Schroders believes investment in the affordable housing sector could provide the right level of returns for its Real Income Fund.
The company has devised an investment model that teams up local authorities with land and funding from institutions to develop housing for key workers, such as teachers and nurses, which will be let at intermediate rents when completed.
“We have been talking to clients for the best part of two years and in the past six months we’ve seen progress, with a number of local authority clients willing to invest land side by side with us,” says Schroders fund manager Tony Doherty. Schroders now has a list of possible sites it is looking through.
Local authorities would put the land into a development, in return for nomination rights on the housing and a share in the upside of the scheme. “Their return is subordinated to ensure other investors’ yield,” says Doherty.
“For investors, the main issues with the traditional private rented sector are the yields – the gross to net yield is quite high, so it doesn’t quite tick the box.” He thinks key worker housing can deliver around 5-5.5% returns, making the sector attractive to institutional investors.
“Now there are more opportunities for institutional capital and pension funds to get involved in financing sectors that were previously dominated by banks, or grants, or private equity,” says Doherty.
This model also has clear attractions for local authorities. Financially strapped and with funding drying up, they are having difficulty in meeting their targets for affordable housing. At the same time, many are reviewing their land holdings to see if they can release capital or use them more effectively.
“This is good for local authorities because it can kickstart development, rather than selling land to a developer that might bank it for a while,” says Doherty. “It’s taken a while to communicate, but there’s been real progress in their willingness to look at more innovative solutions to unlock land and provide affordable housing.”