Last week my co-director Juliette Tarrant and I met with members of London's finance community in preparation for the market launch of our social housing REIT. It was a mixed bag of people who were enthusiastic and positive about what we are aiming to achieve, and those who are seemingly devoid of social conscience and unable to read the writing on the wall.
Allow me to explain...
As we were arriving at Euston to discuss the flotation of our REIT on the stock market with an AIM adviser (NOMAD), another NHS Trust fell victim of an overpriced PFI contract. In describing our investment - social housing to meet local authority defined need and the return of 4.33% - the NOMAD told me without a flicker of humour that the return rate was unattractive compared with PFI investment opportunities at 9-12%. It was pointed out that the products shared the same low risk profile and that we were unlikely to be successful unless we could either match this high rate or obtain sizable government grant funding.
I was stunned; a 9-12% return rate conflicts strongly with the affordable rent agenda as it demands significantly higher rent requirements. At this level, our rent levels would have to be twice the market rate and not the 80% we aspire to. The NOMAD was unmoved.
Fortunately, a number of market leading organisations in the city were more supportive of our proposition and we obtained enough interest to proceed. However, the events of the day and recent news from the banking and investment arena had left me pensive.
The rate of return governing an investment should be determined by two factors: The availability of cash and the risk involved in the deal. Despite the country's economic woes, cash-rich investors are constantly on the search for "safe haven assets" such as gold and AAA-rates sovereign debt.
Investment decisions are based on risk v reward and with return rates of 9-12% the rewards are clear to see. But where lies the risk? There is already an expectation forming that the government will take on the liability arising from the collapse of South London Healthcare and indeed the 30 other Trusts thought to be in the same situation. It is this default expectation that the government will bail out investors which I am uncomfortable with. If an investment has risk priced into it, as these PFI deals appear to have had, then there has to be a downside. If not, that premium for risk becomes unjust enrichment.
The British public have become much more fiscally aware. We recognise a bailout when we see one and we now know that at the centre of each and every one sits a fat cat. Our tolerance for bailing out rich financial institutions has evaporated and the prospect of having to lay off yet more nurses and front-line staff or limiting access to services in order to protect the investors from the consequences of this unjust enrichment is likely to raise a shout that no government can ignore.
The unthinkable word "haircut" can and must enter into the negotiations surrounding the future of PFI contracts. If investors are not willing to expose themselves to risk then they cannot seek the rewards that go with it
Public outrage is spreading and understandably so as we witness the slashing of services to pay for the betrayal of the banks. But what we have seen to date is nothing compared with the fury that will be provoked if PFI contracts are bailed out to the detriment of services or at further expense to the British public. In the face of such fury any government has to respond and it is not without precedent for Cameron & Co to act retrospectively.
The investment community plays a vital part in our financial infrastructure and thankfully there are imaginative, realistic and well-motivated investors out there. They understand that to invest in social infrastructure with the protection of government backing calls for a fair return, without unjust enrichment.
To everyone else may I suggest a very realistic scenario: Imagine that your investment decision is exposed by Jeremy Paxman himself. Could you stand the test of a grilling on Newsnight? Could you convince both Paxman and the viewers that you have not unjustly enriched yourself on the back of the taxpayer? If not, then your investment could very soon face the brunt of overwhelming public outrage.
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