investors

INSTITUTIONAL INVESTORS BACK AFFORDABLE HOUSING SECTOR

Step Forward Homes is one of a number of affordable housing groups to have attracted long-term investors

*This article on investors originally featured in Property Week Magazine.

Over the past six months, there has been a noticeable increase in the number of institutional investors looking to enter the affordable housing sector.

Step Forward Homes is on the cusp of securing funding from an unnamed backer that it describes as “one of the biggest institutional investors in the property market”. Founded in 2014, it has just opened its 100th home aimed at ex-servicemen and women and emergency workers, and the new investment will enable it to ramp up its output to 1,000 units a year over the next five years, says sales and marketing director Chris Metcalf.

It is easy to see what is in it for the housebuilder but what is driving long-term investors to invest in propositions like Step Forward? Metcalf believes one of the key reasons institutional money is eyeing the sector is that other sources of funding have dried up. “Local authorities are finding it difficult to deliver the social and affordable housing they said they would and housing developers have no interest in developing this type of stock, so there is an opportunity for private finance to deliver those types of homes,” he says.

The sector also provides the type of income long-term investors are interested in, adds Andrew Screen, managing director of TradeRisks, an investment firm specialising in affordable housing. “Institutional funders, REITs and pension and insurance funds are attracted to investment in affordable housing because it provides a long-term, inflation-linked investment to match their investors’ requirements,” he says. Another attraction is that it is currently an under-served sector, says Metcalf. The shortage of affordable homes, particularly for ex-servicemen and women, is acute. One of Step Forward’s homes advertised for rent on an online portal received 120 enquiries a week.

While supply of affordable and traditional social housing is limited, demand has increased as a result of the rise in house prices over the past few years, knocking supply and demand further out of balance and adding further weight to the investment case.

No longer as risky

Such is the demand for affordable housing that it is no longer seen as quite as risky as it once was, adds Screen. In the past, many funds that invested in affordable housing insisted that housing associations or local authorities provided income guarantees or issued long-term index-linked leases. However, this is changing. “There is an increasing trend towards greater investment in affordable housing where it does not have the benefit of a long lease or guarantee with a housing association or local authority,” says Screen.

“This is because the increase in house prices has increased demand for housing that is affordable, therefore reducing the risk of investing in the sector, making it more attractive to investors,” he explains.

Screen says housing associations and local authorities prefer not to provide income guarantees and leases to investors because it allows them to keep liabilities off their balance sheets. For firms like TradeRisks, it can provide a return for investors without placing an obligation on the housing association.

Shamez Alibhai, partner of alternative asset manager Cheyne Capital, says increased private capital in the affordable housing sector is positive but investors must always consider the vulnerable tenants and homeowners who will live in their buildings. “One can’t lose sight of the social focus,” says Alibhai.

“These opportunities should not be seen as an investment strategy for pure financial gain. The real challenge is how to balance a financial return with the social outcomes of the people living in the homes.”

If you’d like to learn more about how Step Forward Homes can help get you on the housing ladder, contact a member of our team today.

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