Profit for all?

Making waves

At the start of the year, US private equity giant Blackstone made waves by taking a 90 per cent stake in Sage Housing Association. Legal & General (L&G) has also announced plans to launch a housing association with ambitions to build 3,000 homes a year, making it potentially the biggest developer in the sector.

Meanwhile, British Land, best known for its commercial developments, launched its own registered provider – Seymour Street Homes – in 2017. Although it currently owns only 11 homes on a single site in Westminster, it is already eyeing more opportunities linked to its parent company’s existing schemes.

In May the NHF caused a minor stir by writing to Sage to warn it about the use of the term ‘housing association’. Although the offending word was removed, with the company now trading under the name Sage Housing, the incident has put the spotlight on the for-profit part of the sector.

For some, the concern is less about Sage’s name and more the level of returns they believe it is seeking. It is understood that Blackstone’s fund has a hurdle rate – the point at which it receives a bonus from its investors – of eight per cent. Such returns are significantly higher than those typically available to affordable housing investors.

Secondly, there are more immediate fears that Sage, with the financial might of a major private equity house behind it, could outbid housing associations on Section 106 properties – the homes affordable housing developers are required to provide as a condition of planning consent. In an exclusive interview with Social Housing, Sage said it has won fewer than one in five of the properties it has bid on and built up its portfolio of some 6,000 homes, suggesting that it is not exactly pricing competitors out of the market.

Opportunity or threat?

Some believe the concern that surrounds Sage and its for-profit peers is unmerited.

“Social Housing has openly questioned the capacity of the housing association sector to meet the [social] housing needs of England on its own,” says Andrew Cowan, a partner and head of social housing at Devonshires, which acted for Sage on Blackstone’s investment. “So in the absence of increased grant rates, if reputable institutions are prepared to invest new equity into the sector and sign up to the regulatory standards, then on a macro analysis, this should be helpful in achieving that target.”

Joe Cook, chief executive of Sage, says the growth of for-profits “represents a sea change in the way the sector is funded”. He says: “I don’t think anyone can see a bad thing in potentially billions of pounds coming into the sector.

“We’re registered with the Regulator of Social Housing like every other provider, and as long as we operate in a proper manner and are offering rent capping and nominations to local authorities on terms consistent with the sector, it opens up the sector for a lot of new investment, and to me that is good.”

“L&G might want its profits but how many [other] people are there putting equity into the sector?” -
Housing consultant

Emma Cariaga, head of operations at British Land and director of Seymour Street Homes, agrees that new entrants should be welcomed by a sector that has spent years canvassing institutional investors.

“I don’t see it as a threat,” she explains. “Part of the challenge for the sector is to make itself relevant to the real estate market.

“Such is the housing crisis and the need for more homes of any kind, if there are professional, long-term players entering the sector with good intentions that should be supported.”

Like Sage, Seymour Street will look to own and manage homes built under Section 106 agreements. However, Seymour Street will initially only take on Section 106 homes delivered on British Land’s own developments. That said, this could deliver significant numbers. There are 3,000 homes in the outline planning permission for its Canada Water redevelopment in south London, with the first phase likely to include 35 per cent affordable housing. Ms Cariaga says there could also be “significant numbers” on schemes in Ealing and Bromley-by-Bow.

While Seymour Street is currently funded entirely by its parent, Ms Cariaga admits that the decision to register as a for-profit was driven in part by the potential to attract outside investment.

“We looked at the not-for-profit option,” she says. “With for-profits there is the flexibility of funding models. It gives us capability to do more in future.”

Great expectations

But there are legitimate questions as to whether new investors in the social and affordable housing market will achieve some of the returns that are being bandied about.

“It’s uncertain whether a Blackstone or an L&G can generate enough profit,” says one housing consultant who did not wish to be named. The consultant compares the situation with the struggles some real estate investment trusts (REITs) have had in attracting investors.

“I think that some of the people looking to invest money in this space have been unrealistic about some of the risks they have taken on,” continues the consultant.

Others see the hunt for profit as relatively benign, so long as it brings more investment into the sector.

As one advisor comments: “You could say their aspirations for returns may be unrealistic, but if they don’t make those returns then that’s their problem.

“L&G might want its profits but how many [other] people are there putting equity into the sector?”

The NHF disagrees that additional equity is necessarily something to be welcomed at any price.

“We have some concerns around some of the institutional-grade investors as so far their primary means of acquiring homes is through Section 106, so we would question the additionality of that,” argues Adam Morton, policy leader at the NHF.

“Equally, Section 106 is an important public policy tool, designed to provide social housing and wider community benefits.

“We’d question whether using Section 106 to generate profit and shareholder return is a desirable public policy outcome.”