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Investing in Social Housing: A Win-Win Opportunity


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Investing in Social Housing: A Win-Win Opportunity

  1. 1. Redington13-15 Mallow StreetLondon EC1Y 8RDT. 020 7250 Group SeminarNew Development Finance ModelsInvesting in Social Housing: A Win-Win Opportunity25th November 2011
  2. 2. 2In this presentation, we:• Explain why social housing is attractive for long-term investors• Show how it can form an attractive part of their investment strategies• Discuss additional important considerations , e.g. investment structureInvesting in Social Housing – Executive Summary• Access to high-quality, inflation-linkedcashflows offering attractive real yields• Accessing such returns in traditionalways has become increasingly difficultin the recent market environment.• Long-term investors will also haveadditional considerations such as theinvestment structure and therisk/return profile of each specificinvestment.Benefits for long-term Investors• Opportunity to access a new andpotentially large source of financingwith a long-term horizonBenefits for Housing AssociationsWin/Win OpportunityInvesting in Social Housing
  3. 3. 2.533.544.555.5Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11%30yr Gilt yield30yr swap rateChallenging markets: declining yieldsLong-term yields have fallen, pushing up thevalue of pension funds’ liabilities...31Source: Bloomberg, RedingtonNov11Investing in Social HousingChallenging markets
  4. 4. 406080100120140160Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 111January2007=100FTSE 100MSCI Emerging Markets*MSCI Developed World Ex-UK**4The financial crisis has set equities on a rollercoaster ridewith low and volatile medium and long-term returns. Riskyassets have increasingly failed to deliver adequateoutperformance.2Source: Bloomberg, RedingtonChallenging markets: underperforming equities*Emerging market equity = MSCI Emerging Markets Index**Developed world equity = MSCI Developed World ex. UKInvesting in Social HousingChallenging marketsNov11
  5. 5. 5Source: Bloomberg, RedingtonReal yields have declined, making it more difficult forpension funds to access attractive and secure long-term returns that will allow them to reach full funding.3Challenging markets: low real yieldsInvesting in Social HousingChallenging markets-0.500.511.52Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 111January2007=10030yr Gilt real yield30yr swap real yieldNov11
  6. 6. 80%85%90%95%100%105%110%Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11FundingLevel(Assets/Liabilities)Funding levelFull Funding250300350400450500Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11£billionsAssets LiabilitiesThe effect on pension schemes: declining funding levels1. Falling long-term yields 2. Risky assets underperforming 3. Declining real ratesFTSE 100 companies’ aggregate pension assets and liabilities Aggregate funding level of FTSE 100 pension schemesAs asset performance failed to keep pace with rising liabilities, funding levels declined.Pension funds must therefore focus on making the right decisions to achieve full funding in a difficult environment.Source: Aon Hewitt Pension Risk Tracker, Redington Source: Aon Hewitt Pension Risk Tracker, Redington6Nov11Investing in Social HousingChallenging marketsNov11
  7. 7. Full fundingSocial housing: accessing required returnsCurrent positionSocial housing can help schemes achieve fullfunding because they offer...• Attractive rates of real return• Inflation linkage• Long-dated, high-quality cashflowsPension funds must find ways to:• Earn attractive long-term realreturns sufficient to achieve fullfunding• Obtain inflation-linked cashflows• Strike an attractive risk/returnbalance• Which investment structure (e.g. tailored fund) fits best with long-term investors’ objectives?• Understand the risk/return profile of different social housing assets.Making the most of the opportunity7Investing in Social HousingAccessing required returns
  8. 8. 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020GBPMillionsLiabilities Path Actual Liabilities Assets Path Actual AssetsLiability BasisContributions & Asset ReturnsTime HorizonThe Flight Plan is an effective tool for making focussed asset allocation decisions and identifyingthe best opportunities.It allows schemes to identify the assets which contribute most towards their progress to fullfunding – we call them Flight Plan Consistent Assets.8The Flight Plan• Maps out the path of ascheme’s assets andliabilities from theircurrent position to fullfunding.• Requires three keyvariables to build: theassumed rate of returnon assets, the cashcontribution schedule,and the target date forfull funding.Investing in Social HousingPension funds’ strategic approach
  9. 9. 9Growth“FlightPlanConsistentAssets”MatchingFuel efficiency: achieve an efficient risk/return balanceInvesting in Social HousingPension funds’ strategic approach
  10. 10. 10-6-4-2024680 5 10 15 20 25 30GBPMillionsYearsInitial investmentAttractive realreturnsInflation-linkedcashflowsProviding a matchfor liabilitiesInflowsOutflowsSource: RedingtonFlight Plan Consistent Asset – Example Cashflow ProfileKey CharacteristicsFlight Plan ConsistentAssets• Enable schemes toaccess attractive realreturns and long-datedinflation-linked cashflows.• The attractive realreturns are the resultof a significantilliquidity premium.Key CharacteristicsAttractive real returns and inflation-linked cashflows High-quality, often secured cashflowsIlliquid Varying degrees of complexity/might be difficult to accessInvesting in Social HousingFlight Plan Consistent Assets
  11. 11. • Take advantage of attractive yields on long-term securedproperty leases• Yields may be in excess of yields on corporate bonds issued bysame borrower• Long-dated index-linked cashflowsSecured Leases• Ground rent created when freehold land or building is sold onlong lease• Typically “pepper-corn” rent for land only (not buildings)Ground Rents• Low-cost rental housing provided for disadvantaged people inneed of housing• Generally provided by local councils and housing associationsSocial Housing• Offers long-dated, inflation-linked cashflowsfrom secured borrowers (i.e. housingassociations) with quasi-governmentguarantee• Investing in public sector projects through, for example, PrivateFinance Initiatives (PFIs), bespoke investments structures or bypurchasing a suitable infrastructure asset• Wide range of possible assets, from roads to power generationTraditional Infrastructure• Long-term, potentially inflation-linkedrevenue streams• Offers attractive returns, limited creditrisk and high level of security11Investing in Social HousingFlight Plan Consistent Assets - Examples
  12. 12. Social HousingSocial Housing is a form of low cost, rental housing typicallyprovided by local councils and non-profit organisations calledhousing associations.12• Housing associations issue inflation-linked debt secured on apool of housing units to finance activities• Interest payments are matched by rental income that istypically increased yearly at RPI + 0.5%• Illiquidity gives rise to a premium return over gilts• Enjoys a large degree of government support, with rentalpayments often heavily subsidised• Combines social responsibility with returnsSocial Housing investment featuresBackground• Traditionally financed by state support and bank loans• Financial crisis imposed losses and higher capitalrequirements on banks, limiting their ability to lend• The government is burdened by debt and a large deficit,causing it to reduce spending• This ‘funding vacuum’ has given pension funds anopportunity to step in and provide financingInvesting in Social HousingKey features for pension fund investors
  13. 13. Bespoke investment structures13Source: EvolutionSecurities, RedingtonAsset Manager• Manage day-to-day operations and supervise financial performance of eachinvestment/provide operational fund management servicesInvestment Manager• Provide financial analysis and investment,origination and structuring expertiseExample Bespoke Investment StructureInvestment Consultant• Support for evaluating and structuringinvestments• Ensure investments’ risk/return profile andinvestment structure are in line with FundrequirementsPension FundTailored Investment Structure(e.g. Fund/Special Purpose Vehicle)Development 1 Development 2 Development 3Equity/Debt InvestmentHousing AssociationPortfolioEquity InvestmentInvesting in Social HousingAdditional considerations
  14. 14. Risk profile• The diagram shows a typicalsocial housing portfolio for apension fund investor with ablended real return of ca. 3-4%p.a.• The portfolio consists of differenthousing types with specificrisk/return profiles• By adapting the share of thedifferent housing types in theportfolio, an investor can tailorthe portfolio’s return and the riskcharacteristics so that they fitrequirementsSocial Housing is typically a low-risk asset class but the returnsand the risk on a portfolio can be tailored (to some extent) tomeet pension funds’ requirements.14Source: Evolution Securities, RedingtonInvesting in Social HousingAdditional considerations
  15. 15. ContactsDisclaimerDisclaimer For professional investors only. Not suitable for private customers.The information herein was obtained from various sources. We do not guarantee every aspect of its accuracy. The information is for your private information and is for discussion purposes only. A variety ofmarket factors and assumptions may affect this analysis, and this analysis does not reflect all possible loss scenarios. There is no certainty that the parameters and assumptions used in this analysis can beduplicated with actual trades. Any historical exchange rates, interest rates or other reference rates or prices which appear above are not necessarily indicative of future exchange rates, interest rates, or otherreference rates or prices. Neither the information, recommendations or opinions expressed herein constitutes an offer to buy or sell any securities, futures, options, or investment products on your behalf.Unless otherwise stated, any pricing information in this message is indicative only, is subject to change and is not an offer to transact. Where relevant, the price quoted is exclusive of tax and delivery costs.Any reference to the terms of executed transactions should be treated as preliminary and subject to further due diligence .Please note, the accurate calculation of the liability profile used as the basis for implementing any capital markets transactions is the sole responsibility of the Trustees actuarial advisors. Redington Ltd willestimate the liabilities if required but will not be held responsible for any loss or damage howsoever sustained as a result of inaccuracies in that estimation. Additionally, the client recognizes that RedingtonLtd does not owe any party a duty of care in this respect.Redington Ltd are investment consultants regulated by the Financial Services Authority. We do not advise on all implications of the transactions described herein. This information is for discussion purposesand prior to undertaking any trade, you should also discuss with your professional tax, accounting and / or other relevant advisers how such particular trade(s) affect you. All analysis (whether in respect oftax, accounting, law or of any other nature), should be treated as illustrative only and not relied upon as accurate.Redington Limited (reg no 6660006) is a company authorised and regulated by the Financial Services Authority and registered in England and Wales. Registered office: 13-15 Mallow Street London EC1Y 8RDTHE DESTINATION FOR ASSET & LIABILITY MANAGEMENTContacts15Direct Line: +44 (0) 20 7250 3416Telephone: +44 (0) 20 7250 3331Redington13-15 Mallow StreetLondon EC1Y 8RDRobert GardnerFounder & in the QR code with yoursmartphone to get straight to ourwebsite.