Housing fund plans £1bn equity investment into social housing

Equity drive

The AAIM ambition is to become “the exemplar RP investment vehicle for pension funds seeking long-term stable returns from equity investments in social housing assets”.

It is the latest in a line of funding vehicles launched with differing structures in recent years but with the shared goal of placing equity into the sector, including PfP Capital, Legal & General and Blackstone, Cheyne Capital, CBRE Global Investors and Man Group.

Listed real estate investment trusts (REITs) Civitas Social Housing and Triple Point Social Housing have seen the most activity, having focused predominantly on specialist supported housing and come under intense regulatory scrutiny.

ReSi REIT – set up by Traderisks in 2017 and now part of Gresham House – has focused on shared ownership, along with retirement housing, and is also primed to launch a private fund to attract investment from local government and corporate pension funds.

M&G Real Estate revealed to Social Housing last year that it was looking at launching an equity offer and for-profit RP to forward-fund new build shared ownership primarily, alongside potential acquisitions.

Major associations L&Q and Hyde also told Social Housing in January that they would be looking at equity solutions amid the increasing challenge of investing in existing homes and delivering new build.

Phil Jenkins, founding partner and managing director at Centrus, said there had been a stringent, 18-month process with the regulator, probably as a result of “lessons learned” in the past with other new entrants. 

“We’ve seen the start of equity coming in to more non-mainstream housing assets, with a flow of capital through public REITs into the supported living end of the sector.

“But what really hasn’t happened on the same scale is equity capital flowing into general needs and shared ownership.”

He said part of the reason for that was a mismatch between the returns required by the listed funds, compared with those available from core social housing.

AAIM intends to offer similar returns to what institutional investors would expect from core, low-risk infrastructure equity and below the five per cent dividend yields promised by retail funds. 

The fund is in discussions with “a number of investors” as it targets a first close in the range of £100m-250m, as part of an ambition to reach £1bn over three years.

Considering the current disruption caused by COVID-19, the team are looking to close the first fund “this calendar year”.

Fund structure

AAIM Housing RP has been registered as a for-profit RP so it can hold social housing assets for the long term and be eligible to keep historic grant funding.

It will sit beneath a holding company, which is where the investment will flow into via a series of funds. 

The immediate investment vehicle is an English Limited Partnership, a common structure in real estate fund management.

The investor returns are “not explicitly index-linked”, albeit there is the expectation that returns from residential property will tend to grow with inflation.

Jon Clarke, managing director at Centrus, likened the approach to returns expected by wholesale institutional investors in an infrastructure equity fund, rather than those sought by retail investors in listed funds.

Mr Curtis added: “We have been working hand in hand with housing associations on what really makes sense for them.”

He said one particular area will be a lower fee structure recognising it is a “low-return industry”, adding the costs to providers will be at a “meaningful discount” to the fees of one per cent-plus seen elsewhere in the market.

Mr Curtis – who had also been initially looking at launching a REIT structure – added that that the private markets are “less fickle” than the public markets, as seen with the experiences of publicly-listed REITs.

Centrus is sponsoring the set-up of the entity and will remain a shareholder, but it will be run independently.

Mr Curtis added: “The whole ethos here is that we believe there’s a good place for responsible capitalism to bring money into this sector.”

That includes promoting the ESG credentials of the sector, enabling pension funds and other investors to meet their own ESG and social impact criteria.

That comes as the sector moves more into ESG and sustainability-linked financial arrangements, with Centrus now also involved in a new ESG standard for the sector.

Flexible approach

Mr Jenkins said while AAIM will primarily hold assets, it could be open to housing associations buying stakes or working in a joint venture.

He said: “We’re taking a very flexible approach as to how we interact with housing associations, including differentiating between footprint disposals where an association does not want to manage the stock, or where they may want to retain management if in a core location.”

Mr Jenkins said the acquisition strategy will focus primarily on associations that have spent “the past several years pushing and gearing businesses up and seeing credit ratings diminishing over that period”.

“The approach we’re looking to take is very much a partnership approach with registered providers, not competing with them or going for the same assets. It’s about working with large, developing housing associations to calibrate business plans, while providing alternatives sources of capital.”

There could also be some Section 106 acquisitions as part of a wider package, but this is not the primary focus for the fund.

The team said they had been having in-depth discussions with housing associations over the past year, including going into a granular level of work on portfolios.

Mr Jenkins added: “We’ll continue with potential sellers of stock during that process with a view to completing on transactions once we have got the funds in.”

Mr Exford – whose other roles have included being a board member on The Housing Finance Corporation and consultant for CBRE – said the AAIM non-executive is made up of people with “a deep-rooted commitment to social housing and extensive practical experience”.

“Our business model introduces an innovative approach to the financing of new affordable housing and is intended to support the delivery of new homes by mainstream housing associations, rather than compete with them for new supply.”