think could be long term. Maybe we’re looking at one scheme with them at the moment, but we’d hope that, in time, it would turn into multiple schemes.”

Energy efficiency

For a firm whose sister company is a power company with a focus on renewables, it’s perhaps unsurprising that Octopus Real Estate has emphasised the energy efficiency of homes it delivers.

Explaining the decision to enter affordable housing at this time as driven by the shortage of homes as well as the “parallel crisis” of the cost of living and fuel poverty, Mr Davis referred to the firm’s desire to deliver housing that helps to answer both problems.

“We have a strategy to try to tackle both of those problems through provision of affordable housing, but also housing which has as low an energy bill as possible.

“Our ideal business model will be partnering with housing associations for many years on multiple schemes, where they can take a more strategic view around energy efficiency, net zero, use of air-source heat pumps, for instance, roof-mounted solar, or even solar off the side of the scheme – whatever it might be, perhaps even wind generation.”

The firm previously announced a funding partnership with Homes England called the Greener Homes Alliance, to provide discounted loans to house builders and developers based on how high an energy performance certificate band the house builder achieves.

False start?

While Social Housing has described Octopus’s latest foray as an ‘entrance’ into social housing, the firm is, in fact, not a stranger to it. In 2015, Octopus Investments, a sister business to the real estate division, announced a joint venture with QSH, an affordable housing developer. This would have seen homes developed and then taken to housing providers to act as managing agents. However, it was shut down in 2017 after not delivering any homes.

How has this experience informed the new strategy to avoid another false start?

“That was several years ago, and it was a different strategy led by a different team within Octopus,” Mr Davis said.

“That strategy was about backing a developer to go out and develop affordable housing and develop a land bank. This [new] strategy is quite different in that it’s a long-term landlord strategy, coupled with an energy-efficiency angle around really trying to deliver affordable homes with as low energy bills as possible.”

‘Hands-on’ landlord

Regarding the regulatory environment in social housing, and in particular the responsibility of being a registered landlord, Mr Davis said the firm would pursue a “hands-on” approach.

“The way we approach being a landlord of care homes, I would describe as very hands on; we’re an active landlord. We lean into our operators, and we’re the opposite of a passive landlord. We see ourselves as partners.”

Drawing parallels with the clinical assurance team Octopus has established within that care homes fund, he said: “We would work to closely evaluate our housing association partners. These are ultimately going to be our partners for the long term, who are going to be in control of lettings and maintenance and the experience that the tenants are going to have, living in these buildings. So we have to make sure that we’re comfortable with how they operate and their viability, whether they are a cultural fit and that they can work with us.”

Octopus is a listed B Corporation – a label applied by B Lab, the certifying agent and non-profit network. B Lab defines B Corps as companies it verifies as meeting “high standards of social and environmental performance, transparency and accountability”.

Pointing to the label, Mr Davis said this meant the firm would seek to work with partners that shared its values. “It might be that there are some deals that we wouldn’t do, because maybe we can’t reach an alignment of views between us and our partners, but that’s OK.”

Means and ends: raising capital

Social Housing asked to what extent ESG and ‘impact’ would be a focus for the affordable housing strategy and within its fundraising to end investors.

“There are two parts to that,” Mr Davis said. “From our discussions with housing associations and local authorities, I think we’re getting a level of engagement that is partly because we are a B Corp and people see us and our motives as an investor perhaps as slightly different from other investors. So we’re building a really strong pipeline, which is partly linked to that.

“In terms of the fund we create, the impact we’re having in that fund will be a core part of the fund. So it will be an ‘impact fund’; you could describe it as that.

“Our care homes fund is an impact fund under the World Bank definition of ‘impact fund’, so it reports on the number of quality care beds delivered in the UK market, and it’s audited. So it will be a similar approach that we’ll take in this one.”

Mr Davis would not disclose the level of returns the investor would be targeting or offering to its end investors, but said the fund would follow in the footsteps of its care homes fund in targeting “long-income institutional investors” and those of a similar profile.

“Our care homes strategy has many institutional investors [from the] UK, Europe and, more latterly, Asia. It will be a similar sort of investor who’s seeking long, steady income from their investment.”

While Mr Davis would not reveal the approach to fundraising Octopus would take for its affordable homes strategy, he said the acquired RP would be “an integral part of the funds structure that we set up” and investment through the fund would include “modest gearing”.

On the question of a potential exit, Mr Davis emphasised that the investor would not look to churn its assets after a short investment term, but would rather target a strategy that it wants to "be in forever”.

“There is an investment strategy, not just in this sector, where people seek to come and build scale, get yield compression and then sell the assets. I guess we’re at the other end of the spectrum. We want to build for the long term in the right way: highly energy-efficient homes, in partnership with housing associations, providing really steady long income on a direct-let model. It wouldn’t suit investors who are looking to make quick returns over five years and then exit at a profit.

“I sometimes describe our care homes fund as a forever landlord fund. We know that, for that particular strategy, there’s an evergreen fund that will go on forever and outlive all of us in this building [Octopus’s office]. We take the same approach to affordable housing.

“This is a strategy that we want to be in forever. We want to make sure we’re building homes in the right way that are going to be good for many, many, many decades, rather than a few years.”