New players

In theory, equity investors and housing associations have always been a very good match.

‘They want very long term, high quality income streams and that’s exactly what rental properties provide,’ says John Gooding, chief executive of Dolphin Housing.

Despite this, and despite much talk and prolonged efforts down the years, direct equity from institutions remains a fringe activity in the way social housing is funded. But this could be set to change.

Salamanca Group, a merchant bank, is on the cusp of launching a company – Funding Affordable Homes Limited (FAH) – which promises to pull in new funders from around the globe to bankroll the construction of a new wave of social and affordable housing.

Currently it has 10 investors – all newcomers to the sector – lined up to put an initial swathe of £50m into 20 projects, with eight social landlords, including a council, in the latter stages of negotiations.

So is the long-awaited institutional investment in social housing about to become reality? And what exactly is it Salamanca is offering landlords?

The project was established by Labour peer Lord David Triesman, now a director of FAH, and has been two-and-a-half years in the making, with Paul Munday and Andrew Dawber (pictured) at the helm. The pair now head up Salamanca Housing Advisors (SHA), which will work to ‘identify opportunities for the fund’.

Lord Triesman, whose CV includes a distinguished stint as chair of the Football Association, says he has always believed in the social value of housing.

‘Almost everything you look at as significant socially – kids dropping out of school, health outcomes, job outcomes – all of these things were most highly correlated with being in poor housing and indecent housing,’ he says.

‘We have something which I believe will prove to be a very good commercial proposition, but will also improve those outcomes.’

FAH is essentially designed to bring investors to the table, and match them with housing associations seeking funds. It is currently closing in on the initial £50m it is targeting to launch.

‘All the investors we have attracted so far have not previously invested in the sector,’ says Mr Munday.

‘We’re talking about family offices - the organisations which sit behind high-net-worth individuals – and some smaller pension funds. We’ve got a particular interest from Scandinavia.’

Social value

The organisation is attracting interest from investors keen to put cash into something they see as socially and economically valuable, while still offering a solid return.

To this end, it is using housing charity HACT’s social value methodology to present to investors – offering them statistics which quantify the social good the investment achieves.

‘When we’ve been presenting this to investors, they’ve seen that social value that’s being generated as an important factor,’ says Mr Munday.

‘[The HACT data] gives the ability to show that when they invest purely in bricks and mortar, there’s also a social value which we can put a number against.’

The investors are also hoping, ultimately, for a return in the order of between 4% and 6%. But making this competitive will be a challenge. Currently, housing associations can raise long-term development finance on the capital markets at under 4%, and through the government guarantees programme at under 3%.

Indeed, David Montague, chief executive of L&Q, says: ‘It’s great that more people are looking at investing in affordable housing but large housing associations have unrivalled access to capital markets, and it’s a very good time to raise significant funds at low rates.’

Mr Munday recognises that this may mean returns are lower initially. ‘We are obviously very aware of the pricing of things like own named bonds, and other bilateral instruments,’ he says. ‘We intend to be price competitive in comparison to that.’

He says that for larger landlords such as L&Q, the product might work less well in comparison to bonds. However, it is in talks with some larger landlords about stock rationalising. Essentially, it is offering to buy up stock landlords are offering for sale, and then allow the landlord to continue managing it or bring in another housing association to do so.

It is also offering lease and leaseback, direct lending and direct ownership of homes developed by housing associations.

To do this, FAH is at the ‘latter stages’ of registering with the Homes and Communities Agency (HCA) as a housing association, necessary for it to own the properties outright. Existing housing associations would then manage the homes.

Leaseback deals have been part of the sector for some time, from investors such as Aviva and M&G, while the management model has been used by Assettrust.

Leaseback deals in particular, which typically tie the landlord in to an inflation linked return, have been approached with caution by some housing associations.

‘From our perspective, we are always interested in new funding arrangements, but we have been unwilling to enter into long-term leases and that position is unlikely to change,’ says Matthew Harrison, chief executive of Great Places.

All landlords which entered into deals to either lease or sell properties to FAH would be given the option to buy them back after 20 years.

Mr Munday says FAH will be able to do deals that are smaller in scale compared to the type which would typically entice pension funds in. The key significance of what FAH is proposing is that it is bringing in new funds from around the globe that have never previously been involved in the sector.

‘Currently, there are a whole range of different products out there, but in reality that money is coming from a relatively small bunch of people,’ says Adrian Carter, a partner at Trowers and Hamlins. ‘Potentially, this is a genuinely new source of money and that’s the exciting thing.’

‘This is a very new way of doing things. We don’t think anyone has done this in this country before,’ adds Mr Munday.

Military background

As well as being a new way of doing things, the Salamanca Group – the merchant bank which sits behind FAH and has to date bankrolled the entire operation - is a very different beast to the kind of investor the sector will be accustomed to.

Founded in 2002, it grew from the UK real estate market into a merchant bank with a broad portfolio. In 2013, it joined forces with sister company Salamanca Risk Management, an operational risk consultancy ‘focused on protecting assets and people globally’ and is now registered in the UK, Jersey, Switzerland and Mauritius.

Bizarrely, its directors have an incredible background in the British military – perhaps not surprising considering that the company is named after the Battle of Salamanca, a decisive victory in the Napoleonic wars that saw 13,000 French troops captured, wounded or slaughtered.

Ed Butler, the executive director for group business development, has led 22 SAS missions and was in command of the British Army in Afghanistan during a battle into Helmand in 2006. He joins four other directors, including chair and chief executive Martin Bellamy, with at least a decade of military experience on their CV, while the magnificently named group managing director Heyrick Bond Gunning flew into Iraq the day the second Gulf War ended and set up a business worth £70m.

If this all sounds a million miles from the cosy world of the UK housing sector, compared to the executive team at Salamanca, the board of FAH could hardly be more familiar.

Richard McCarthy chairs the organisation, having previously played key housing roles as a top civil servant at the Department for Communities and Local Government (DCLG), chair of the National Housing Federation and chief executive of Peabody.

Debby Ounsted, former chair of The Joseph Rowntree Housing Trust and former chief executive of housing associations Habinteg and Octavia Hill, and Greg Campbell, co-founder of consultancy Campbell Tickell, are also on the board.

‘I think the attraction of working with us is that we are a group of people who substantially come from the sector, and we understand some of the issues and the risk and reward within the sector,’ says Mr Munday.

‘There is a strong social conscience within the project; we are not making a specific debt product fit within every instance.’

The cash will fund projects across the affordable housing spectrum – from straightforward rental, through to shared ownership and hostel-style accommodation.

Mr Munday expects the project to grow beyond the initial eight landlords – which are not currently being named – on a steady basis, bringing in new investors and funds as it does so. It is not committing to time scales or levels of funding or homes, beyond the initial £50m.

‘What we are trying to do is balance the amount of money we take with our ability to put that to work reasonably quickly into good-quality projects,’ he says.

Only time will tell if the Salamancer model provides a geunine alternative to traditional bank debt, social housing grant and bond finance, but social landlords will be watching it closely as it develops over the coming months.

‘The potential for doing this on a large scale is unquestionably there, but it needs to be demonstrated in the first projects that are undertaken,’ says Mr Munday. “We are starting with quite significant numbers, but they could potentially become very significant indeed.’