Commentary: How institutional investors can play a role in tackling U.K. homelessness

The often overlooked S in ESG is sharply coming into focus as more financial decision-makers wake up to the full, negative impact of the pandemic on people and the economy. Many social issues in the U.K. are in evermore desperate need of addressing. One of the most serious is arguably homelessness and rough sleeping.

A consensus that capitalism should be less short term and more inclusive of wider society was establishing itself in mainstream investing well before the coronavirus pandemic hit. For years considered niche, the growth of sustainable and impact funds is facilitating genuine change in many areas of society and the environment. The growing inequality between rich and poor and the existence of chronic housing shortages in hot spot areas make the provision of affordable accommodation a critical imperative to achieve the Sustainable Development Goals stipulated by the United Nations.

Recent years have seen increased appetite for residential property investment from institutional investors, and within that, social and affordable housing. Importantly, the pandemic has highlighted the diversification benefit of social and affordable housing, whose underlying revenues have proven relatively robust vs. many of its commercial and mainstream residential property counterparts. This is largely due to the source of rental income, which is often underpinned by a government-funded housing benefit, as well as strong structural supply/demand imbalance.

This has not been lost on institutional investors. Last year, we saw greater participation of local government pension funds investing in these funds, and we expect a broader suite of institutional investors to follow suit.

Social and affordable housing funds now account for the largest segment of the social impact investment market. According to figures from Big Society Capital, they made up 42% of the social investment market, which was estimated to be worth £5.1 billion ($6.7 billion) at the end of 2019. In particular, there is a growing universe of social and affordable housing funds that specialize in tackling homelessness. The increase in their popularity among pension fund investors has in part been driven by attractive risk-adjusted returns, but also by growing demand for investments that make a positive impact on people's lives.

Crucially, social and affordable housing funds provide a clear and tangible positive social impact‚ which is of increasing importance to institutional investors as they look to fulfill their fiduciary duties and provide a level of positive engagement with their scheme members.

A subset of social and affordable housing funds have been proven to effectively address homelessness. Well-managed funds can help reduce local authorities' reliance on inadequate and often highly priced, private rented sector temporary accommodation. The funds can also provide a stable basis for charity partners to deliver wraparound support for vulnerable individuals and ensure those people have the best chance of breaking what is often a repeated cycle of homelessness and remain safely housed for the long term.

In turn, this creates wider positive impacts on local employment levels and on community cohesion. Social property manager Resonance cited in its latest impact report that across its three housing funds, employment has increased in the last three years to just over 46%. Some 76% of all tenants of their Real Lettings Property Fund — which was developed with homelessness charity St. Mungo's to provide more than 250 properties to people at risk of homelessness — say their support network and relationships have been positively affected.

Social and affordable housing funds also target long-term, low-volatility rental income that is generally paid for by the local housing allowance: a benefit historically adjusted in line with the consumer price index. Additionally, lease lengths with charities tend to be longer than the traditional private rented sector and void periods are low. The low void is largely a result of the substantial unmet demand, as well as the quality of homes and wraparound support delivered by charity partners.

These funds offer attractive asset-backed investment and the long-term growth prospect of the U.K. residential housing market. Some invest in ordinary homes on ordinary streets with strong alternative use, meaning they are more resilient to market cycles than other types of real estate assets, such as offices or hotels. Others work with local authorities and housing providers to build a new supply of affordable housing. Given the U.K.'s housing shortages, there is unlikely to be a reduction in demand for these homes for the foreseeable future.

Social and affordable housing funds will undoubtedly continue to evolve, certainly in response to rising demand for strategies that go beyond ESG integration to produce measurable societal benefits, and the participation of institutional capital is vital in this evolutionary process.

Karen Ng is investment director at Big Society Capital Ltd., a social investment-focused financial firm. She is based in London. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I's editorial team.