A workman inspects a window fitting at a Persimmon Plc construction site in Uxbridge, U.K., on Monday, Aug. 17, 2015. Persimmon Plc, the U.K.'s second biggest homebuilder by market value, is training former soldiers amid a shortage of bricklayers. Photographer: Jason Alden/Bloomberg
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Starting in September, tenants on a waiting list for affordable housing in Luton, a large town north of London, will begin moving into 80 new flats. With hardwood floors and big windows, the properties are very different from some of the ageing council towers that loom on the London skyline.

It is thanks to a new kind of owner that such upgraded accommodation is possible: the buildings are the first affordable housing in England to be developed by a hedge fund.

Cheyne Capital plans a number of such developments around the UK as part of a fund that invests in social housing. The London-based hedge fund says it is in it for social good.

“The old assumption is social return compromises financial return, but there’s been a huge change in mindset,” said Shamez Alibhai, a partner at Cheyne Capital who runs the social housing strategy.

Cheyne is aiming for levered returns of about 10 to 12 per cent, though investors must have their money locked up for about three years. It is also charging a 1.5 per cent yearly management fee and a 15 per cent performance fee. It is a sizeable return to chase at a time of low interest rates, when hedge funds are struggling to generate large enough profits to justify their fees.

Cheyne hopes to generate its high returns by using debt. The fund closed at about £250m and borrowed another £500m to invest in the sector, a strategy that will amplify returns, or losses.

It comes at a time when there is a growing shortage of affordable housing in the UK. Councils have a statutory duty to house people who cannot afford full rent, and in England alone the waiting list for discounted housing is 1.37m people.

Part of that shortfall is because of the right-to-buy policy that allows tenants to buy their social housing, reducing stock. Between 1980 and 2014, the stock of UK council, social and public housing fell from 7m to 4.5m, while the population grew from 56m to 64m.

The sector is increasingly attracting private-sector money. Salamanca Group, a private bank, has set up an investment vehicle called Funding Affordable Homes. Insurance companies including Legal & General and Pension Insurance Corp have been investing for several years, mostly through direct lending: buying up the bonds issued by housing associations as bank financing grew scarce.

L&G has recently become more involved in build-to-rent schemes and is negotiating directly with councils to build the properties, said James Lidgate, a director of housing at Legal & General Capital with responsibility for residential investments and acquisitions. “That’s the direction of travel for L&G at the moment for all housing strategies,” he said. The insurance companies in the sector are aiming for returns of 4 or 5 per cent.


People waiting for social housing in England

Patrick Odling-Smee, the interim director of housing at Luton council, said he was “quite cynical” about working with a hedge fund, but the Cheyne situation was good value for them. “We get access to 80 units we wouldn’t otherwise have,” he said. “That’s a good deal for us. It brings us quality rented accommodation.”

Luton council has about 1,200 families in temporary accommodation, Mr Odling-Smee said, and more people are being priced out of the town as rents rise faster than salaries. “There’s a ripple effect as poor people are priced out of London, and that affects us. Prices keep rising in Luton,” he said.

The council, which owns the land the flats have been built on, is paying Cheyne about £500,000 a year to begin with in guaranteed rent. That figure will go up by inflation. The risk is that the Local Housing Allowance, which determines how much Luton and other councils receive for rent for affordable housing, decides to cap or lower the rate, Mr Odling-Smee said.

The Cheyne fund started with seed money from Big Society Capital, a fund set up by the British government to make use of money in dormant bank accounts, topped up by the UK’s four biggest banks. Cheyne has added funds from other investors and its partners. Anna Shiel from Big Society Capital said any returns it gets from the Cheyne fund will be reinvested in social initiatives.

Interest has raised the likelihood of second and third funds, Cheyne said. The current fund matures in 2019 and the intention is to convert it into a real estate investment trust, the first publicly traded social housing Reit in the UK.

Cheyne is in the midst of a planning application for a second site in Luton, and a project in Sheffield is in the works. It is also scoping out sites across the country, from Exeter to Newcastle, for social housing, key-worker housing, extra care for the elderly and care homes.

Alan Finch, principal adviser for finance and productivity at the Local Government Association, said he would take the assertion that investors in the space are in it for the social good “with a pinch of salt”.

“I’m relatively surprised that’s the kind of return they are claiming from it,” he said. “I guess for them it’s a local authority, so it’s a fairly stable, fairly secure type of investment.”

But for Luton and any other councils working with Cheyne, he said, there “is clearly some risk involved”.

Additional reporting by Mary Childs and Judith Evans

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