Social housing, rich families, and a strong return on capital

Victorian entrepreneurs built the industrial revolution. Now their philanthropic legacy is starting to reinvigorate an entirely different sector.

It comprises housing associations formed in the 19thCentury to fight destitution. Associations in the UK now have six million tenants and their management skills are helping today’s entrepreneurs to build a new fortune.

The founder of the UK’s housing association movement was US investment banker George Peabody, co-founder of JP Morgan & Co which he set up after moving to London in 1837

Social housing is winning backing from wealthy investors like Edmond de Rothschild, multi-family office Alvarium, and Blackstone, the private equity firm.

Their funding could be seen as an example of modern-day philanthropy, tagged social impact. But there is commercial potential in every deal, as the fear of inflation starts to rise.  

Agents say investors can expect yields of 4%, or slightly more, from social housing, whose yearly rent reviews, backed by the UK Government, offer them an inflation hedge at a decent premium to index-linked gilts, yielding less than zero. State rent guarantees add to their attraction.

To this day, residential property has provided an excellent hedge against inflation for several family offices, including those run by the UK Freshwater family and US billionaire Sam Zell.

The social housing movement started in France in 1775 when the Royal Saltworks at Arc-et-Senans was converted into accommodation for its workers. Over the years, Denmark, France, Stockholm and Austria went on to develop debt-funded social housing associations. 

The founder of the UK’s housing association movement was US investment banker George Peabody, co-founder of JP Morgan & Co which he set up after moving to London in 1837. 

He started Peabody Trust in 1859 to develop dwellings for poor individuals of “good moral character”. It now manages 66,000 homes for 133,000 residents generating a surplus of £122 million reinvested in its business.

Ratings agency Moody’s gives Peabody a mid-tier credit profile of A3 due to a strong regulatory framework and the “strong likelihood of extraordinary support from the UK government in the event of acute liquidity stress.”  Debt investors really like this soft state guarantee.

Octavia Housing was started by Octavia Hill, co-founder of the UK National Trust, who persuaded John Ruskin to bankroll the purchase of three houses in Marylebone in 1865.

Hill was a great believer in self-reliance but worked hard to know her tenants. Despite the odd regulatory spat, associations tend to perform and rarely suffer rent arrears.  Their professionalism in tenant management is crucial to today’s social housing projects: governments are not remotely keen to risk the kind of criticism levelled at care homes following an injection of private capital.

As is the case today, Victorian benefactors knew the importance of a decent yield. The Four Per Cent Industrial Dwellings Society, now IDS, was founded by Nathan Rothschild. Given the social return on offer, he believed that a yield of 4% was sufficient to support two-room units: “It is considered that many investors will be found willing and even anxious to contribute their capital.” Descendent Sir Evelyn de Rothschild is president at IDS

Edward Guinness, Earl of Iveagh a member of the Guinness brewing family, set up a housing association in London in 1890, now known as the Guinness Partnership. 

Money from William Sutton, founder of UK parcel delivery, started his eponymous housing association in 1900, now part of Clarion, the largest in the UK.  Over the years families have often been involved in the creation of other associations. 

Research by Said Business School, Oxford University confirms social housing offering a 4.5% premium over index-linked gilts, currently yielding less than nothing. Said believes the market can bear greater tenant protection, as long as indexation remains in place.  

Last year, Home Reit, backed by Qatar-backed multi-family office Alvarium Investments, raised £250 million to invest in homes for the homeless to be managed through housing associations and other regulated entities. It pitches its central return from housing at 4%.

Funding Affordable Homes, backed by Edmond de Rothschild Real Estate Investment Management, is buying residential estates in the UK while securing housing associations for their management. 

Residential Secure Income (£340 million) Civitas (£900 million) and Triple Point (£540 million) are recently-created social housing investment trusts. 

Their shares yield nearly 5%, attracting the attention of wealthy investors, advised by the likes of Investec and EFG.  Companies backing student accommodation have also developed.

Elsewhere, CBRE UK Affordable Housing has raised £250 million and expects a yield of 4.6%.  It has finalised a London deal with Bridges Fund Management, led by social impact pioneer Sir Ronald Cohen. 

Funds have been raised by Aberdeen Standard, Legal & General and M&G, a long-standing supporter of social housing debt and equity. 

Blackstone, the private equity firm which specialises in real estate,  has bought control of Sage Housing, a “for-profit” housing association that intends to buy affordable housing from commercial developers.

The UK government is planning partnerships to develop affordable housing. Blackstone could be part of the mix, along with councils and housing associations. The rollout, if it happens, could incorporate modular housing, currently backed by Goldman Sachs

Social housing could also form part of a programme to redevelop empty shopping centres. A string of proposals have started to emerge in the US, where housing associations are also starting to develop.  

UK retailer John Lewis & Partners has plans to turn 20 of its redundant sites into affordable accommodation.  Few will be surprised to learn it started out as a Victorian family business in 1864.