Two Very Different London Stories about Investments in Affordable Housing

Posted by on December 15, 2014 in Entrepreneurship, Europe

450px-Burgoyne's_house,_LondonRecently, there has been a story in the news that links low-paid workers including firefighters, teachers and other public sector employees in America to pensioners and single mothers in East London. It’s the story about what happened when the American private equity firm, Westbrook Partners, bought a low-rent housing estate with the help of Richard Benyon, a Member of Parliament. This happened because the U.K. government is no longer providing affordable housing for all in London’s booming real estate market. Now, Westbrook has gone back on its word when it said that the rents on the New Era estate would, in some cases, quadruple in 2016 to meet market rates. Instead, it has served tenants with an eviction notice giving them until Christmas to find new homes.

The local authorities and the mayor of London are protesting, pointing out that Westbrook’s profits will be made at the cost of the British taxpayers who will foot the bill when the families are made homeless. Yet now the homes belong to an American private equity firm, which has made no secret of its sole objective: to make the maximum profit from its investments. The house prices and rents in London are soaring far above what this community can afford to pay, so the residents face not just losing their homes, but being forced out of London altogether.

Yet while this story rages on there’s another tale, but one with a better and happier storyline. This is about how investments made with social benefit as well as financial profit as the bottom line are a growing trend in the U.K. Cheyne Capital, a £6 billion, London hedge fund, is the hero. It is filling the gap through social impact financing with its Cheyne Social Property Impact Fund, planning to buy property to rent to organisations that provide essential social services. The fund is raising £300 million, and aims at returns of 10 to 12 percent. Those returns are based on affordable rents and the fund’s ability to generate attractive debt financing.

There is a tremendous social need for this kind of investment. In 2012, government grants for social housing were about £2.5 billion to £3 billion; those funds were dramatically reduced to nearly £500 million after the British government cut expenses in the financial crisis. That’s £2.5 billion of capital withdrawn from the system. This new fund aims to balance financial and social returns. It is part of a growing trend of investing with an eye to improving society as well, an effort that includes so-called social impact bonds. Big Society Capital, a government-established finance group with a social mission, anchored the Cheyne fund with a seed commitment.

Social impact investing is on the rise globally. Last year in the U.S., Merrill Lynch and U.S. Trust raised $13.5 million for a social impact bond where the proceeds would finance a program to lower recidivism rates among former convicts in New York. Overall, these groups aim to fill the gaps where governments are increasingly falling short.

Photo Credit: Wikimedia

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