Cheyne Social Property Impact Fund

The fund was launched to take advantage of a material dislocation in the social property sector. For about 70 years, UK government offered social sector organisations (local councils and housing associations) free equity (what the sector called “grants”) to invest in property. For example, in 2011 the government gave approximately £3 billion of grants. In 2012, the government cut the grant program to £500 million and has actively encouraged the social sector to seek private sector solutions..

Against this supply side shock, the demand for social housing is currently at 1.7 million households and growing. To address this demand would require £170 billion to £200 billion of capital investment. Due to cuts in government grant there are approx. 40,000 social housing units being built per year, a 40 year backlog.

Since the sector has no credible way of funding capital investment now that government has stepped back, the fund will invest in property and lease these properties to local councils, the NHS, housing associations etc. on 20 year long-dated inflation linked full repairing and insuring leases. Investments typically have some or all of the following characteristics:

- High degree of income security due to high quality covenants (no UK council or housing association has ever defaulted)

- Inflation-linked rents providing a natural inflation hedge (typically CPI+1%)

- Ownership of the properties

Financial description

Typical investments will involve the Fund investing in property and entering into a lease with a social sector organisation such as local councils, registered social landlords, charities that will use the property to deliver their services. Rental income linked to CPI providing a natural inflation hedge.
Dual covenant rental security – the Fund will enter into a head lease with a council or charity. Properties are then sub-let to individual tenants. Therefore, the Fund will have a rental claim on both the head lessee and the tenants. Quasi-governmental Rent – tenants satisfy their rental obligation using UK local housing benefits. In the event a tenant fails to pay rent, the Fund can direct payments from the Department of Work and Pensions
The Fund’s investments will benefit from a high degree of income security due to the ultimate look-through to government housing benefit payments. This will help to facilitate an exit for the Fund at attractive price levels. Target net return of 10-12% with potential for further upside through favourable exits.