Investing for impact in social housing

The Schroder BSC Social Impact Trust was launched in December 2020 to provide investors with unique access to a diversified portfolio of high impact, private market investments within a liquid investment vehicle. It aims to help address some of the UK’s most pressing social issues, and in this article, we take a closer look at one of those challenges.

The high impact social and affordable housing market accounts for 33% of the Social Impact Trust’s portfolio^[1]. It is estimated that more than £250 billion is required to adequately respond to the chronic shortage of social and affordable housing in the UK. At the moment, there is simply not enough supply of good quality social housing to meet the demands of those that need it. This represents a structural undersupply of around 100,000 homes per year.

Attractive financial characteristics

Over the past decade, the amount of private capital investing to respond to this pressing need has steadily increased, most notably from social and affordable housing impact funds. New capital is being attracted by some attractive financial characteristics, which include a positive link to inflation, due to the government’s rent setting regime. Historically, housing benefit has moved in line with inflation, and although rents are not expected to immediately reflect the current surge in prices, we can expect them to rise with inflation over time.

Meanwhile, social and affordable housing assets have shown a very low correlation to other property markets and the broader economy, and they possess strong cash flow characteristics, with rent collection rates typically between 97-99%. The sector has delivered very stable revenues over time, with a high proportion coming from government sources.

As a result of these positive characteristics, the social and affordable housing impact funds market is increasingly seen as an attractive home for institutional capital that is looking for a combination of investment returns and impact.

There are three main segments of the social and affordable housing market:

1. Transitional supported housing: This segment typically utilises existing housing stock, which is then refurbished for short-to-medium term lets to people with significant crisis needs – there is little-to-no development risk in this segment, which has historically tended to yield 4-6% per annum depending on the strategy
   
2. Specialist supported housing: This segment involves some property development, repurposing existing housing stock to provide people with longer-term specialist care and support – the yields here have been historically slightly higher at 5-7% to compensate for the additional risk
   
3. General needs affordable housing: This segment usually involves new build housing stock, to provide homes for people, primarily key workers such as teachers or nurses, that need affordable rents or the option of shared ownership – there are historically lower asset yields available in this segment, typically 3-5%, but it offers the highest potential total return due to the presence of additional development and sales risk
   

Each segment has been exhibiting steady growth in recent years and we look to achieve a sensible exposure to all three, with the aim of delivering a good balance between financial returns and impact.

Our approach to social and affordable housing

The Schroder BSC Social Impact Trust accesses the social and affordable housing market by investing with property funds that either acquire or develop high quality housing assets. These include specialist housing for vulnerable groups, such as the provision of transition accommodation for people who were formerly homeless or fleeing domestic violence, or housing for low income renters currently living in poor quality or insecure accommodation. For the greatest impact, we look for opportunities to address the housing needs of societal groups that have the lowest incomes and are often the most disadvantaged or vulnerable.

Our counterparties include registered providers of social housing, such as housing associations, and charities with long-standing track records, deep expertise in addressing specific issues, and strong local relationships with authorities and beneficiaries. In total, we work with 30 counterparties, all of whom are highly experienced (with an average of 27 years’ experience in social housing or specialist care and support), well resourced (with nearly 900 staff on average) and financially robust (with an average £50 million of net assets).

Source: Schroders BSC Social Impact Trust as at March 2023

Case study: Notting Hill Genesis

A good example of a high quality counterparty in the Schroder BSC Social Impact Trust portfolio is Notting Hill Genesis, who has this year agreed a partnership with social impact property fund manager Resonance to manage almost 600 properties aimed at supporting families in the highest need. Notting Hill Genesis has been providing care, support and shelter for people at risk of homelessness since the 1960s. It operates more than 66,000 houses in London and the southeast of England and has deep experience making a genuine difference to the lives of thousands of vulnerable people.^[2]

It is widely considered to be an excellent operator of social housing assets, achieving very good tenancy feedback and being recognised by its regulator for high standards of governance and viability. Meanwhile, with more than £3bn of net assets, it is an extremely strong organisation financially. These are all qualities that make it a fantastic counterparty to work with, from the perspective of both impact and financial returns.

This demonstrates how high-quality managers that understand the social issue can design funds that attract strong and experienced counter-parties.

Our experience in social property

Big Society Capital’s social property team is led by Gemma Bourne, who has nearly 20 years’ experience in property and construction, and has always focused on the environmental and social impact of the industry. The team also consists of two investment directors (Drew Richie and Amelie Busch) and two investment managers (Marie-Alix Prat and Bridget Zhang) who are collectively responsible for all initial due diligence and ongoing maintenance of the trust’s social and affordable housing investments.

The team has a wealth of direct experience in construction, development, impact and investment, and is supported by a broader team of almost a hundred professionals, offering specialist expertise in impact, public affairs and other areas of commercial property.

The team are passionate about working with partners who share a rigorous approach to assessing impact risks and opportunities, in addition to well-established reporting methods that can help provide transparency and accountability at every stage of the investment process.

Summary

The UK social and affordable housing market is well-established, but it is becoming increasingly recognised for the uniquely attractive characteristics that it can offer investors. These include the prospect of uncorrelated, reliable and inflation-linked returns, along with high impact potential in the parts of society that need it most.

With a highly skilled and experienced social housing management team, the Schroder Big Society Social Impact Trust invests around a third of its assets in this attractive market niche. As a liquid investment trust, it represents a democratic way for anyone to access an impactful investment opportunity which is normally seen as the exclusive domain of institutional investors.
Click here to find out more about the Schroder BSC Social Impact Trust >

[1] - Source: Schroders BSC Social Impact Trust Interim report as at 31 December 2022
[2] - Source: Notting Hill Genesis as at 6 April 2023

Key risks that are specific to the company

There can be no guarantee that the Company will achieve its investment objective or that investors will get back the amount of their original investment. The Company has limited operating history and investors have a limited basis on which to evaluate the Company's ability to achieve its investment objective.

The Company has no employees and is reliant on the performance of third party service providers. Failure by the AIFM, the Portfolio Manager or any other third party service provider to perform in accordance with the terms of its appointment could have a material detrimental impact on the operation of the Company.

The financial performance of the Company will depend upon the financial performance of the underlying portfolio. The Company's portfolio will include Social Impact Investments over which the Company and Portfolio Manager have no control. In particular, investments in Impact Funds and certain Co-Investments will be managed by third party managers. The Company's performance and returns to Shareholders will depend on the performance of those Social Impact Investments and their managers.

The Company's objective is to deliver measurable positive social impact as well as long term capital growth and income and these dual aims will generally be given equal weighting. Social impact is the improvement of the life outcomes of beneficiaries in a specific target group or groups. There is no universally accepted definition of 'impact', an assessment of which requires value judgments to be made. The Company's impact focus may mean that the financial returns to Shareholders are lower than those which might be achieved by other investment products.

The Company depends on the diligence, skill, judgement and business contacts of the Portfolio Manager's investment professionals and the information and deal flow they generate, especially given the specialist nature of social impact investing. The departure of some or all of the Portfolio Manager's investment professionals could prevent the Company from achieving its investment objective.

The Company will make investments where the Company's commitment is called over time. Due to the nature of such investments, in the normal course of its activities the Company expects to have outstanding commitments in respect of Social Impact Investments that may be substantial relative to the Company's assets. The Company's ability to meet these commitments, when called, is dependent upon the Company having sufficient cash or liquid assets at the time, the receipt of cash distributions in respect of Investments (the timing and amount of which can be unpredictable) and the availability of the Company's borrowing facilities, if any.

The Company's investments may be illiquid and a sale may require the consent of other interested parties. Such investments may therefore be difficult to realise and to value. Such realisations may involve significant time and cost and/or result in realisations at levels below the value of such investments estimated by the Company.

Any change in the Company's tax status or in taxation legislation or practice generally could adversely affect the value of the investments held by the Company, or the Company's ability to provide returns to Shareholders, or alter the post-tax returns to Shareholders.

Important information

This article is a marketing communication.

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rates may cause the value of investments to fall as well as rise.

For help in understanding any terms used, please visit address https://www.schroders.com/en/insights/invest-iq/investiq/education-hub/glossary/

Any reference to sectors/countries/stocks/securities are for illustrative purposes only and not a recommendation to buy or sell any financial instrument/securities or adopt any investment strategy.

The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions.

Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy.

We recommend you seek financial advice from an Independent Adviser before making an investment decision. If you don't already have an Adviser, you can find one at www.unbiased.co.uk or www.vouchedfor.co.uk.Before investing in an Investment Trust, refer to the prospectus, the latest Key Information Document (KID) and Key Features Document (KFD) at www.schroders.co.uk/investor or on request.

Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registration No 4191730 England. Authorised and regulated by the Financial Conduct Authority.