Adrian D’Enrico, fund manager at Edmond de Rothschild REIM, explains how working with investment managers to deliver appropriate affordable housing solutions can be a win for all.
The UK housing crisis continues to worsen. Over 140,000 children don’t sleep in a permanent bed each night. Tens of thousands of families are living in temporary accommodation – including hostels, B&Bs and budget hotels – for months at a time.
Housing insecurity has material impacts on education, wellness and employment. It also places a material burden on limited public finances – one in four councils in the UK are spending more than 5% of their budgets on temporary accommodation. Twenty are spending over 10% and one is spending almost half1. The annual temporary accommodation bill across England reached £1.7bn in 20222.
Imagine if that money could be diverted from plugging the gap to delivering a solution? It could build almost 10,000 homes a year and free up resources from constrained local authority budgets for service improvements, delivering a cascade of positive outcomes.
Public bodies are acutely aware of the issue, of course, dealing with its challenges first-hand – but increasingly the public also want action. Housing is always a political topic but no more so than in the current UK general election cycle. Manifestos are framing housing as a key issue for the country and its voters.
However, whilst proposals for improving the supply response are being touted, including reforms to the planning system (applications and approvals are at almost 20-year lows3), any changes will take time to deliver results and require investment beyond public budgets.
Recent estimates suggest c.£205bn4 is needed to address the current shortage in England alone, where 1.3 million households are on waiting lists. Other studies put that number even higher, at 2.5 million5. At that level and considering population growth and household formation rates, we would need 550,000 additional homes each year over the next decade to resolve the shortage.
Both leading political parties have annual targets equating to 300,000 new homes – whilst ambitious (that level hasn’t been achieved since the 1970s), at that rate the gap would take decades to close. Whichever way you look at, the challenge is vast and will require significant collaboration, investment and action.
That is not to say that efforts are not already being made. Private investment has been increasing, with the sector growing to 9% of the UK MSCI index in 2023. Investors see the benefit of diversified income streams (multiple residents, often with financial support, particularly in affordable tenures) and one which offers implicit or explicit inflation-linked rental income. Investing in affordable housing can also deliver on social impact and broader ESG ambitions.
Local Government Pension Schemes (LGPS) have already taken up the challenge. Encouraged by the government to allocate 5% of their assets under management to impactful strategies delivering solutions for ‘local’ areas, many have chosen affordable housing to help achieve this goal. That 5% amounts to £16bn of investment, more than matching the public funds earmarked for levelling up6. But if the scale of the challenge is materially larger than the LGPS’ available resources, why should they continue to lead the charge?
LGPS have played a vital role in kick-starting the supply response, being uniquely placed to understand local pressures and deliver new homes of the right tenures where they are most needed. Allocations, to date, have varied in their focus – direct strategies, co-investment alongside third-party capital or via third-party managed funds. Investment into affordable housing has already increased materially, from virtually zero in 2023 to £5bn in 20227. Those ‘first movers’ have, in large part, achieved their desired outcomes – more homes and demonstrable, measurable social impact.
But further support is needed – and for those willing to commit capital there are three attractive benefits: income, inflation-alignment and impact.
Of course, where there is reward, there is risk. Whilst the investment case is compelling, hurdles exist which, despite increasing evidence of investment success, continue to inhibit allocations. For those seeking ‘local’ impact, nationwide strategies might not deliver sufficiently targeted solutions. Pooling processes are also underway, with progress in offering solutions that meet LGPS aspirations varying. There are also considerations of fiduciary responsibilities (can investments deliver sufficiently attractive risk-adjusted returns?) and reputational risk (are governance policies and procedures sufficient to avoid damaging outcomes from a well-intentioned allocation?).
We believe the arguments ‘for’ can outweigh those against. Experienced managers with aligned long-term investment horizons and impact-led ambitions can work together with LGPS to deliver solutions, both nationwide or more locally. The investment universe is so large that bespoke strategies can be created – delivering targeted outcomes and robust risk-adjusted returns to meet fiduciary obligations. The track record of performance and delivery is growing – and is increasingly compelling.
Five-year total returns and volatility
Returns have, in the face of recent societal, geopolitical and economic turbulence, been as resilient as one might expect. As a defensive diversifier, the sector has clear appeal, delivering dependable long-term financial returns and positive social impact. Working with investment managers to deliver appropriate solutions can be a win for LGPS, public finances and for the UK population as a whole.
1 Inside Housing, Generation Rent, 5 June 2024
2 Inside Housing, October 2023
3 Gov.uk Live Table P120, 2024
4 JLL, Counting the Cost, 2024
5 Bidwells, The Productivity Engine, 2024
6 Impact Investing Institute, 2021
7 Better Society Capital, Market Data to end-2022
