Royal London Asset Management’s Senior Fund Manager Shalin Shah, and Investment Analyst Tom Johnson, explain that investing in social housing isn’t an easy win for sustainable funds.
In recent years, ‘social housing’ has become an increasingly important component of our sustainable funds at RLAM. However, it is crucial to find the right way to invest in the sector, in a manner which respects the strong social benefits that it provides.
The provision of affordable homes is a clear social benefit, and one which makes the sector attractive for our funds. As housing charity Shelter England puts it, social housing “gives social renters better rights, more control over their homes, and the chance to put down roots”.
The sector’s approach to its own environmental, social and governance (ESG) obligations has also been maturing. Royal London Asset Management (RLAM) fed into the consultation for the first set of industry-wide standards on sustainability reporting and we are encouraged by the numbers of housing associations that are taking them up.
The production of standard data should help investors to better compare the relative ESG performance of different social housing borrowers. Increasingly, however, our analysis is driven by more than an assessment of operational policies and practices, preferring to make a more holistic assessment of what each association offers. For example, we aim to scrutinise the future development pipelines that our bonds are funding to assess how much is being put towards badly needed general purpose social housing, as opposed to homes for market rent or shared ownership.
There are two major ways in which investors can get exposure to the social housing sector. The first, and our preferred method for our sustainable funds, is to buy bonds issued by registered not-for-profit housing associations. This is one of the most ‘impactful’ elements of our portfolio as, while many businesses we invest in have a positive impact, here much of the lending we provide is going directly into the construction of new social housing properties.
In addition, the social benefit is not just on a ‘use of proceeds’ basis as is the case with most labelled green, social or sustainable bonds. The income paid on the bonds comes from social rents, thereby ensuring that our lending remains focused on social provision rather than general income from a wider business that may have other activities, as is the case with most labelled bonds.
Lending in this way also fits neatly into our longstanding credit philosophy, which targets inefficiencies in markets, including the undervaluation of secured debt. Our exposure to the sector is largely secured on pools of social housing. Spreads remain attractive for a sector that has a zero historical default and provides good downside protection.
The more recent trend for investors to take equity stakes in social housing properties through a real estate investment trust (REIT) is one that we’ve chosen to avoid in recent years. Having previously held one REIT (Civitas) in our sustainable funds, we rescreened the company at the end of 2018 and chose to exclude it, after assessing several similar REITs and deeming those unsuitable. In our view, this sort of investing can undermine the sustainability case associated with social housing.
While we’re open to diverse methods of financing to help to boost the quantity and quality of social housing, our analysis suggested a clear gap between lending to well-governed, high quality institutions in the corporate bond market and the weaker sustainability case associated with equity-based REITs focused on social housing assets. Although the whole sector looks superficially attractive for sustainability focused funds, in our view, how and where you invest can make a real difference.
There is no ‘free lunch’ in buying social housing corporate bond issues, however, as not all housing associations are equal. With increased focus on the sector and despite significant issuance, we are seeing early signs that some investors are buying indiscriminately due to the high ratings and social label status, while ignoring latent balance sheet risks due to some issuers’ overemphasis on property sales. This highlights why we believe that a thorough and well-resourced bottom-up approach to active sustainable investing will ultimately deliver the best returns for clients.
This article first appeared in FT Adviser, published on 20 October 2021.
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This is a financial promotion and is not investment advice. The views expressed are those of the authors at the date of publication unless otherwise indicated, which are subject to change, and are not investment advice.
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