Cromwood Housing Group recently secured a loan of more than £19m to invest in homes for former rough sleepers and domestic abuse survivors in London. Scott Douglas, director at financial advisor Centrus, explains how the deal came together and why investors view Cromwood as a strong partner to work with.
Your work with Cromwood has attracted investment into social housing from investors perhaps not traditionally associated with the sector – what were the key success factors?
The structure of the Cromwood transaction was relatively innovative given: (1) grant funding provided by the Greater London Authority; (2) long-term nomination agreement and significant demand from the user groups; and (3) strong social benefits in terms of reducing homelessness and supporting victims of domestic violence. This combination was attractive to investors, including those who had not traditionally invested in the UK social housing sector.
While the transaction structure and ESG characteristics were really important factors, Centrus also has a very strong relationship with investors across the board and it was these relationships combined with our knowledge of the sector and transaction structuring that allowed us to attract a new investor into the transaction and ultimately get it over the line.
Do you feel the for-profit registered provider model offers any advantages when it comes to securing investment in projects?
The regulated nature of the registered provider definitely helps with investor appetite as it provides third party oversight and governance to ensure that providers are adhering to and exceeding standards. The for-profit model is attractive to investors given UK social housing has real asset backing, inflation-linked cashflows, high levels of regulation, and a large demand/supply imbalance creating a strong need for the product. The UK has an acute shortage of affordable homes and private capital will be critical if it’s to deliver the homes the population needs.
To what extent do you feel a shared ethos has been important in your work with Cromwood? (Cromwood being mission-led and Centrus having a ‘finance for purpose’ mantra)
As a certified B Corporation (which is awarded to businesses that demonstrate high social and environmental performance), Centrus is focused on responsible finance that delivers sustainable benefits to society, therefore working with clients such as Cromwood is incredibly important to us. We can be sure that funding raised will help tackle homelessness and support victims of domestic abuse, both of which are very important social causes. For us, this embodies our mission of ‘finance with purpose’.
Do those values have a bearing on which investors you approach on behalf of clients? Do you find investors are increasingly looking beyond the bottom line for added social value?
While ESG (environmental, social and governance) is really important for investors, the underlying fundamentals of the transaction need to stack up on traditional financing metrics to make it work for the investor as they do need to generate sufficient returns.
However, positive ESG characteristics help sell a transaction and improve investor appetite as the underlying capital is increasingly demanding that their capital is deployed into transactions that have positive ESG benefits. Underlying capital has become increasingly vocal and interested in where their money is going (and increasingly where it’s not going).
We do see a small pricing benefit on transactions that exhibit positive ESG characteristics, although we have also increasingly started to see a price premium for transactions that do not have positive ESG characteristics. It certainly helps where the transaction size is a little smaller than an investor would typically look at as transactions that exhibit genuinely positive ESG characteristics are in high demand and we see investors apply some flexibility to their standard criteria on this basis.