England is experiencing a significant mismatch between housing demand and housing supply. This especially relates to affordable rented housing. The picture is getting worse. A recently published report commissioned by the government has found that the ability of councils across England to meet the requirements of the Homelessness Reduction Act has been significantly hampered by a lack of such housing.
The Act was introduced in 2018 and places local authorities front and centre in responding to people who are homeless. 224 councils across England responded to the survey, and the major challenge to meeting this responsibility effectively was ‘insufficient access to affordable housing’, cited as a problem by 50% of the councils responding. In London, 68% of councils responding highlighted this issue.
This is one among numerous indicators of insufficient supply of new affordable homes across the UK. Indeed, the 2018 report of a commission into the future of social housing for the respected charity Shelter identified a need for an additional 3.1 million social homes in England alone over a 20 year period, to keep pace with housing need and household formation.
While government has taken steps to address this deficit, the reality widely recognised by many housing professionals, developers and providers alike is that these steps – mainly couched in terms of grants and subsidies – will be inadequate to meet demand. This is the case from nationwide level down to individual development sites, even when allowing for the effects of cross-subsidy (i.e. topping up the funding from government grant and the income from rents through developing market sale properties, in order to make the economics of a scheme work).
It is an urgent priority to find new sources of funding and investment for affordable housing. Fortunately, there are positive signs of this appearing, in particular from what are relatively new investment sources for the sector. We have seen an upsurge in the past few years of interest and investment from UK and overseas institutional and private investment sources. These have included major players, such as Legal & General, M&G, Blackstone, and sovereign wealth funds.
As well as presenting a positive in terms of steady and stable returns, the affordable housing sector directly addresses the ESG agenda set out in the UN Sustainable Development Goals. Interest has been growing markedly, at the same time as alternative real estate investments, such as commercial and retail, have been recognised as problematic, as we look towards a post-COVID world of increased homeworking and online shopping.
It is important to recognise, however, that UK affordable housing is not an area for investors to pursue if they seek spectacular returns. Rather it is about achieving a steady and reliable income stream, operating in a sector where the providers of affordable housing are regulated, and rents are also in effect regulated. It is true that some investors have sought to use the affordable housing sector to generate higher returns than the norm – in particular the supported living sub-sector where residents typically have particular mental health, learning disability or physical disability support needs, and hence rents are higher than for ‘general needs’ properties. However, difficulties have been experienced by investors in this area, and the regulator is paying close attention to the governance and financial viability of this sub-sector of housing providers.
The registered housing association sector in England is well established: it numbers over 1600 organisations, and has asset values totaling over £160bn. While there is no guarantee that this may not happen in the future, the reality is that no registered housing association (or ‘Registered Provider’) has ever gone bust.
In the round, affordable housing in England represents an increasingly popular home for institutional investment, given the need for more housing supply, the relative stability of this regulated sector and its maturity, and the focus on identifying opportunities that meet ESG goals.