The original impact investors – “five per cent philanthropists”

In a blog post in July last year I compared the early 20th century co-partnership capping of equity returns as not dissimilar to the Victorian era “five per cent philanthropists”.

There seems to be growing interest in the potential for impact investment to support property development projects. The Guardian ran this as part of their ethical money series in November and Sarah Gordon, the Chief Executive of the Impact Investing Institute, referred in December to the excellent work done by our friends at Bridges in this field. Earlier in the year the IPE noted that “something seems to be happening in parallel within the institutional real estate industry: the mainstreaming of social impact investing – principally, in the form of social and affordable housing strategies.”

Whilst this interest is welcome, it feels like the lack of historical context is unhelpful to the growth of this part of the market. For me, its important to know that impact investment has deep roots and a long history of success in property development. The more that we can show that this is nothing new or very innovative (or scary), the quicker we can mainstream this thinking and for the public good.

Nothing new under the sun

From the mid nineteenth century until the early twentieth century a group of societies and companies emerged to experiment and share innovative approaches to solving the crisis of insanitary and overcrowded housing. In pursuing their social agenda, these societies tended to offer their investors a capped dividend of 5%, appealing to what became known as the “five per cent philanthropists”. A lot has been written about these societies (and I might return to them another day) but for now I want to focus on the financing.

We at Stories are interested in this aspect of housing development history and what we might learn from their experience. As one starts to look at how to maximise the social benefits from property development one inevitably ends up looking at how the landowner, developer and investors might all ‘lean in’. “Five per cent philanthropy” is one way that investors have historically ‘leant in’ to help in times of housing crises. Today this would be called Impact Investment and it’s worth studying for the lessons we can take.

The first reference I can find (and standing on the shoulders of John Tarn and his book “Five per cent philanthropy”) is from the 1840s and the emergence of The Society for Improving the Condition of the Labouring Classes (SICLC) and the Metropolitan Association for Improving the Dwellings of the Industrious Classes (MADIC).

The SICLC itself grew out of The Labourers’ Friend Society (1827 or 1830) which had primarily agricultural interests. The SICLC’s interests ranged from the provision of allotments to the refurbishment and development of housing. The SICLC would last until 1959 when it became the 1830 Housing Society and then in 1965 was taken over by Peabody. MADIC was the first society expressly founded to build houses (but not connected, it would seem, to the much later Metropolitan Housing Association).

The SICLC received Royal Charter in 1850 and limited its dividend to no more than 4%. MADIC, although founded at a public meeting in 1841, took four years to raise £20,000 (£2million today). Securing royal charter in 1845 (then the only way to limit liability to the proportion of investment), the charter fixed the maximum rate of interest at 5% with any surplus first going towards a guarantee fund of £15,000 and afterwards to the furtherance of the society’s objectives. To put this into context, MADIC’s first development (completed in 1848) was a five storey building on the east side of Old St Pancras Road in London and provided accommodation for 110 families. It cost £17,737 to build.

Later, in 1863, would follow the Improved Industrial Dwellings Company (IIDC) founded by Sir Sydney Waterlow (who would go on to become Lord Mayor of London). Having housed some 80 families as a private philanthropist he founded the IIDC with £50,000 but on the basis that it would pay investors a five percent return; as a result, the capital grew quickly and reached £921,500 by 1884 (c.£115million today).

In February 1875 Charles Gatliff reported in a presentation to the Statistical Society (where he was a Fellow and also a member of MADIC) on the improved dwellings movement. According to Gatliff there were at that date a total of 6,838 “improved” or model dwellings on operation in London, housing total of 32,435 people – delivered by 28 “agencies or individuals”. The details of this presentation can be found on this excellent page on Model Dwellings.

Although this data is suggestive of some success for the MDCs, and the five per cent philanthropist-backed societies (and ‘proper’ philanthropists like George Peabody), contemporaneous reports suggest a mixed bag when it comes to the financial success of these ‘societies’, especially the pioneers.

Writing in his book Healthy Homes in 1857 the SICLC’s first architect William Bardwell informs us that “The means of the Society were limited and not at all commensurate with the ideas of its members”. Later in his writing Bardwell implores the Society to lift its cap on dividends to encourage investment and boost its capacity and reach in the interests of those that would benefit the most. Tarn notes that the great Edwin Chadwick also urged the Society to reconsider their attitude to finance and remove the cap “to place the proceedings on a commercial principle simply, as being really the most benevolent in its ultimate operation to the working classes”. Chadwick’s point was that more people would stand to benefit if the society was able to attract more investment.

MADIC had mixed financial success too it would seem (their experimental lodging houses for individuals being less successful than family houses). It took a long time to raise the money they needed but what is interesting is that, once they did, the clear positive social impact they were able to observe galvanized the market. At a meeting in February 1854 they were able to report that “…the average rate of mortality in the improved dwellings erected by the Metropolitan Association not being one-third that of the metropolis generally, while the rate of infant mortality in the same dwelling is little more than a fifth…”. Although leading up to the meeting MADIC was only able to issue a dividend of less than 2% (due to the problems of the lodging houses, the development of which were halted in favour of family housing) the public response to the ‘impact report’ was an impressive round of investment totalling £15,275.

The fact that the IIDC and then the Four Per Cent Industrial Dwellings Company (1884, still in existence as the Industrial Dwellings Society) were able to come along later suggests that despite the concerns of Bardwell and Chadwick the capped dividend model could work and at some scale. In part it would seem this was achieved by perfecting the system and design for the housing in question and targeting a middle market, rather than the very poorest, and by better property management - thanks to the work of the likes of Octavia Hill who entered the fray in 1865. But it would also appear that the Societies became better at catching the imagination of the target investors and, it would seem, the State - which through Acts in 1866 and 1875 created better conditions for the work of the societies to flourish (loans to remove reliance on public subscription and discounted land sales). Thomas Scheuerle and Gunnar Glänzel, in their 2016 article (link below) write that probably one of the crucial success factors was the fact that the model dwelling companies could, via the Metropolitan Board of Works, borrow capital from the state for 4%, repayable over 40 years. By 1875 they inform us that £250,000 had been lent to the model dwelling movement. This recognition from the state is perhaps one of the key successes of the early pioneers (and their influential founders and backers). It was also the beginning of the end for the movement as the state started to recognize the importance of housing delivery and the need to face the challenge of the slums – but that’s for another day.

I plan to spend a little time in the London Metropolitan Archives as soon as Covid, business and family allows me to have a more detailed look at the minutes and papers of many of these pioneers. But it does seem that with a clear impact agenda, supportive and aligned investors, landowners and state institutions (and the judicious combination of debt and equity) there is a successful precedent for capped equity returns and the creation of impactful property development. An inspiring way to start the year. And nothing scary.

Scheuerle, T and Glänzel, G., (2016), Five per cent philanthropy as an early form of social impact investing – differences, parallels, and what can be learned for today, 2016.

Tarn, J. T., (1973) Five Per Cent Philanthropy – an account of housing in urban areas between 1840 and 1914, Cambridge University Press