Home REIT is where the heart should have been

Summary: The collapse in Home REIT's share price has drawn questions from shareholders about how closely the REIT's investment philosophy for social impact was being followed.

Why this is important: As interest in impact investing grows along with capital available and willing to be deployed, the veracity of projects and fund strategies will be key.

The big theme: Impact investing seeks to improve lives either through social or environmental projects. It has grown materially in the past decade and can have important leveraged impacts developing local communities, reducing the draw on social services, improving lives and providing economic sustainability. 'Doing well by doing good' is a careful balance with potentially direct and immediate sacrifices of some return resulting in longer term benefits to society as a whole.

Summary of a story from Portfolio Adviser

Law firm Harcus Parker is seeking compensation on behalf of Home Reit shareholders and has called on the REIT trust to explain links between potential bidder Bluestar and its fund manager Alvarium. Following the AGM on Monday 20th Feb 2023, no proposals were put forward and the meeting was used as an opportunity to engage with shareholders. Jennifer Morrissey, partner at Harcus Parker, pointed out that shareholders had suffered substantial losses and had yet to see the publication of the long overdue financial results. There was also no clear indication as to when the outcome of an independent investigation into alleged wrongdoing would be published.

Why this is important

First, some background on Home REIT: Initially launching on the London Stock Exchange in 2020 with a £240 million IPO, it's aim was to invest in properties and provide housing for homeless people - a social impact aim. Initially investing in 500 properties this drove further fund raisings and further property purchases such that towards the end of 2022, Home REIT had purchased more than 1,000 properties and raised £740 million. In early December 2022, a group of shareholders claimed that Home REIT was not following its social impact investment philosophy. There were questions posed about the valuation of the property portfolio amidst claims that some of the occupants did not qualify for housing benefit (a large source of income for the REIT) and tenants and representative charities not wanting to pay rent because of the state of the accommodation due to lack of upkeep. Finally there have been concerns about related party transactions including the takeover approach described in the article by Bluestar and their connection with Home REIT's former investment adviser Alvarium. Home REIT deny the allegations.

The global impact investing market size is estimated to be US$1.164 trillion. In the UK alone the social impact investment market is estimated at £7.9 billion as at the end of 2021 and has grown more than 10x in the past decade. Big Society Capital (BSC) is the leading social impact-led investor in the UK, funded by English dormant bank accounts and the four main UK high street banks. They are an independent financial institution with a mandate to "improve the lives of people in the UK through investment with a sustainable return." The order of things is important: 'social impact' through 'investment with a sustainable return'. In the case of Home REIT, was that order reversed in an effort to build scale and raise funds losing sight of the social impact?

The Impact Management Project (IMP) has emerged as the forum for building global consensus on how to measure, manage and report impact.

BSC is very much aiming for the 'C'. An example of a successful social housing initiative is the Hull Women’s Network (HWN). As well as offering specialist domestic abuse support and nursery provision, HWN provides access to safe and affordable housing across Hull. The difference is that HWN actually buys homes meaning that they can save on time and money spent on grant applications and can support women for longer periods (more than two years). They received investment to buy 82 homes from Social and Sustainable Capital’s Social and Sustainable Housing fund, and its Community Investment Fund. BSC invested £26 million across both funds. There are now 200 safe homes for women across Hull with 56 empty homes being brought back into use.

What are the returns from impact investing? In a 2019 paper by Barber, Morse and Yasuda, a study looking at data from 1995 to 2014 comparing impact with impact-agnostic funds of broadly the same average size, concluded that the median IRR for private equity VC and growth impact funds was 6.4 percent compared with the median IRR for impact-agnostic VC and growth funds at 7.4 percent. However the objective of an impact fund isn't solely financial return. 'Doing well, while doing good' means a willingness to sacrifice some return for achieving social or environmental outcomes - 'Willingness to Pay'. However those outcomes could also have leveraged effects reducing systemic risks in the economy, for example. A 2021 study by the New Economics Foundation for Refuge, found that on average the social return on investment for Refuge's specialist domestic violence services was £8.24 for every £1 invested. Looking at another example, according to research by Vivid Economics for international NGO WaterAid, investing in clean water, sanitation and hygiene is estimated to generate a return of US$21 for every dollar invested in the form of improvements in quality of life, reduced pollution and reduced healthcare costs.

We shall explore Impact investing in more depth in a forthcoming long blog.

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