Social housing highlights mixed motives of impact investing
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In 1969, Beau and Emma moved with their five children from a shack without running water into a modern concrete-block home in rural Sumter County, Georgia, in the south of the US. Their new home, part of a pioneering mixed-race community founded by Baptist ministers, was the start of a scheme in which would-be homeowners wielded tools side by side with volunteers to build new houses, for no profit.
It was also the start of a global institution, Habitat for Humanity International, which now operates in 70 countries. Its mission remains to form partnerships with people in need of better homes and build them.
But where Habitat began with shovels and plumbing, parts of the organisation are now creating financial products. The group’s New York arm is establishing a community development financial institution to lend investors’ money to housing projects in the city; its set-up costs have been financed by Deutsche Bank.
If the scheme works as Karen Haycox, Habitat’s New York chief executive, hopes, it will enable the group to “reach more homeowners than we could ever touch directly” while offering third-party investors a financial return. “The origins of Habitat for Humanity are very humble — a volunteer mob with a one-house-at-a-time approach,” she says. “But the affordable housing community is becoming much more sophisticated.”
The forces behind Habitat’s latest move are twofold. On one hand, housing costs around the world are increasing, and the need for affordable homes, especially in cities, is becoming more pressing as populations grow and urbanise. In New York, the number of households on low or very low incomes has reached almost 1m — more than double the number of homes set aside to cater for this group. Last year almost 130,000 people slept in municipal homeless shelters, a rise of 85 per cent from a decade ago.
On the other hand, investors are plagued by conscience. Since the term “impact investing” was coined a decade ago, the sector has grown substantially, according to the non-profit Global Impact Investing Network. For impact investors that belong to the GIIN, housing makes up on average 8 per cent of assets under management, says Amit Bouri, chief executive.
Housing projects with a social mission stretch back hundreds of years, but the rise of impact investment as a sector has drawn in institutional capital, including from pension funds, family offices and faith-based institutions. At the same time, wealthy individuals are often attracted to the sector after seeing housing need in person, says Beth Bafford, vice-president of syndications and strategy at Calvert Impact Capital, a Maryland-based non-profit investment firm. “There is certainly interest from investors in the places with the greatest affordability shortages,” she says. “We get investor calls all the time — from San Francisco, Denver, Austin, Washington DC — saying, ‘How can I invest to create more affordable housing in my city?’”
The term impact investment has been a mixed blessing, she says. “It has led to a spike in interest from investors of all stripes, but it has created a lot of confusion over what exactly it means, and who is policing or creating parameters around what counts as an impact investment or what doesn’t.”
One question is how impact is measured. This is something the GIIN is seeking to standardise. Investors may assume that with affordable housing in short supply, adding more is obviously beneficial, but for the GIIN this is just a starting point. Its guide to impact in the field offers options such as cutting homelessness, reducing the number of people forced to live in abusive households, ensuring people have more cash left after housing payments, and improving housing stability.
Other impacts can be more self-serving: investing in the sector can help institutions in the US access low-income housing tax credits and other federal schemes that benefit those investing in low-cost homes.
In financial terms, many impact investors expect a market-rate return, but about one-third are prepared to compromise financially for social returns, says Bouri. According to a small survey of funds owning rented accommodation, he adds, impact investments can generate a greater return than other housing assets: where the benchmark for rented “multi-family” apartment buildings is an 11.4 per cent internal rate of return, five impact investment funds in the sector generate an average IRR of 17.2 per cent, he says.
Such funds hold income-generating portfolios of housing much as mainstream corporate landlords do. But another focus for housing investors is lending, especially to sectors of the market where banks do not tend to venture, says Bafford. Currently, Calvert is seeking to syndicate a $10m loan to Chicanos Por La Causa, an organisation that supports Latino and low-income communities in Arizona, Nevada and New Mexico. A non-profit that runs a series of profit-making divisions, CPLC owns and manages more than 2,200 homes, and is seeking money to expand.
The unsecured 60-month loan, with an interest rate of 320 basis points above the five-year Treasury rate, has few conditions on its use, enabling CPLC to leap on affordable housebuilding opportunities that would otherwise quickly be bought by commercial developers, said David Adame, chief executive. He says that although the loan is “a little more expensive than some of our other money”, it will fill an important gap in CPLC’s financing; it would be difficult for the group to access a similar sum either in grants from foundations or as a bank loan.
Bafford says such loans, when used at the early stages of property schemes, often allow affordable housing developers to access commercial finance later when a building can be offered as security. Bafford calls this type of lending “financial engineering for good, innovative financing so that you are reaching into markets that are otherwise neglected”. There is a particular need for “patient and flexible” capital, sometimes underpinned by institutional guarantees, that is prepared to invest in low-income communities, she adds.
Impact investing may at times be closely related to the business of the investor. In one unusual scheme, in Phoenix, Arizona, CPLC owns homes near a hospital that are financed by UnitedHealthcare, an insurer. A severely ill child from an impoverished Navajo family, who had been travelling 300 miles to hospital, was able to move into one of the apartments with her family, saving the insurer hundreds of thousands of dollars in costs — while being better for the child’s health. “They are able to sleep in their own beds more often,” said Adame.
There are risks to this type of investing, not least the cyclicality of housing markets. The variation in ways of measuring impact is also a concern: Kevin Starr, managing director of the Mulago Foundation, which supports social entrepreneurs in the developing world, says impact investors can end up supporting communities that are wealthier than their original targets to keep investments profitable.
Investors must adapt to different countries; impact investment into affordable housing in the UK has yet to reach the scale and sophistication of US projects.
Investors may also find themselves swimming against the tide. In the US, cuts to corporate tax mean the government tax credit scheme is worth less to investors. Sudden policy changes, such as housing benefit cuts in the UK, can alter the economics of a scheme.
But, according to Bafford, there is one constant in affordable housing: demand. Her investments so far have performed well, financially and on the level of impact. “But, given the scale of the problem, we only wish they could do more, more quickly,” she adds.
London’s financiers hedge their bets
Hedge funds and affordable housing might seem an unlikely combination. But in the commuter town of Luton, north of London, the hedge fund Cheyne Capital has funded 80 new homes that are now rented out at below-market rates.
Cheyne’s Social Property Impact fund, launched in 2014, raised £240m for investment in UK affordable homes. Cheyne will use debt to increase its investment to £700m in the sector, at a rate of about £200m a year, mainly through joint ventures.
Shamez Alibhai, portfolio manager, says the fund aims for “both a financial and social return. I don’t believe there is a trade-off [between the two] if you have long enough horizons.”
For-profit social housing providers were permitted in the UK for the first time under 2008 legislation, but new providers have been slow to come forward. Cheyne is one of a handful to emerge in recent years, as affordable housing need grew more acute, while local councils and housing associations have struggled with funding cuts.
The insurer Legal & General is also dipping its toe into affordable housing, using cash from its balance sheet, while Bridges Fund Management, an impact specialist, is building a UK portfolio.
Other for-profit initiatives have been more contentious. When Blackstone, the world’s largest property manager, acquired the social housing group Sage, it was pushed by an industry group to stop using the description “housing association”, which is normally used by non-profit groups.
To boost its credibility, Cheyne has brought in New Philanthropy Capital, a consultancy, to measure the impact of its investments and maintain governance, including sitting on the fund’s credit committee.
Providers will also need to demonstrate whether their model can create homes to be let out at “social”, or significantly discounted, rents. Homes in the separate category of “affordable” rents can be up to 80 per cent of market rates, which in major urban centres can still leave those on average incomes struggling to pay.
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