Low interest rates mean the time is right for UK social investors
Low interest rates reported by the UK Monetary Policy Committee earlier this year mean that the window for social investment is ajar, but is it about to slam shut?
Deputy head of the charities team at NPC Abi Rotheroe urges social ventures and their potential investors to “put their flag in the ground now”, because the economic climate might not be so well suited to their needs forever.
The Monetary Policy Committee announced earlier this year that interest rates are staying at 0.5%, which means we’ll go into the election with rates at a historic low.
Whether or not this is a good thing for people going about their daily lives depends on what those lives involve – older savers dependent on meagre returns on savings face real drops in living standards, while mortgage holders can enjoy lower interest payments.
But low interest rates bring positive news for the social investment market. The cost of borrowing is kept low, making it cheaper for charities to access loans. Meanwhile the lower financial returns associated with social investment may start to look more attractive in comparison to lacklustre yields found in commercial markets.
And yet, despite these apparent advantages, the market still seems to be struggling.
According to the Charity Aid Foundation in 2014, more than six in 10 charities had never even considered repayable finance (from a survey of charities turning over more than £60,000 a year).
The Alternative Commission on Social Investment cautioned in its After the Gold Rush report last month that there’s “a major disjunction between the rhetoric … and the reality on the ground”. And NPC also hesitated over some of the hype – we agreed that the promises of trillion dollar investment are exciting in 2014 but can they be turned into a reality?
You don’t have to look too far for diagnoses of why such problems have emerged. Our manifesto for the upcoming election argues that Big Society Capital (BSC) – the ‘Big Society Bank’ set up to boost social investment – demands a financial rate of return that is too high for many social ventures to realise. (BSC has pledged to look at how it’s financial return targets are decided).
After the Gold Rush identified a series of problems with how the market currently functions, along with a number of eminently sensible solutions, including prioritising social investment as a part of the wider movement to invest in good causes, clarifying the opaque language that swirls around it, localising funds to communities, and more.
Which brings us back to interest rates. When they eventually start to rise again – and they will – how is social investment going to cope?
It feels like a window of opportunity is ajar, but will soon slam down again. Social ventures and their potential investors should put their flag in the ground now, because conditions might not be so well suited again for some time to come.
This can be part of mixed funding models such as the Access Foundation, where grants are provided (from the Big Lottery Fund) as well as loans (from BSC). Their first Growth Fund offers to combine the two, effectively lowering the cost of capital.
Home improvements
There are certainly specific projects from which to take encouragement. As we hurtle towards the election, with daily debate around fair access to housing, it’s worth considering the immediate potential of social investment in purchasing and developing assets otherwise beyond the means of deprived groups or parts of the country.
The Real Lettings Property Fund, for example – which closed a fortnight ago after two years buying homes to let to homeless people in London – had grown to £57m. This fund, managed by impact investment company Resonance and leading charity St Mungo’s Broadway, shows the depth of the demand out there.
The programme has re-housed 230 people, with more families still working their way through the system. The Golden Lane Housing Bond, successfully established to secure accommodation for people with learning difficulties, showed the interest too from the retail market.
The social investment model is in many ways a very good suit for addressing housing problems. Purchasing property can be financed, given the right terms, through the tenant’s housing benefit. So-called ‘wraparound support’, which extend other services to tenants to make sure they’re managing their finances, searching for work and so on, can be paid for through additional grant-funding or a payment-by-results contract with a charity.
There’s plenty at stake if the investors get this right, too. The evidence is pretty clear that suitable, stable housing is at the heart of improved social outcomes far beyond just where someone lives.
Social investment also offers scale. There simply isn’t enough donor and grant-making money in the system to finance the vast gaps in the housing market. A colleague’s rudimentary calculation got to an annual gap north of £30bn – these amounts are more readily raised through repayable capital, even if each project is at more modest scale.
Social investment isn’t a ‘cure-all’ in a time of social need and austerity, but its potential for addressing some complex and enduring problems is significant. For would-be investors and investees alike, economics might currently be in their favour. They may regret it if the moment slips past.
