Cheyne Capital: Making an impact in real estate

What have been your main achievements as an organisation over the past 18 months?
In 2020 we launched our second impact real estate fund which builds or buys property for use as affordable or specialist housing, demonstrating that private capital can work with the public sector to help tackle the chronic shortage of such housing in the UK. The fund launched with Local Government Pension Scheme investment and has already committed £36m to homes for adults with a learning disability, £34m to a development in central Manchester with 35% of homes allocated to keyworkers at discounted rents, and £38m to building three state-of-the-art care homes with 35% of beds allocated to publicly funded residents.
In the case of the Manchester and care home developments, we are particularly proud to be delivering accommodation at discounts to market rents in schemes where there was no planning requirement to deliver any affordable housing at all. Further, we have introduced indexation limits on all rents to ensure the long term affordability of the accommodation.
Across the wider firm, we continued to provide other funding solutions for real estate and corporates, launching the sixth and seventh vintages of CRECH, our £2.2bn European real estate lending programme, and we closed our second €1bn (£850m) strategic value credit fund which focuses on providing constructive capital solutions to financially constrained mid-market businesses.

What do you believe sets you apart from your peers and contributes to your successes?
In impact real estate, we launched the UK's first affordable housing fund in 2014 so we have had the chance to establish a track record and build up a large pipeline of investments to which future capital can be quickly committed. In addition, we are one of the few managers with in-house development capabilities, which means that development gains go to the benefit of our investors rather than being paid away to external developers. We favour diversification across location, tenant and counterparty type to reduce risk for investors and to aid the rapid deployment of capital for impactful purposes; we are evangelical about our schemes being ‘tenure blind' so there is absolutely no difference between the homes for market-rate rent and those at discounted rents; and we focus on additionality (creation of stock) rather than buying existing stock which would always have been made available for use as affordable housing anyway. Our experience of having operated in this space for seven years means that investors benefit from the lessons we have learned and we are always happy to share details of our experiences, for example why we have chosen to launch our second fund as an evergreen fund rather than a closed-ended fund, with anyone who is interested in this sector.

How has your business dealt with the challenges of Covid-19?
As an asset class, affordable housing has not been negatively impacted by Covid-19. Rather Covid-19 has exacerbated the chronic housing issues in the UK and heightened the need for institutional capital to help plug the funding gap. Indeed, some estimates suggest that councils' waiting lists will increase to two million people as a result of the pandemic. While we did experience some delays in construction timetables in the short period when construction workers were not able to get on site, these were temporary. For existing and completed schemes, rental income was not affected.

What are the key challenges facing your pension scheme clients at the current time and how are you helping them address these issues?
With various traditional sources of yield having become less attractive (UK 10-year Gilts, for example, are currently offer a negative yield), pension schemes need to look elsewhere for long-term, stable, inflation-linked income to match their liabilities. Our experience shows that the distributable yield on a diversified portfolio of affordable housing, supported living and social care assets can be approximately 5% (net of fees) and is inflation-linked. With supply/demand dynamics suggesting a 20+ year backlog in UK affordable housing and the stability of the rental receipts, we believe this asset class is a perfect match for UK pension schemes in the current environment. And on top of the financial investment case, investment in this sector also makes a "real impact on individual lives" (See: Cheyne Social Property Impact Report 4, The Policy Institute at King's College London).

How will you continue to improve your services to pension scheme clients over the coming year?
We hope to continue meeting the needs of our pension scheme clients by providing cost effective funds that demonstrate a visible and stable running income and attractive internal rates of return. We know that rapid deployment of capital is important to our clients and we plan to continue to deliver this through our substantial investment in our origination platform along with fundraises which are purposefully limited in size so that capital can be put to work quickly. Finally, we will continue to strive for best-in-class ESG credentials both directly, such as in our affordable housing schemes, and in other areas for example, incorporating ESG-linked covenants and pricing incentives into agreements when we act as a lender.