Impact real estate is on the radar of some local authority and other funds, including the London Borough of Newham Pension Scheme. What should investors know about this type of investment? 

 

The UK is suffering from a severe shortage of social housing, with government grants having shrunk dramatically since 2010. Some say that this presents an opportunity for institutional investors, arguing that returns can be made from such properties. 

 

Nareser Osei, chair of the London Borough of Newham Pension Scheme, said there are long waiting lists for social housing in her borough and across the UK. In addition, the pandemic has put into relief the fact that many key workers find it hard to afford housing, and there is a need “to target that”, she said, speaking at an online event on Wednesday, organised by consultancy Barnett Waddingham. 

 

The fund is keen to invest in the local area. “We saw it as an opportunity to produce housing at much greater speed than the local authority,” she said, while ensuring the fund wouldn’t be duplicating any work by the local authority. 

 

However, “whilst going through the selection process we were always clear that if it wasn’t viable in Newham, it wouldn’t stop us from making the decision,” she stressed, saying the fiduciary responsibility to invest for members should always override the desire to support the local area. 

 

“If looking at affordable housing don’t just look at your local constituency; that’s the dream, but if that’s not possible, it shouldn’t stop you from going ahead elsewhere to make returns for members,” she added. 

 

The impact of such an investment could be measured not only in whether waiting lists are going down but also by looking at the impact the quality of the accommodation is having, she suggested, saying the physical and mental health benefits this brings could be reflected in lower demand for these services. “Housing has been cited as a key driver of poor mental health,” she observed. 

 

 

“The opportunity set is enormous” in the UK given that 1m households are on waiting lists for social housing and there are other needs like housing for people needing care, said Stuart Fiertz, co-founder and president of Cheyne Capital. 

 

Fiertz pointed out that the UK lags far behind countries like Germany or the US when it comes to institutional ownership of residential property. He said the high proportion of non-institutional ownership leads to poor quality housing and poor practice in dealing with tenants, whereas institutional ownership could offer professional management and result in a better outcome from a society point of view. "One can match the needs of institutional investors with the needs of society,” he claimed. 

 

Fiertz criticised the quality of housing in the UK saying that “the percentage of rental stock available that doesn’t meet decent [health and safety standards] is absolutely shocking". 

 

He did not address how the UK’s housing stock could be updated – the oldest in Europe and much of it in the form of houses rather than flats – or how institutional ownership would address conflicts among property management and construction firms to avoid tragedies like Grenfell Tower. It is also unclear how investors could avoid a 'race to refurbishment' to fill allocation targets as seen in Switzerland, which has a negative impact on poorer tenants.

 

He said for investors, “the risk reward is very strong in the context of today’s alternatives”, saying his firm targets a 5% real dividend paid annually, with a total return potential of 6-8%. 

 

Investments like impact real estate are also “very attractive in making transition from LDI to CDI where the dividend is supported... by long-term leases”, he said, as well as by the chronic undersupply of affordable housing.