Social Impact Investing and ESG (Environmental Social and Corporate Governance) are terms that are being used more and more, but what do they really mean? And how do they relate to Social Property Investment? First, it is important to understand what these terms mean.
Social Impact Investing
Impact investing refers to investments “made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return”. At its core, impact investing is about an alignment of an investor’s beliefs and values with the allocation of capital to address social and/or environmental issues.
ESG
Environmental, Social, and Corporate Governance is an evaluation of a firm’s collective conscientiousness for social and environmental factors. It is typically a score that is compiled from data collected surrounding specific metrics related to intangible assets within the enterprise. These three broad categories are termed used to define “socially responsible investors”, i.e. the investors who consider it important to incorporate their values and concerns (such as environmental, governance, or community concerns) and then form investment decisions rather than just potential profitability towards.
But what do ESG and Social Impact Investing have to do with the real estate market? Well, it is no secret that people are finding it increasingly more difficult to get on the housing ladder. And social property investement is the first step by private investors to bring these same concepts of ESG and Social Impact Investing to the housing market. The way they are doing this is through social housing.
What is Social Housing?
Social housing is a form of housing where its cost is linked to local incomes. The intention is to make the housing truly affordable and provide the occupiers with financial security.
Who provides Social Housing?
Social housing in the UK is provided by housing associations, sometimes referred to as registered providers. These are not-for-profit organisations that own, let, and manage social housing.
There are many forms of social housing in the UK that have been created under various schemes. However, the most common forms of social housing are three different tenures:
Shared Ownership
Shared ownership offers an alternative route to homeownership for people who probably could not otherwise afford to buy their own homes. Shared ownership allows purchasers the ability to purchase between 25% to 75% of a property and the remaining element of the home is owned by the social housing provider.
Under the shared ownership scheme, the purchaser obtains a mortgage for the element of the property purchase. And the remaining element of the home they rent from the social housing provider and pay below-market rent for that element of the home.
The advantage of shared ownership is because the purchaser is only buying a proportion of the property, they require a smaller mortgage and therefore a smaller deposit for the property.
Discounted Market Rental
Discounted market rental (DMR) properties is a type of affordable housing that developers and owners of build to rent properties can let to qualifying people at a discount to the actual market rent for similar property in the same area. Discount market rent is used by developers to fulfil their obligation to provide affordable housing.
The discount for DMR property varies but ranges between 20% to 50% of what the rental would actually be for the home if it was otherwise let in the open market.
Social Rented Housing
Social rented housing is typically the lowest cost for housing in a specific location and its price is set by specific formulas.
The amount of social rent a person pays depends on the location and size of the property and is set according to a complex formula, but it is typically set at between 50% and 60% of market rent.
Who can get Social Rented Housing?
Most social housing is allocated by the council and there are generally long waiting lists for people who want to buy or rent social housing. Councils have policies about who qualifies for social housing and who gets priority for housing, which is typically referred to as its allocation policy.
People who are seen to have the greatest need will be given the highest priority. Some councils also say that you must have lived in their area for a certain number of years to qualify.
Why do developers build Social Housing?
Under planning rules in the UK developers of residential property are required to build affordable housing. Under what is called a Section 106 Agreement developers must negotiate with the local government authority about how much social housing they are required to provide as a condition of obtaining planning consent for a development.
Local authorities have different criteria for when developers are required to provide affordable housing. In the UK there is an NPPF (National Planning Policy Framework) that states the following:
Affordable housing should not be sought on residential schemes that are not major developments. These are developments with 10 or fewer dwellings or combined floor space of 1,000 m².
Why do private investors want to get into Social Housing?
Social housing is provided by not-for-profit companies and private investors are all about making a profit so what would developers get involved in social housing? Well, the answer is simple, not only does investing in social housing make sense from a branding perspective it makes good financial sense too.
For private developers, there are several ways that they can make a profit from involvement in social housing including the following.
Rental Income
Many property investment funds purchase housing for rental and rent the accommodation on long-term leases to social housing providers which they in turn rent as social housing. For the investment fund, they have not only the advantage of long-term secure income but also a quasi-government tenant.
Profit element of shared ownership
Private investment funds are able to buy social housing at a discount because it can only be purchased by a limited number of registered companies. These companies can buy the housing at a significant discount and then retail the shared ownership housing and make a profit from the private element of the housing which they sell to the buyer.
Profit on private element
New build developments have both a private and social element of housing. In many situations, it is possible for large investment funds to purchase both elements and sell the private element at a profit.
Important notice: Proptech Pioneer and its associated companies seek to provide real estate investors with guides, information and tools, but we cannot guarantee this information to be accurate or perfect. You use the information at your own risk and accept no liability if you rely on this information. Proptech Pioneer is not a tax advisor, accountant conveyancer, lawyer, financial advisor or mortgage advisor. You should seek independent advice from independent professionals before making any investment decision.
