Britain’s housing crisis, is it all doom and gloom?

Somewhere in Britain’s housing crisis lies an attractive opportunity for advisers and investors – to earn a reasonable return on their assets while helping to bridge the gap between the property available to people today and the homes that are really needed.

Enter three investment companies that specialise in social housing.

In aggregate, Civitas, Triple Point and Residential Secure Income have raised more than £1bn for investment in social housing throughout the UK. These funds work with housing associations and local authorities, acquiring their social housing stock – the management of this stock is then contracted out to authorised providers, often the same authorities and associations – and therefore providing funds for further development.

When it works well, this process creates winners across the board. Local authorities and housing trusts are able to unlock the value tied up in the property they own, which is crucial for developing further stock, while investors benefit from a steady yield provided by tenants’ rents.

Over time, investors may also benefit from property market inflation, with social housing stock rising in value given the increasing demand for homes and the limited supply. Some funds have already reported capital gains of this type.

However, for investors today, quality and consistency of yield are likely to be the key attractions to these funds. All three currently offer yields of between 3 and 4 per cent a year, well-ahead of anything available from risk-free assets such as cash, but also competitive with high-yielding equities and bonds.

This income is not guaranteed. The funds are exposed to the possibility of defaults by tenants in their properties; however, a significant proportion of the rents paid on social housing comes directly from the government or local authorities, which provides a valuable underpin. Civitas points out that the social housing sector in the UK has never suffered a loss.

This is not to say there is no risk in the sector. The collapse of a prominent housing association earlier this year amid governance and financial problems highlights the importance of funds working only with providers that are well-managed and operationally sound. Political risk is also a theoretical concern, with the Labour Party having indicated its dislike of public-private partnerships – this could extend to social housing projects, though Labour hasn’t singled out these projects.

Nevertheless, social housing trusts currently appear to be pulling off that rare trick of providing generous returns while simultaneously working as a force for social good. They won’t suit all investors, but for income seekers looking beyond cash, they’re certainly worth considering.

It’s worth pointing out too that only a closed-ended fund can offer exposure to this sort of asset. Property is an illiquid asset class and social housing stock would be particularly challenging to trade in times of financial stress or market anxiety. Fund managers therefore need to be confident that they will never be forced to sell assets in order to meet redemption requests from investors who want out. Only a closed-ended fund structure offers this kind of certainty.