Most impact investing relies in part on some government funding or philanthropic involvement to lever an investment up to investment grade. One UK manager, Cheyne Capital’s Shamez Alibhai, is proving that this is not essential. He has delivered 10-12 per cent a year, levered, from affordable housing for the past two years.
Alibhai, a partner in Cheyne Capital who ran a US$2 billion traditional real estate debt fund until 2013, decided he wanted to do something different and talked his colleagues into getting into what is known as “social housing”. So far, he has a big French pension fund, a UK pension fund, a European family office and Big Society Capital (BSC) as investors. BSC is an independent financial institution which is funded by unclaimed moneys from the Reclaim Fund in the UK and topped up by the four main high street banks.
Alibhai has attracted a lot of interest in the US too, where impact investing is a rapidly growing asset class, and also attracted interest from some Australian super funds.
Cheyne Capital is represented in Australia by Allen Partners, which is marketing the strategy as a standalone real estate investment, according to principals Nicholas Allen and Craig Gribble.
Alibhai, who was educated in computer science and engineering in Canada and then did three years at Yale studying computational neuroscience, started in the industry with Barclays and Credit Suisse before joining Cheyne Capital in 2006.
His fund, ‘Cheyne Social Property Impact Fund’, invests in property which is used by social sector organisations to help disadvantaged groups in the UK. “Our aim is to be a socially responsible landlord for the sector,” he says.
Cheyne Capital is an alternatives manager across a range of strategies including corporate credit, real estate debt, high yield, event driven and equity long/short.
Alibhai says that in 2014 there were an estimated 1.7 million low-income householders in the UK looking for affordable housing. “To fill that gap would require about A$400 billion,” Alibhai says, “which is beyond any government to pay for.”
His fund does not rely on any government grants, although the organisations which typically lease the properties may do. The lessees will usually be housing associations or local governments. Their leases will be between 20-40 per cent below market rates.
“We need to find schemes that are independent of government,” he says, “because governments and government policies change. We’re relying on the efficiency of the private sector.” In 2012, the UK Government slashed its annual grants to housing associations from about A$5 billion to less than $1 billion.
Cheyne Capital’s story for investors looks good at the moment where there is generally a shortage of yield around the world. Because the fund’s leases are linked to CPI increases, the risk/return profile looks a lot like an inflation-linked bond.
“We produce a steady income with low volatility. It’s a compelling investment. And then we optimise the liability side. As a landlord we increase rents in line with CPI. CPI bonds are not readily available. Government CPI bonds are showing negative returns at the moment,” Alibhai says. The fund is levered to offer the competitive 10-12 per cent a year return.
The main groups of beneficiaries of social housing are the “working poor”, the elderly, the physically or learning disabled and long-term unemployed.
Alibhai says there are a lot of “negative externalities” which flow from inadequate housing, such as health, social isolation and inadequate heating.
“We’re not saying that housing is a sufficient condition to improve people’s lives but it is necessary,” he says.
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