The two-bedroom brick house in the village of Dunchurch in central England looks much like any other freshly built home in the UK: newly turfed garden, mullioned windows, magnolia-painted walls waiting for pictures to be hung.
But the buyer of the semi-detached house, a short stroll from the Dun Cow pub, will share ownership of their home with an unlikely partner: one of the world’s largest private equity firms, headquartered on New York’s Park Avenue.
The home is among those recently made available, in this case under a shared ownership deal, by Sage Housing, a fast-growing provider of affordable homes that is majority-owned by the US real estate giant Blackstone.
Similar deals are quietly being conducted worldwide. Blackstone is among hundreds of companies — including private equity groups, fund managers, institutions, listed real estate groups and others — that see big business in affordable housing.
Public-sector housing providers in the UK, as in many countries, have struggled to keep pace with demand for homes for middle and lower-income workers in areas where employment growth is strong. Increasingly, heavyweight profitmaking groups are seeking to fill the gap, pledging to generate commercial returns for investors while fulfilling housing need.
But opponents of the trend, including social housing groups and the UN’s special rapporteur on the right to housing, see trouble ahead. The National Housing Federation, a group for UK social housing providers, has fought back against for-profit groups seeking to call themselves “housing associations”.
“If you are a for-profit organisation, are you there for the long term?” asks Kate Henderson, NHF chief executive. “The question of accountability is a key one . . . will they add value in a sector that desperately needs investment, rather than being there to extract value? Housing associations are known for being not-for-profit and they exist to deliver long-term value to their communities. They can do this because they don’t have to return value to shareholders.”
Leilani Farha, the UN special rapporteur on the right to housing, goes further. In March, she wrote an open letter to the chief executive of Blackstone attacking the company’s housing investments as “inconsistent with international human rights law and norms”.
“Unprecedented amounts of global capital are being invested in housing as security for financial instruments and traded on global markets, which is having devastating consequences for people,” she said.
Farha cited evictions, charges to tenants and rent increases among the problems she had found; she also attacked Blackstone for lobbying to defeat a rent control proposal in California.
Blackstone fought back. In a reply to Farha, the group’s co-heads of real estate said they were “bringing significant capital and expertise” to a sector that badly needed it. “We share your concern about the chronic undersupply of housing in major metropolitan centres around the world,” they added.
The company pointed to examples such as Hembla in Sweden, a listed rental landlord which it says has reinvested all its income in the properties it owns since Blackstone acquired a controlling stake. It also has a development pipeline of 5,000 new homes and says evictions cannot be a problem, since Swedish tenancies are indefinite by law.
The company’s UK housing business, Sage, has its roots in buying up affordable homes that developers are obliged to build as a condition of planning permission, a strategy that has irked non-profit groups, which say it has encroached on their turf.
The private equity giant is keen to show it is also adding to the stock of homes being built: it has begun partnering with developers to fund new sites, contributing to a goal of 20,000 new homes in five years. The homes are designated “affordable” under UK planning law, meaning they operate with rent controls or under shared-ownership deals.
Blackstone owns its housing assets within a series of different funds, ranging from “permanent capital” vehicles to private equity-type funds with shorter time horizons. Sage is owned within its Real Estate Partners Europe V fund, an opportunistic fund, and could ultimately be sold or listed.
Others are joining the fray: CBRE Global Investors, the fund management arm of the world’s largest property services group, this year launched a UK affordable housing fund, seeking annual returns of 6 per cent from investing in a range of homes, from homeless accommodation to rented homes for “key workers” such as nurses or teachers.
An open-ended fund with an indefinite lifespan and social impact aims, the product aims to generate its returns by working in partnership with non-profit providers and without significant borrowing; it will fund developments as well as buying existing homes. Hannah Marshall, head of UK funds at CBRE GI, says it will share the risk attached to changes in regulated rents with its partners, including the impact of a series of rent cuts currently under way.
Legal & General, the UK insurance company, registered a social housing provider late last year as part of a broader push into housing, investing from its own balance sheet. The insurer says it expects to hold assets for the long term, adding that the sector needs to move away from its reliance on debt funding: “An equity model where institutional investors are the long-term holders of assets represents a much-needed shift away from the current debt-only funding model that [cannot] scale up at the speed that is needed to address the affordable housing shortfall.”
For all residential landlords, failures in services to tenants can result in a public outcry, tarnishing a property owner’s image and forcing changes in strategy. Non-profit UK housing associations have had to contend with blots on their own reputation. This year, L&Q, one of the largest, apologised for maintenance problems on one of its London estates, including serious damage from water and sewage leaks.
“We got it wrong, we didn’t fix things when we should have, and as a result we let down our residents,” the group’s chief executive wrote in an industry magazine, Inside Housing. The NHF’s Henderson acknowledges that housing associations need to improve to maintain their reputation. “This is about differentiating ourselves from other sectors,” she says.
Private investors moving into affordable housing can look to Germany as a cautionary tale. Indebted states and municipalities sold off swaths of housing in the early 2000s to private equity groups, which quickly became known as “locusts”.
According to an account by Vonovia, a listed housing group, the private equity owners “came under financial pressure, with the effect that maintenance and investment in the housing stock had to be largely cut back. This was at the expense of serious housing defects.”
Many of those portfolios have now found stability as listed housing groups, including Vonovia itself, but suspicion still hangs over private equity’s role in housing in Germany.
Jan Crosby, UK head of housing at business advisers KPMG, says prospective investors need to “get under the skin of the economic model” when considering an investment in affordable housing. “It is important that there is enough disclosure when people are making investment decisions,” he adds.
“Is it building new housing or is it taking existing housing? Who are the tenants going to be? Who is paying the rents, in a rental model? Is it regulated or unregulated? How long will the property be targeted at affordable or social tenants? They should understand how the returns are driven.
“From that, people can make a judgment as to whether it is a social impact investment or just an investment in residential.”
