The housing crisis has had policymakers scratching their heads for years. How is it possible to build the sheer number of social houses that are required when there is so little financial support available? Hedge funds might represent an unlikely answer to this question.
At first glance, it may seem unusual to propose that hedge funds can help address the social housing crisis. After all, hedge funds are much maligned in the mainstream and particularly on the left. Yet this is exactly what some hedge funds are already doing.
In Luton, the local Labour-run council has forged a partnership with Cheyne Capital’s Social Property Impact Fund, with investment from Big Society Capital, to address their housing shortage. As part of a deal they struck in 2015, Cheyne Capital agreed to fund an investment of £8.5m to build 80 new high-quality affordable homes.
Rents on these houses will be set lower than the local housing allowance level while the council will manage and maintain the buildings. Luton has experienced a severe housing shortage with many on the social housing waiting list. This unlikely partnership between a local authority and a hedge fund has provided a vital step towards resolving Luton’s pressing housing problem.
I am not saying that hedge funds alone will solve our housing crisis. But the model they are pioneering in places like Luton could inspire other financiers and lead to a more diversified funding mix for these vital projects.
For far too long the alternative investment industry has been suffering from an image problem. As Chair of the All-Party Parliamentary Group for Alternative Investment Management, I have met with colleagues on both sides of the House of Commons and representatives from the industry. What was clear from these meetings is a negative perception of the industry among policymakers. Both parties seem to be unclear. Someone told me that when it comes to hedge funds, Labour doesn’t like them and the Conservatives do, but neither really seems to know what they are.
If we look past the headlines, it becomes clear the industry has huge potential to have a positive impact on the lives of ordinary people, the Luton project being a good example of this. There is an ever-increasing demand for affordable homes every year in the UK for our graduates, young families and key workers. The same Cheyne Social Property Impact Fund has also been working with the South Yorkshire Housing Association to provide key worker accommodation in Sheffield.
Whether they want to rent or buy, too many people across the UK are unable to afford their own home. Such is the housing market the third sector is currently delivering, on average, approximately 30,000 affordable homes per annum – far short of what is needed.
According to Shelter, the UK needs to build 250,000 new homes every year to keep up with demand but overall we are not coming close to that level. It follows on the basic rule of supply and demand that as supply in housing is low, demand rises and prices go up. This is what is hitting so many people across the country so hard.
Notwithstanding the government’s failure to amend planning regulation to properly aid housing delivery and to reform the land market, there is a need for alternative, innovative solutions to the housing crisis. Ever since the global financial crash of 2008, the major banks have been hamstrung by regulation. Lending against real estate projects for banks is both time consuming and very often they now must jump through hoops of red tape before they can make a decision. For the developer trying to meet demand this can take too long.
When decisions are made, it is not uncommon for banks to take extended periods of time to decide on granting loans, often placing quite restrictive covenants on real estate borrowers, cutting off supply to this essential area. This position is almost impossible to sustain and is keeping the supply of housing low.
It is a simple fact that building high-quality housing is expensive. Considerable funding is required to develop land for large scale housing projects and funding has not been forthcoming in recent years. The harsh reality is that there is no magic money tree which developers or local authorities can use to get started. As traditional lenders have had difficulty delivering, clearly it is time to look to new and alternative investors and lenders including hedge funds.
Alternative finance providers such as investment funds are willing to take greater risks than banks and therefore accelerate delivery on more complicated housing developments. Impressively, financing in excess of £3bn has been provided at attractive rates to housing associations by UK annuity funds. Our pension funds, insurers and major businesses are looking for longer term stable investments.
The private sector has historically shown a poor track record in dealing with vulnerable groups and investment was typically short term. However, due to changes in both investor appetite and asset management expertise, the time has come for the private sector to be able to contribute to the sustainable development of social and affordable housing in the UK. They must be given their chance to put their funds to work in an inclusive way which provides value to society at large, including and especially the most vulnerable.
Alternative Capital and Impact Capital can address the shortcomings that are inherent in both the third sector and the private sector. Impact capital is typically patient and balances financial and social outcomes. There are some alternative models to provide capital to improve affordable housing delivery, making the housing affordable, fewer tenants default on rent and end up evicted. There is generally less tenant turnover, which lowers the overall cost of managing the properties. This is a win-win situation for those most in need of these houses.
Substantial financing is out there waiting for housing programmes to access it. This approach relies on the credit quality of the housing association sector and the need of annuity investors for inflation linked cash flows.
This approach represents a genuine opportunity for the UK to take advantage of its enduring housing demand and strength in the alternative investment management sector. If people could bring themselves to look beyond their preconceived ideas, we might be able to both retire on good pensions, and have lived in affordable housing. This is why I call for people to stop and think before they’re next tempted to bash hedge funds and other alternative investment managers.