‘Housing affordability? The only answer is to build more homes’
Thriving Investments is working with real estate stakeholders to create housing and communities for mid and low-income workers. CEO Cath Webster explains how it is driving change.
The name says it all: Thriving Investments is a fund manager committed to driving returns through careful management of the environmental and social impact of its investments. It is part of Places for People Group, one of the largest housing associations in Europe and the UK’s leading social enterprise.
Its vision is to create thriving neighbourhoods and give people, especially keyworkers, the right to live in a safe and affordable home, while giving investors the opportunity to support positive social change. It is committed to investing clients’ capital responsibly, enhancing asset value and improving investment performance.
Impact spoke to chief executive Cath Webster about Thriving Investments’ strategy, its achievements so far, and her plans for the future.
The last couple of years have not been great for real estate, but on the positive side, there seems to be increasing interest in the residential sector in all its aspects. What impact has this had on your business? Is fundraising easier?
The residential sector continues to perform well among all asset classes, including equities and bonds. It is stable – you could even say boring, but that’s a good thing, also for diversifying portfolios.
Lack of liquidity has been an issue, and after October 2022 [after the Liz Truss mini-budget and market collapse] lots of people pulled out and we were affected, even if the problems were not in the residential sector, but in commercial real estate. Now people are looking to come back, which makes things easier. Residential has become one of the favourite sectors to invest in, along with logistics, science parks and data centres.
ESG has been a driver of real estate strategies for a few years, but investors’ focus seems to have shifted more and more to delivering social value. Are you finding it easier to establish partnerships?
A lot of people, when they heard about social impact, assumed they couldn’t get returns. But residential can provide both social impact and returns. They are core returns, low returns, 7-8% ungeared, but they are stable and long-term. People now understand it’s not an either/or situation. The issue has been that the E part of ESG is quantifiable, but the S part is less easy to quantify and deliver. But in the case of residential, delivering good housing in good communities is easily demonstrable.
The sector has seen many headwinds recently, but inflation and interest rates are on their way down and construction costs are not as high as they used to be.
What are the biggest challenges you still have to face?
The biggest challenge is still high interest rates. We’re a long-term investor and we have a very low-yielding asset class, and debt is not accretive. It’s a capital-intensive investment. The other challenge is viability: the average cost of building a home is now £250,000, which is fine in London, but in other parts of the country it is not viable to build because property prices are too low. A recent report by the Housing Forum highlighted the difficulties in building affordable housing without significant subsidies. Building costs have not been going up at the same rate recently, but they have not gone down.
Another challenge is the skills shortage in the construction sector, which is partly due to Brexit and partly due to a longstanding lack of focus on skills. To address this, we have a new project called PfP Thrive – a training centre in Derby to teach construction skills, create apprenticeships and upskill people, especially younger workers. The average age of a worker in the construction sector is late 40s. We need to bring in younger people for when that generation retires.
Thriving Investments has recently formed a partnership with Gresham House, the specialist alternative fund manager, to create a new UK affordable housing fund management platform. What will this partnership enable you to do?
The partnership with Gresham is about shared ownership tenure. Gresham had an existing team and money already invested, and we were setting up our own fund, so going into a partnership with them allows us to deploy our skills, and to have a bigger platform, which gives us more options. It is a win-win: the provision of third-party capital to buy and fund the development enables us to continue without balance sheet constraints. We didn’t have to set up a competing platform and chose to work together instead.
‘Rent controls deter investors and it is something that doesn’t happen in other sectors: no one has ever suggested a price cap on a cup of coffee. Investors just move on to another sector.’
Cath Webster, Thriving Investments
It also makes sense because scale is crucial in residential investments: from a property management point of view it makes it more efficient. We now have more options and can add homes anywhere in the country and be efficient, rather than building up a group in a new location. The partnership with Gresham is looking at the whole country, even if clearly some areas in the South West, the South East and the Midlands, where people find it harder to afford a home, see bigger demand for shared ownership.
You now have over £1 billion of assets under advisory and a stated ambition to become one of the UK’s leading providers of housing solutions across both rental and sale tenures at attainable prices. What are your next steps to achieve that goal?
We have four strategies and we want to grow across all four. The first is market rent, the second is the essential worker housing fund. We are about to launch a new fund in Manchester, with the first close before year-end, and we are looking at doing more of them. We buy a whole development and turn it into a discounted rental offer. The third strategy, as discussed, is shared ownership.
The fourth is our regeneration strategy: we work with our subsidiary, Igloo, to regenerate brownfields. Igloo has a long track record of working with local authorities across the UK.
The new Labour government has set ambitious building targets to help solve longstanding housing shortages. What will it take to make them achievable and what will your contribution be?
First, it has to be said that targets are an aspiration, so they need to be high. In 2023 England delivered 150,000 homes and we need to double that. £40 billion extra investment a year is needed, so the question is: where is the money coming from? Public finances are stretched, so private investment is much needed.
Housebuilders won’t increase their delivery massively because they want to keep prices high, they are reluctant to cannibalise their own market. But mixed tenure is doable, and a multi-tenure community provides a more vibrant mix of people. It also allows people to stay in the same area and move over time from shared to full ownership. We are waiting for the government’s Spending Review in spring 2025, and we know social rents are key for the most vulnerable people in society, but we also need multi-tenure grants so we can deliver different kinds of homes for essential workers.
This government is listening and it is the most pro-housing government we have had in decades in the UK. It has been an improvement on the previous one, because now we have a housing minister who has been a shadow housing minister for years and knows the issues very well.
In the previous government the average tenure of a housing minister was nine months, so they left just as they were getting to grips with the brief. But it is not just about housing – a number of things need to happen across all departments, from planning to net zero, and the necessary infrastructure needs to be in place. There must be a cross-departmental approach. We always need to work in partnership, with the public sector, with private investors, housebuilders and SME developers to help them deliver more homes, more quickly.
You recently commissioned a report which found that there is a serious affordability crisis for renters in the UK. Not just in London but in many other cities, nearly half of renters spend more than 30% of their income on rent. Has it helped you inform your strategy and identify which areas to focus your efforts on?
Everyone knows that London is unaffordable, but what about the rest of the country? The statistics there are equally appalling, we found. The percentage of people on medium-to-low incomes with a family who can afford to rent is 11%. The report highlighted that there are numerous unaffordable areas, many of them urban, but not exclusively. We are looking at where the pressures are, where the population is growing but there is no supply.
Economic growth and a housing strategy must work together, because lack of housing can strangle growth. If companies are moving to a place, they need homes for their workers. This is why we focus on affordabiIity for people on medium or low incomes.
The much-trumpeted Levelling Up strategy does not seem to have worked. You have a presence across England as well as in Scotland. How important is it to have targeted regional strategies in the UK?
We are creating local communities, and the fact that we have offices across the country means we’re able to understand what the drivers of those areas are and what the affordability issues are. Scotland, for example, has its own tenures and rules. It recently put in place rent controls, which have had the opposite impact to the one intended: instead of rents going down, the supply tap turned off.
It was a classic test case: on paper rent controls are good, but in practice they stall the market. They also deter investors and it is something that doesn’t happen in other sectors: no one has ever suggested a price cap on a cup of coffee. Investors just move on to another sector. The only answer to the problem is increasing supply.
Looking to 2025, what are your hopes and expectations? Do you see any tailwinds for your sector?
I hope the Spending Review will deliver multi-tenure grants, although the government could decide to focus on social housing only. The tailwinds are that residential is increasingly recognised for
its stable, long-term, inflation-linked returns, and because the supply/demand dynamics will remain the same even if we deliver the uplift in supply. It is favourable to investors who can also deliver the social impact that is becoming more of a concern for them. Another positive is that we have no problem finding people who want to work in this sector because they know they are doing an important job and finding a solution to a serious problem.
The headwinds are interest rates and viability. We want to continue buying homes, getting good returns for our investors and delivering affordable homes for our customers.
In 2025 we want to launch more of our essential worker funds, because they have the most place-based impact. We also want to increase the number of homes we create directly or indirectly and are aiming for 20,000. Housing associations have been the biggest providers of new homes, but are focused on fire safety and repairs and have less resources for development.
We want to help that sector by buying some tenanted stock, creating more homes in an indirect way: that’s a new strategy we are working on. We need many nuanced solutions to deliver more homes.