Invest in affordable housing – a solid return with a social impact

In his 1991 book Parliament of Whores, the political satirist P. J. O’Rourke showed that the US government spent $98bn on poverty relief each year– twice as much as the aggregate amount ($50bn) by which 32.5 million Americans fell below the poverty line. Additional state and local spending of $28bn meant the average poor family should have received enough to raise them comfortably above the poverty line. Yet all that money failed to solve the problem.

The US hasn’t got better at poverty alleviation in the subsequent 30 years, and the UK government is no more efficient. There are 288,000 homeless households in the UK yet local authorities’ policy is to accommodate them in expensive and often sub-standard bed-and-breakfast accommodation. Perhaps the private and charitable sectors can do a better job for less cost?

A solid yield from Home Reit

This is the thesis of two funds listed in late 2020, Home Reit (LSE: HOME) and Schroders BSC Social Impact Trust (LSE: SBSI). Home, managed by Alvarium, raised £240m to invest in “acquiring high-quality properties across the UK let or pre-let to robust tenants on long leases (typically 20 to 30 years), with index-linked or fixed rental uplifts”. These tenants are registered charities, housing associations, or community interest firms but Home is a passive landlord and so it is not responsible for providing care operations for the occupants.

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Within six months, £235m was invested in 572 properties managed by 16 tenant partners providing 3,019 beds for the homeless. The initial rental yield is 5.8%, paid for by the Department for Work and Pensions via local authorities. Index-linked rents average just £86 per week, compared with an average £225 per week for those in temporary bed-and-breakfast accommodation.

Home has borrowed £120m for 12 years at a fixed cost of 2.07% to invest in further properties. Another equity issue is likely before long. Even without the benefit of leverage, net asset value (NAV) increased by 4.9% to 102.8p in its first six months, ahead of its target return of 7.5% per year. The shares at 114.5p trade at an 11.3% premium to NAV (as of end February), but are better value than they first look. With a prospective yield of 4.6%, they provide investors with a healthy return and generate a positive social impact.

A less compelling choice

The Schroders trust offered more meagre returns, so raised only £75m. It calls on the expertise of Big Society Capital (BSC), founded ten years ago by Ronald Cohen and four high-street banks, to help it invest in a mixture of social enterprise debt, high-impact housing and social outcomes contracts.

The target return is only 2% over inflation, which, given the Bank of England’s 2% inflation target, means 4%. The yield when fully invested will be just 1%-2%. The gross return is expected to be near to 6%, but BSC and Schroders will each get a management fee of 0.4% and the underlying managers’ fees will be about 1%. It seems when it comes to good causes investors are expected to tighten their belts more than managers.

The trust announced that at the end of April it was 60% invested and 90% committed. The NAV at the end of 2020 was up to 99.9p, but it is hard to see it raising significant further equity or sustaining additional debt without higher than target returns. The shares at 103.5p trade at a premium to NAV, which doesn’t look justified. The social impact is commendable, but it may be naive to believe that it will protect it from public-sector hostility to the private and charitable sectors if the political mood changes. Investors can achieve better social impact and better returns by combining conventional investment with tax-deductible philanthropy. Home shows that investors don’t need to sacrifice returns for social impact. Perhaps SBSI will get the message.