Andrew Davey, head of affordable housing, CBRE Investment Management on why a place-based approach to affordable housing is crucial to ensuring that we build the right type of housing, in the right places.
Aspirations for place-based investing have increasingly emerged in LGPS circles, as pension committees endeavour to marry up investment opportunities that can deliver attractive risk adjusted returns as well as delivering positive local impact. Directing private impact capital towards local objectives has been shown to be an effective way to raise living standards, provide economic opportunity, and build thriving, inclusive communities.1
Investments made with the intention to yield appropriate risk-adjusted financial returns as well as positive local impact, with a focus on addressing the needs of specific places to enhance local economic resilience, prosperity and sustainable development
– Defining place-based impact investing2
Real estate is a well-established element of most LGPS portfolios, offering predictable income returns which generally provide a degree of inflation hedging. Diversifying traditional real estate allocations to include affordable housing, is a natural progression that could help LGPS investors meet their dual objectives of fiduciary responsibility and creating positive impact.
As with any real estate investment, understanding the local demographics of a town or region is critical to underwriting. In selecting appropriate investment opportunities within the residential sector, we consider the need for housing nationwide along with the specific financial and impact dynamics within each local submarket.
Understanding nationwide needs
It is tempting to take a relatively broad view of UK residential investment opportunities; however the residential sector is highly nuanced, with wide variations in the types of housing needed. This in turn results in a broad range of risk and return opportunities available to investors across the different housing tenures and models.
The scale of the investment opportunity within each housing tenure is a function of the underlying demand pool. A larger tenant or owner pool not only indicates greater occupier demand from a financial perspective but also greater potential impact from a social perspective. Mapping the UK residential universe can illustrate how an investor approaching the sector can begin to think about portfolio positioning.
Proprietary analysis from CBRE Investment Management (CBRE IM) shows that the bulk of tenant demand sits in the ‘Regulated Rent’ and ‘Local Affordable Rent’ segments. Indeed, these two combined comprise over half of the total rental pool across the UK.
There are 28 million households in the UK, of which 9.5 million currently rent their home. The ‘Regulated Rent’ sector which is also referred to as ‘Social Housing’ provides for 4.5 million households, with a further 1.3m households on waiting lists.
By comparison, with average market rent in the Private Rented Sector (PRS) now close to £1,300 per month. A household would need to earn £52,000 gross income a year for this to be affordable, as a result 55% of renters in the UK cannot afford to rent at market rent levels. The demand pool for Regulated Rent and Local Affordable rented properties is likely to grow larger as incomes fail to keep up with rental growth in the PRS sector.
Understanding local needs
The analysis above identifies nationwide needs, however implementing a local, place-based strategy requires analysis that goes deeper into the specific needs of a defined local area. A simple copy and paste of a nationwide top-down strategy is unlikely to provide the optimal local balance between financial return and impact.
It may seem obvious, but targeting the specific needs of a local area is required to optimise both impact and financial performance. This can only be done by going back to basics by focusing on location, demographics and the provision of the correct product to match local consumer needs.
Recognising this, analysis can be conducted into specific local purchase and rental affordability characteristics as well as the nature of demand. As an example, a longer than average local waiting list may provide evidence that the most appropriate housing provision is via the implementation of regulated rented accommodation.
Once local needs have been identified, the method of implementation is pivotal to success. The execution of a local place-based investment strategy should always ensure that fiduciary duties are front of mind. At CBRE IM, we believe that this is achieved by leveraging a robust, independent, governance process. On behalf of our LGPS investors, we have the ability to source local placed-based investment opportunities within our pooled affordable housing fund alongside specific local side cars. By combining investment in an established pooled fund vehicle alongside a dedicated local side car, investors can overlay the rigour of CBRE IM governance and investment process to ensure that financial integrity is maintained, gain exposure to an established and diversified portfolio of investments in addition to increasing local investment, and ensure any perception of political influence or conflicts of interests are removed.
Conclusions
Given the structural undersupply that has persisted for decades, there is no shortage of investment opportunities and the case for investment in affordable housing can be made across the United Kingdom. However, different locations have different acute needs. Only a locally focussed approach can adequately meet these needs and ensure the appropriate financial and impact performance.
Implementing a place-based investment strategy can present issues for LGPS investors in the form of conflicts of interest or political objectives overriding fiduciary duties. To overcome these CBRE IM can source opportunities on behalf of LGPS investors to deliver place-based investments whilst maintaining independent governance and maintenance of fiduciary duty, ensuring that a truly local approach leads to both local impact and attractive risk-adjusted returns for investors.
1 Place-based impact investing | Impact Investing Institute
2 The Good Economy
