The news comes after Social Housing reported in October that a government-backed initiative had launched to unlock a “chest full of gold” of institutional investment for ‘place-based’ impact investment, including into social housing.The initiative placed a particular focus on the potential to tap local authority pension funds.
While not connected to that initiative, the investment offers a case study of how capital from local authority pension funds can be harnessed to help fuel delivery and meet housing need locally.
Teesside Pension Fund’s investment sees it invest into The Ethical Housing Company (EHC) on the same terms as established impact investors Big Society Capital (BSC) and Bridges Evergreen Holdings.
The former, which invests funds from dormant English bank accounts to promote the development of a ‘social investment marketplace’ in the UK, has committed £2.5m of funding into the company.
This adds to the £5m invested by Bridges Evergreen Holdings, which is managed by specialist sustainable and impact investment firm Bridges Fund Management, to support the company’s launch three years ago.
EHC launched in early 2018 to acquire properties to let to people in housing need. It is run in partnership with community interest company The Ethical Lettings Agency, which was established two years earlier to let and manage residential properties in the Redcar, Cleveland and Teesside area on behalf of private landlords.
The companies sit within the private rented sector (PRS), so are not registered with the Regulator of Social Housing, but were created to provide a better alternative to accommodation at the lower-cost end of the PRS in local areas.
Carla Keegans, founder director of EHC and TELA, told Social Housing that in many cases private rents in Teesside are lower than social rents, and that operating outside of the regulated sector enabled TELA “the freedom to house the people that can’t get into social housing”.
According to TELA, around two-thirds of the households it supports are in receipt of housing benefit, while 38 per cent of its new lettings were to people facing homelessness last year – increasing to 50 per cent since the first COVID-19 lockdown.
The agency manages homes for private landlords (and EHC) through a management agreement, with fixed fees deducted from the rent collected monthly. All properties are let on assured shorthold tenancies and TELA works through key performance indicators (KPIs) to keep arrears and voids to a minimum, and support tenants to maintain their tenancies in the long term.
Ms Keegans, who has a background in social housing and the public sector, said that when it came to attracting investment for the EHC, being able to show a track record of delivery was crucial.
“The first phase was me running the agency [TELA] to really to prove that operating model, because it is tight, and that if you can do it managing other people’s properties, then when you own your own properties obviously you’ve got full control over that which you don’t when you manage other people’s,” she said.
She added: “I have very tight KPIs to make sure that things are delivered and consistently delivered day in and day out, so for example our arrears being arguably the most important from a finance point of view, our arrears KPI is that we would never breach three per cent, and we never have in over five years, for all properties under management for the agency.”
The new £7.5m of investment will be used to expand EHC’s portfolio of owned properties. The company has ambition to acquire 100 properties per year for the next decade, adding to the 60 properties it already owns; a further 20 are due to complete soon.
Teesside’s pension fund was its “ideal and first choice” as an investor, Ms Keegans said. “We hoped it would tick the kind of boxes that the pension fund would be looking for, and obviously for us as well it’s the visible social impact that we deliver across Teeside as well in increasingly challenging times for people.”
For Teesside Pension Fund, the £5m allocated to the EHC forms a small part of a circa £4bn portfolio largely comprising investment into equities, private equity funds and some commercial property. However, Nick Orton, head of pensions governance and investments at the fund, explained that it reflects a more recent commitment to investing more locally.
“Our pension fund committee for a lot of years deliberately didn’t invest locally because of potential concerns about conflict of interest and perhaps political issues around local investments,” Mr Orton said. “But they took a conscious decision three or so years ago to invest up to five per cent of the assets of the fund in local investments, but only if they met the returns need of the fund and the sort of risk return ratio that we’re looking for.”
The EHC marks the second local investment the fund has made, following a recent deal with a start-up bank based in Middlesbrough, which Mr Orton described as the “higher risk end of the spectrum – more risk, more return”.
By contrast, referring to its investment into the EHC, he said: “We immediately saw that ethical housing wasn’t going to provide enormous double-digit returns, but it would provide quite a lot of security because it’s property based and also it’s based on property in the North East, specifically in Teesside, which although it fluctuates in value like all property, it doesn’t tend to go up or down as much in value.”
Across its pension fund portfolio as a whole, Teesside’s assets need to deliver a long-term return of just below 4.5 per cent on average, which it achieves through a mixture of higher and lower-yield-producing assets. The investment into the EHC is in ‘preference shares’, Mr Orton said, which will see it achieve roughly this target (4.5 per cent return).
The pension fund expects to retrieve its money in full, or “potentially a little more” in around 20 years’ time, but is not expecting “meaningful capital appreciation” from the portfolio, Mr Orton said, again because of the nature of values in the local housing market.