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Social housing – A large scale investment opportunity for pension funds?

27/06/2012 10:25

We’re aware that the pension industry is taking increasing notice of new, non-traditional investment opportunities which can potentially offer highly attractive assets.

One of these new opportunities takes the form of social housing, which – although still developing as an asset class – is expected to be picked up within the pension community over the next couple of years.

The opportunity currently available for investors

The investment opportunity presented by social housing consists of providing long-dated, inflation linked funding to housing associations. The funding mix for this sector is changing. Funding was traditionally provided by a combination of government grants and long-term bank borrowing.  However, cuts in government spending and a lack of long term bank funding means there is a ‘funding gap’.

Housing associations (of which there are 1,700 in the UK providing approximately 2.5 million affordable homes) are now turning to alternative sources of finance to provide the estimated £15 billion to fund housing development and regeneration projects up until 2015. A sustainable solution is needed now and beyond 2015 and institutional investment can provide the solution.

So why does affordable housing provide a solid investment opportunity for pension funds?

Investment in social housing can help pension schemes to achieve full funding with a minimal level of risk. It provides a very beneficial opportunity in this way, as:

  • Pension schemes can gain access to index-linked cash flows – which is attractive from a liability-hedging perspective;
  • Social housing offers significantly higher yields than gilts whilst also remaining a secure investment – as houses themselves serve as collateral  and approximately 60% of the rental income is underpinned by local government agencies;
  • Investing in social housing projects can also lead to participation in socially responsible investment (SRI), which delivers robust financial returns and positive social benefits.

The challenges currently facing investors

There are, however, a number of challenges that pioneering investors in social housing are currently facing. With this funding opportunity being so new, pension scheme trustees are still unfamiliar with them, and there is currently poor accessibility into the social housing sector and other non-traditional investment opportunities.

Unlocking innovative funding opportunities is at the heart of what we do

But no matter how new these opportunities are, we at Carlton & Co are seeking to unlock them to help this important sector acquire the funding it needs. Due to the current challenges faced by investors, very few fund managers offer social housing as an investment opportunity; but we believe that pension funds can provide a key solution for housing associations.

There are three primary models of investment in social housing:

  • Long-dated and index-linked debt;
  • Development partnerships (which offer a combination of rental yield, development profit and capital growth and can generate higher total returns);
  • Sale and leaseback agreements, which involve acquiring a portfolio of existing properties and leasing them back to housing associations.

As pension schemes are seriously beginning to take notice of the social housing sector’s attractive assets and robust income streams, new investment products and structures are being developed to ensure that they can increase their allocation to these assets in the future. Carlton & Co are working with a range of stakeholders – including pension funds, fund managers, housing associations and local authorities – to create funding strategies and investment opportunities that will minimise risk and maximise outputs for all stakeholders.






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