For-profit providers call on sector to embrace new sources of capital

Section 106 competition

The speakers were joined by Ben Denton, managing director of L&G Affordable Homes, the for-profit provider owned by Legal & General that has grown a pipeline of 3,500 homes, of which 85 per cent are through Section 106.

The panel received a number of questions asking whether the for-profit RPs were providing additionality or simply heating up the Section 106 market.

Mr Orr – who said that ReSI is “not particularly interested in Section 106” – described the competition in that market as “absurd”.

“I think we have to get to a point where we are thinking differently about all of this,” he added, suggesting that a developer should identify their Section 106 partner at the point of trying to obtain planning permission.

Mr Cahill said Sage’s homes are mostly Section 106 agreements with house builders and developers. He conceded that while it may not mean additionality, it is about “accelerating supply” and potentially taking properties for outright sale into the affordable space.

“I think what we do will begin to broaden – but I do think acceleration of supply has a really important role to play, as well as additionality.”

Private equity concerns

Asked about the level of returns expected by equity investors, Mr Denton said L&G’s were in the region of five to 10 per cent.

Mr Alibhai cited the equivalent to an HA’s cost of capital, at between four and six per cent, which was also echoed by Mr Cahill.

Social Housing last week reported that ReSI REIT – which has built up a portfolio through acquisition consisting predominantly of retirement housing, with some shared ownership and temporary housing – is on track to pay five per cent dividends to shareholders, equivalent to £8.6m.

Asked by an audience member whether that sum would have been better reinvested in homes, Mr Orr said: “I don’t think it’s a dichotomy or a binary question.”

“We all have different ways of paying for what we buy. The questions is, ‘Is the cost of that commensurate with the benefit?’.”

He went on to say that “the scale of the housing demand is such that this is all hands to the pump”.

Mr Orr added that the REIT has a clear understanding of what it will be paying shareholders in return for their investment, adding that in the context of the REIT being a long-term holder of homes, “the outcome and impact… is commensurate with bringing [the investment] in”.

Nevertheless, Mr Alibhai warned that the sector “should be worried about private capital”, adding that a quick internet search will show the “havoc wrought” by private equity in Spain, the Netherlands and Scandinavia.

“If you are going to pick the private sector, choose the private sector partner very carefully,” he added.

Mr Alibhai – who previously set up a social property impact fund for hedge fund manager Cheyne Capital – said that Man Group has taken the view that “we have to have external governance of the social impact side” in the form of audits by outside companies.

Man Group has said its strategy involves setting up its own registered provider and working with councils and HAs to build new community housing, rather than buy homes in the Section 106 market.

Mr Orr added that ReSI Housing was registered specifically to provide the quality of services that are assessed externally and within the regulatory framework, while also being able to access grant funding.

He said he was also pleased with the extent to which the focus is on quality when outsourcing management. One of ReSI’s HA partners is Metropolitan Thames Valley, from which it bought some properties in Clapham planned for sale but re-designated to shared ownership.

“The thing I was surprised at is just how rigorous the contracts we have produced are.”

Meanwhile, Mr Cahill said he is impressed by the ability of Sage to deliver at scale, the governance and the focus on customer service and quality.

He added that Sage is targeting 7,300 homes and is set to deliver 2,000 of these in the first two years, at average rents of £133 per week.