Nicole von Westenholz, partner at Cheyne Capital, examines the standards an affordable housing investment needs to meet in order to deliver additionality.
It is generally accepted that ‘additionality’ – enabling positive outcomes that would not otherwise have occurred – lies at the heart of impact investing. Within Place-Based Impact Investing (PBII), the creation of additional homes – and, in particular, additional affordable homes – may be cited as a measurement of additionality. But are they always additional?
Any affordable housing that is mandated by planning consent under a Section 106 agreement is not additional as this will be delivered anyway. By extension, buying existing portfolios of Section 106 housing is certainly not additional. Note also that affordable housing mandated under planning regulations is seen by developers as a penalty on their returns and therefore usually built with cheaper materials and to a lower specification than homes made available at market rate.
We would argue that using Homes England grant funding to subsidise the delivery of housing by the private sector is also not additional as this grant funding has already been earmarked for housing creation and could be used elsewhere if not taken by private sector housing providers.
Tangentially, it should be borne in mind that, in most cases, Homes England grant funding can only be given to a Registered Provider (RP) – which has led to a flurry of new RPs being set up in order to be eligible to receive it. However, when the grant-funded properties come to be sold, they can only be sold to another RP. Given the relatively small pool of other RPs who will be able to buy and the downside scenario risk of a ‘rush for the exit’ in unfavourable market conditions, the exit risk from grant-funded schemes needs to be considered carefully.
By contrast, consider a model where the private sector landlord makes a proportion of its homes available at meaningfully discounted rents on a voluntary basis and still makes a healthy return on its investment. This is pure additionality and leaves government grant available for the creation of further affordable housing elsewhere, especially in places where it would otherwise be unviable.
One such example is Cheyne Impact Real Estate’s award-winning Poplin development in Manchester.
The scheme comprises 144 one-, two- and three-bed homes at the intersection of New Cross, New Islington and the vibrant Northern Quarter. All of the homes are ‘tenure blind’, meaning that they are identical in specification and service levels. However, 51 of the homes (35%, which is above the Local Plan target of 20%) are allocated to local key workers at significantly discounted rents whereby their rental payments account for no more than 30% of their net disposable income. In some cases, these discounts exceed the 20% discount that would be achieved under capital ‘A’ Affordable housing.
Yet, all of these affordable homes are provided by Cheyne on a voluntary basis as there is no planning-stipulated provision for affordable housing within the scheme.
The result for residents is a diverse, cohesive and, above all, inclusive community in a development which is ranked third out of 63 places to live in Manchester on Homeviews with comments such as “You literally become a part of a community that cares for all, environmentally, socially when you become a resident.”
The result for investors is a yield which would not look out of place amongst those of Build-to-Rent (BTR) schemes with 100% market-rate rent. The ability to achieve this lies in the entry level at which you buy into the scheme, a tight control of development costs (helped in Cheyne’s case by an in-house development team) and low tenant turnover thanks not only to the discounted rents but also to capped rental increases for all tenants, regardless of tenure type.
Following the success of Poplin, Cheyne is now taking its thesis to Leeds where it plans to deliver up to 50% affordable housing (of which 20% is mandated and 30% voluntary) across 302 homes in a best-in-class, multi-family scheme called Mabgate Yard. Being a larger scheme, Mabgate Yard will include extensive amenities, such as a cinema and gym. It will target an EPC rating of A and Home Quality Mark of 4.5, making it one of the most sustainable BTR developments in the UK.
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