Having spent the past few weeks presenting our financial model to the investment community, with yet more meetings to come, I have become well versed in explaining not only that the investment is well constructed and the risks properly managed, but that the return is commiserate with the size of the investment.
For an investment fund, no matter how reasonable its rate, to properly meet the objective of affordable housing requires an element of public funding: provided in cash or asset. The common method of achieving this with more traditional funding routes is via grant. We, however, use the issue of preference shares in exchange for grant funding which results in an investment relationship between the public and the REIT.
In common with our other investors, the public will wish to know that the fund is well constructed and that the risks are managed. They will also want to know what the return will be. It is the latter which presents the challenge. A preference share is a "capital marker". It retains the public interest so that when the provision that it supports is no longer required and is liquidated, the cash can be returned. However, it pays no dividend and this is the feature that keeps the rent down. So is this an investment for no return?
Investing public money for the public interest is an activity designed to support social policy objectives such as affordability, stimulating housing supply for elders... the list goes on. But can we even put a price on this? Can we calculate the social policy return in cash terms?
A National Audit Office report in 2005 estimated that the nation spends around £1 billion a year to prevent and deal with homelessness. This includes central and local government spending on administration, accommodation and support to homeless people, but excludes indirect costs to government (e.g. arising from health or benefits).
Research in 2008 by the New Economics Foundation indicated an annual cost to the state of £26,000 for each homeless person. This figure included the cost of benefits, hostel accommodation, and care of any children involved.
An earlier report in 2003 by the New Policy Institute estimated an annual cost of £24,500 for a single homeless person. This included the cost of a failed tenancy, temporary accommodation, outreach and advice services, health and criminal justice services, and resettlement.
In fact, the amount of data available which illustrates the cost of failure to provide accommodation is vast. I could easily provide even more through reports from the DoH and organisations like AGE UK which will reveal the effects of inadequate housing provisions for the elderly: this includes hospital beds, residential provision and additional care services. Similarly I can recite reams of data with regard to people with disabilities in dire need of supported housing and the costs associated with the failure to get to grips with the problem of under-supply.
The cost benefits
Of course these are only broad social policy measures, essential to meet, but difficult to ascribe to a cost per tenancy created. This is because there is a general under-supply of diversionary and support service provision. People are falling through the gaps, stuck on waiting lists or waiting to join a waiting list (the irony). As such, it would be some time before any measurable gains can be achieved.
Instead we have to look at the more direct cost benefit of housing provision to properly measure the effectiveness of the public's investment in housing.
We start from the basis that local authorities are working under government advice to adopt a strategic commissioning role to address housing affordability (Department for Communities and Local Government 2008).
Rent affordability is defined by the (Department for Communities as 80% of market rent. Our experience, however, indicates that this varies across the country. We prefer the 30th percentile definition which basically means that, to avoid rent poverty, rent should not exceed 30% of a family's income.
Any difference between the affordable rent figure and local market rent represents a gain. That gain may be a direct financial gain by local and central government through a reduction in housing benefit spend, or by tenants in greater family disposable income. It is the measurement of this gain that can provide a simple basis for calculating the social policy premium of any investment in public funds.
It is a return rate that will vary across the country and it will favour areas where land costs are high and local incomes low. It is simple to calculate: you simply take the capital sum that needs to be deployed to reduce rents and use the rent saved figure to calculate the return.
For example if you wanted to supply a £90,000 3 bed semi in Wigan, the normal market rent is £450 pcm and yet the affordable rent is 375 pcm. To achieve affordability calls for a public investment of 18,000.
This investment is safeguarded by the valuation on the property and so to that extent is secure. But we can also calculate the return rate. That 18,000 investment yields a 'return' in rent saving of £75 per week, £900 per annum or a 5% yield.
In the example above the local authority has the opportunity to base its decision to use public money on an objective measure. This figure, the social premium, will differ across the country, but the process can establish a benchmark - setting the investment standard for local authorities and governments alike. Using this very crude device, establishing if a particular development is in the public interest should be fairly simple.
Civil servants and government officers should act more like fund managers seeking out the social premium.
Governments need to get out of the habit of giving our money away. Grants should be reserved for charities. In all other aspects of governmental spending both nationally and locally they should be asking the question: 'what's in it for us?'
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