Written evidence submitted by Big Society Capital [FSS 058]

Executive Summary

Since launching in 2012 Big Society Capital has signed £220 million of investments in social property, alongside £1.2 billion from other investors. In the investment sector we use our capital, brand and expertise to signal what good and sustainable models look like. We have chosen to answer five questions in the inquiry according to our expertise and experience. These are:

The current state of financial resilience of social housing providers:

6 - To what extent have private equity investors, and in particular international investors, been entering the sector? What challenges does this present?

What are the policy and regulatory challenges to the Department and the Regulator?

1 - Is the current Departmental policy on social housing and affordable homes appropriately focused?

5 - On our inquiry into Exempt Accommodation, we found that issues have arisen when providers are not registered with the Regulator. How does the Regulator of Social Housing engage with Housing Associations whose registration is voluntary?

7 - Does the Regulator of Social Housing have adequate powers to ensure: value for money; and

8 - low risk from new sources of finance such as private equity?

In summary our experience from investing over the past decade in reputable social property funds has shown us that there is huge potential to utilise private investment for sustainable and person-centred social housing. There are levers at the Government’s disposal which it can use, if it chooses, to ensure tenant outcomes are the focus and priority for all investors including utilising an impact measurement framework, alleviating uncertainty around social rent policy and linking value for money higher levels of Local Housing Allowance.

About Big Society Capital

In April 2000, HM Treasury launched a Social Investment Task Force (SITF) born out of its desire to radically improve the UK’s capacity to create wealth, economic growth, and employment in the most deprived communities. The Task Force was headed by Sir Ronald Cohen to explore how investment can achieve social as well as financial returns, including new sources of private and institutional capital and how innovative partnerships between Government, business, and the voluntary sector could support.

The Task Force recommended a five-point action plan which included a tax credit to encourage private investment in under-invested communities, venture funds with Government money matched private finance, and support for community lending. The Task Force ran for ten years with their recommendations laying the foundations for Big Society Capital.

Big Society Capital was set up by the Government in 2012 as an independent investment organisation with c.£625 million capital to help grow the social impact investment market in the UK. We have created and continue to grow a sustainable market for social impact investment, so that more and more social purpose organisations, social enterprises, and charities can access repayable finance at a much larger scale and increase their impact for public benefit. To date, this visionary investment has paid off and we have catalysed a ten-fold growth since 2012 in the amount of money invested in creating positive social impact. Today approximately £7.9 billion is invested into over 7,000 social purpose organisations, social enterprises, and charities in the UK.

We want to share our learnings and experience from investing almost £200 million in 12 housing funds. Across our portfolio of companies, over 10,000 homes are owned, and our investments alone are projected to have provided safe and affordable homes for 8,500 people.

Submission

The current state of financial resilience of social housing providers: 

6- To what extent have private equity investors, and in particular international investors, been entering the sector? What challenges does this present?

In 2011 the social property market was valued at £0 million and by 2021 this had grown to £3.8 billion.[1] A large part of the market is characterised by strong and productive partnerships with investors based on trust and shared objectives.

Importantly we have seen an increase in the amount of impact focussed capital entering the market via impact funds and increasingly investment from Local Government Pension Schemes who are seeking impact and resilient financial returns. This is largely from UK investors.[2] Institutional investor capital is well-aligned to the long-term nature and needs of the social housing sector.

However, as a market builder we observe some challenges where the investment solutions created and offered by some fund managers do not adequately meet the needs of all stakeholders particularly those who are most vulnerable. This has led to poor outcomes for tenants and investors. Home REIT is the most recent example of this worrying trend where publicly available information suggests that housing is unsuitable, level of care and support is low and of a poor quality, and it is delivered my inexperienced and financially unsustainable housing counterparties. Big Society Capital has not invested in Home REIT.

Big Society Capital and our investment partners target high quality, high impact social investment opportunities. We invest where these is high social impact, low risk, and a reasonable return on investment. We are strongly supportive of other genuine participants who are helping to grow the social housing market by offering a realistic set of trade-offs between these factors.

This can be seen in the weighted averages of the age of the counterparties we work with, the number of staff they employ and their average net asset value. Note that none of these metrics are specifically targeted by ourselves or the managers we invest with, they are a product of our investment processes and due diligence which focusses on high impact and high-quality risk adjusted returns.

Along with The Good Economy we developed the Equity Impact Project, a transparent and consistent impact measurement framework which creates a sector standard, building around the linked practices of Environmental, Social and Governance (ESG) and Impact Management - all private capital should be encouraged to utilise this best practice.

Within our investments we conduct a rigorous due diligence process, drawing on 10 years of social impact investing experience, and this process has led to a strong and resilient investments with housing counterparties.

Before investing in a fund, ask the following questions to understand whether fund managers and housing delivery partners are implementing best impact practice:

1. Intentionality: Is there an explicit impact statement or objectives that identify the positive changes to people and planet that the fund aims to create? And, has the fund been designed to deliver on this objective? 
2. Additionality:  How coherent is the description of how key decisions will deliver impact that wouldn’t be delivered otherwise? For example, sourcing, partner selection, asset management.
3. Impact measurement: Does the manager have set impact objectives and reporting practices that align with sector impact reporting standards?
4. Impact practice: Do impact practices go beyond just impact measurement and extend to the entire investment process? 
5. Impact risk: Have managers properly assessed potential risks and negative impacts of the fund for stakeholders?

There are a number of examples of private capital having a positive impact. For example, the Legal and General Affordable Homes received a G1/V1 rating from the Regulator for Social Housing in February 2023.

Man GPM RI Community Housing Fund aims to provide safe, new homes in desirable areas for key workers such as nurses, teachers and bus drivers that might otherwise be priced out. It will deliver 1,295 new homes by 2026 and is currently surpassing its targets through delivering over 90% of homes as affordable (social rent, affordable rent, key worker and shared ownership).

Notting Hill Genesis has this year agreed a partnership with social impact property fund manager Resonance to manage almost 600 properties aimed at supporting families in the highest need. Notting Hill Genesis has been providing care, support and shelter for people at risk of homelessness since the 1960s. It operates 675,000 houses in London and the southeast of England and has deep experience of making a genuine difference to the lives of thousands of vulnerable people.  

Hull Women's Network has worked together with Social and Sustainable Capital to create a social impact investment fund to provide safe homes for 200 women fleeing domestic abuse. Video here.  

Therefore, we know that private equity can have a positive impact on the housing crisis when there is the right intent, transparency, and accountability.

Another innovation in this investment space and led by Big Society Capital is the Schroders BSC Impact Trust. A world- first, the Social Impact Trust was listed in December 2020 to provide investors with public market access to a diverse portfolio of social impact investments addressing entrenched social issues in the UK including high quality social and affordable housing. This has enabled more investors to enter the market, trusting their investment is backing trustworthy and reputable delivery partners.

What are the policy and regulatory challenges to the Department and the Regulator? 

1-Is the current Departmental policy on social housing and affordable homes appropriately focused?

It is estimated that £253 billion is needed to combat the structural undersupply of social and affordable housing in the UK (see graphic). Private capital can help tackle this issue, particularly institutional investment, however in our role as market builder we often hear from investors that uncertainty around rent policy and rent setting is a deterrent.

Structural undersupply[3]

£253 billion capital shortfall per annum

There has been a long history of fluctuating rent policy and an arbitrary approach to social rent sees organisations substantially reducing rather than increasing investment in development, repairs, maintenance and retrofit of homes. Half a million more families need social housing than recorded on official housing waiting lists which equates to 4.2 million people, including 1.3 million children, and so the imperative for a steady and consistent social rent setting policy is a significant one that is currently overlooked.

In 2013 Local Housing Allowance (LHA) was reduced from 50th percentile to 30th percentile to save the government money – this reduced rents by approximately 6% at a time that open market rents were going up by close to 10%. At the same time private sector landlords were hit with a 3% premium on Stamp Duty Land Tax (SDLT). More recently tax and regulatory change (much that is progressive) have further encouraged casual landlords to exit the market.

A cap on increases to social rent therefore significantly reduces investment in homes and services for residents, both short term over the next year and intensified in the long term. In some cases, it may affect organisational viability. According to data commissioned by the National Housing Federation (NHF) from the Centre for Economics and Business Research (July 2022), material costs for repairs and maintenance have increased by 14%, and it is 12.3% more expensive to build new homes than it was last year. Supported and sheltered housing should be exempt from any cap, reflecting the tight financial position in which they already operate and viability risks.

Furthermore, a third of housing associations providing supported housing report that they will have to reduce or cease provision if social rent does not increase at more than its current rate, preventing vulnerable people from accessing the support they need to live independently within their own communities. A reduced supported housing service also affects the NHS and care services, at a time where the partnership between supported housing providers and the NHS is critical.

If the government continues to restrict support for LHA tenants while open market rents increase at close to 10% for the second year running and social rents are ‘capped’ at 7% then both the quality and volume of private rented homes for those on benefits will continue to shrink. Ultimately the cost will be transferred to Local Authorities and the families in temporary accommodation warehoused in substandard properties who face health, safety, and isolation challenges - all of which very quickly start costing the government more money in other ‘budgets’.

A ceiling on increases in rent would require Government intervention to also provide grants to support investment in homes and services for residents to at least the level of the benefit savings resulting from any cap. Reintroducing a ‘catch up’ mechanism, so that rents can gradually return to their real term level once inflation has fallen back, preserving long term investment for residents and a long-term plan for investors.

As an example, over the last 10 years Big Society Capital has seeded investments into Local Housing Allowance backed models providing housing and support. These investment models are proven and in our investments alone have supported more than 5,200 of people at risk of homelessness which could be scaled significantly with private capital. Private capital has the potential to play a more substantial role in the provision of social rent housing if grant were more targeted towards unlocking this kind of supply rather than solely focusing departmental policy on first time buyers.

5-On our inquiry into Exempt Accommodation, we found that issues have arisen when providers are not registered with the Regulator. How does the Regulator of Social Housing engage with Housing Associations whose registration is voluntary?

We analysed some publicly available information on an exempt accommodation provider listed on the London Stock Exchange and found that the majority of the housing providers in the portfolio were Community Interest Companies (CiC) and not Registered Providers. 

Importantly, unlike in our own portfolio, these providers were comparatively young, inexperienced, threadbare staffed and financially fragile. For example, 57% of Home REITs counterparties were less than 3 years old, with many establishing at IPO. 73% of the portfolio value were also CiCs. CiC’s are businesses with primarily social objectives which can include the provision of housing and support to vulnerable groups. However, CiC’s are very lightly regulated (the regulator works part-time) and are not subject to oversight from the Regulator of Social Housing nor the Charity Commission. As such light-touch regulatory oversight is creating the conditions for unsuitable providers to provide housing and support services to vulnerable groups via the exempt rent regime.

Therefore, we agree with the Committee’s recommendations that national standards and possibly a system of registration is needed to ensure that exempt accommodation providers are fit for purpose.

However, there should not be a blanket rule imposed. If all providers were made to comply with registration, without significant changes to both the barriers of application and how the regulator manages and perceives risk, this would have significant unintended consequences. At present regulation leads to a significant increase in cost and a large reduction in the appetite of trustee boards to innovate. If a blanket rule were imposed, overnight this would immediately destroy a number of excellent small social enterprises who provide both high quality accommodation and support to those vulnerable facing a housing crisis – in effect worsening the housing crisis.

If the Regulator were to focus on tenant outcomes and engage with Housing Providers, whether registered or not on “what best practice looks like” we believe this would be a step forward. We believe that the regulator should also call out abuses to the system where tenants are being let down due to poor quality accommodation and poor support services.

A further issue with the current system is the limitation on Local Authorities to recoup all exempt Housing Benefit claims for non-registered providers. This has already been a major contributing factor to a number of high-quality providers closing, this has been to the detriment to the tenants and communities they serve.

7-Does the Regulator of Social Housing have adequate powers to ensure: value for money; and 

One way to create value for money would be to award higher levels of Local Housing Allowance to homes that meet better EPC ratings and the national space standard for the size of property. This is open data collected by third parties, so it is both available and consistent.

The government has declared that a property will be unlettable post 2025 if it doesn’t meet EPC C and yet even well-funded housing associations are not seeing a way to achieve this and requesting a longer transition period. The same is true for private landlords.

If a flat is currently eligible for LHA support of £10,000 then uprating it back to 50th percentile from 30th percentile would cost the government an additional £600 pa. However, with rental yields in many areas this extra £600 would unlock £12,000 of capital at a 5% yield. This is not going to be enough to drive behaviours for everyone, but most landlords want to pursue this path anyway; they just need a little encouragement.

If landlords at the bottom end of the market could be assured of more income, then there is immediately a commercial incentive to improve their property. Good for the tenant, good for carbon reductions (in most cases), and cost effective for the government.

8-Low risk from new sources of finance such as private equity?

The Regulator of Social Housing has powers to regulate housing providers but not finance providers. Finance providers are regulated by the Financial Conduct Authority.

The FCA is currently consulting on CP22/20 Sustainability Disclosure Requirements and investment labels (SDR) which aims to prevent:

“firms are making exaggerated or misleading sustainability-related claims about their investment products; claims that don’t stand up to scrutiny” and to “build transparency and trust by introducing labels to help consumers navigate the market for sustainable investment products, and ensuring that sustainability-related terms in the naming and marketing products are proportionate to the sustainability profile of the product” 

While the scope of the SDR proposals does not seek to define what does and doesn’t constitute a sustainable investment, it should be the case that Registered Providers are either required – or encouraged – by the Regulator of Social Housing to partner with private equity partners that meet the SDR’s highest labels of sustainable investment practice. 

May 2023