Five years ago, City lending guru Peter Denton sat down with Alex Greaves, the founder of M&G Real Estate’s residential fund, to concoct ideas around how the private sector could collaborate to boost housing supply and affordability.
In the years that followed, the for-profit social housing provider has been established as funds acquired section 106 allocations and even housing associations, and launched their own affordable housing development businesses.
But Denton, now chief executive of Hyde Group, and Greaves, founder of the UK’s first and largest dedicated build-to-rent fund, wanted to do something bigger. They wanted to channel the firepower of institutional capital into a housing association.
Conversations with potential investors kicked off three years ago. Two years ago M&G looked to become a registered provider of social housing. One year ago Project Leibniz was born and this month the M&G UK Shared Ownership Fund launched, acquiring a seed portfolio from Hyde Group this week.
“It hasn’t been done before,” Denton tells EG in a joint interview with Greaves as the venture launches. “No one had ever thought through how to get a regulated entity. We didn’t have any market comparables. We had to make sure we understood the pricing, and different companies speak different languages.”
Greaves adds: “We embarked on a journey to make an institutionally investable product from an FCA point of view [and] from both a UK and international investor perspective, to get for-profit registered provider status and make those two different regulatory bodies happy under one investment vehicle. It has been a very long journey, but one that genuinely fulfils requirements for us across multiple spectrums.”
The £500m strategic partnership taps into the affordable proposition, helping buyers get on the ladder. It also offers diverse, long-term, index-linked income for investors, and is scalable, allowing for development, Greaves says.
“This is really a way of unlocking massive additionality, massive creation of homes, the genuine cross-rationalisation between not-for-profit and for-profit and recognising that each side has something to both give and gain from that dynamic,” says Denton. “Tomorrow there will be more people that have a home than today. That is the best bit. This is genuine additionality.”
Resilience challenge
At a time when most housing associations are struggling under the weight of surging safety costs, sustainability initiatives and regulatory pressures, development is squeezed. Denton calls this the “resilience challenge” for housing associations. But this deal means that rather than holding back, Hyde can now significantly increase its development capacity.
“If we look at the coming five years, particularly from a London perspective, this will probably double our ability,” he says. “Hyde’s view is that we have a fiduciary obligation to our charity to get value for money for our charitable capital and we can stretch our charitable capital further by doing this.”
This is more than a question of funding. It is about risk sharing, Denton adds. “Shared ownership has a different risk make-up to rental and it allows us to stretch money further. This is a serious game-changer for Hyde.”
As grant funding has shrunk, housing associations have rolled with the punches, finding new funding solutions. But Denton is adamant that government subsidy is the essential first ingredient for affordable housing development. “Grant is still an important, intrinsic part of the equation, because it is what facilitates the creation of new homes,” he says.
Cross-subsidy and partnerships only build on that. Denton has been an ardent critic of tactics such as sale-and-leaseback and private equity investment in social housing. This is different, he says.
“It’s not just about patient capital, we wanted someone that bought into the philosophies and culture. I think alignment of interests and alignment of playing field regulation is really important to instil confidence into all stakeholders that everyone is doing the right thing and in the same way.”
Development at pace
Both leaders highlight pace as a major focus. Following M&G’s initial £61m acquisition of 422 homes pepper-potted across Hyde schemes in London and the South East, expansion to a portfolio of 2,000 homes will largely focus on new development via forward funding transactions.
This would mirror the growth strategy of the £1.1bn M&G UK Residential Property Fund, with the expectation that it will grow to at least the same size. However, Greaves is quick to point out that the BTR fund started with £100m backing and the shared ownership venture already has £215m.
“Normally, the funds that M&G launches have a very high percentage of internal capital, from our own client, the Prudential,” he says. “This has that, but it is less than half. We have never launched a fund with less than half internal capital before. That gives you a very strong indication as to the appetite for the external parties to come into this.”
The semi-open fund includes investment from Homes England together with local government pension schemes that are clients of M&G, and investment from Hyde.
“There are a number of different bits that all relate to each other, which have literally been born in the last 10 days,” says Greaves. “One of the things that we were super aligned on was that we have very long-term commitments from our investors. We run 30 to 50-year cashflows. These are pension funds – it is super long-term investors with growing capital to invest.”
In this way the venture is similar to M&G’s BTR strategy. That “sister fund” may also buy into larger regeneration mixed-tenure sites as Hyde and M&G scale. After a slow start, the pair are looking to the long term – for themselves and also the industry.
“It has been years in the making,” says Denton. “I think, we would all like to think in some small way that hopefully we have made it easier for the next lot.”
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