How can we deliver a step change in affordable housing supply?
Affordable housing brings with it countless societal benefits, but the UK still suffers from a chronic undersupply. At Legal & General we’ve been working with the British Property Federation Affordable Housing Committee’s members to develop a series of recommendations to address the problem.
With 1.2 million households on social housing waiting lists in England, an estimated 145,000 affordable homes need to be built each year to meet demand – that’s nearly three times the number built in recent years.
This is a societal issue that we’re passionate about solving, which is why we’ve worked with the British Property Federation to look at what needs to be done to increase the supply of affordable housing. Housing associations, local authorities and developers have shown imagination and determination to overcome obstacles, however our analysis suggests that they are unlikely to be able to increase supply to what is required on their own.
Set within the context of ever more tightly constrained public spending (and despite an expanded affordable housing programme) it is quite clear that output of new affordable homes is still well below what is required and is coming under further strain. The social and economic costs of this continued under provision are very substantial and growing.
What did we do, and what did we discover?
We modelled the financial position of housing associations to assess overall capacity. In the last decade, Government funding for affordable housing has been at historically low levels. Housing associations have typically needed to rely on borrowing to build but are increasingly hitting debt limits.
On top of this financial limit, housing associations face other major challenges. The cross-subsidy model used in recent years to counteract reduced grants and lack of equity funding has weakened, and there are huge new demands around building safety that have resulted in resources, of necessity, being spent on the existing stock rather than new build.
The biggest headwind facing the sector over the long-term is decarbonisation. With requirements for all homes to reach net zero carbon emissions by 2050, it is estimated that this will result in an additional long-term capital requirement of up to £50bn.
Pulling these together, our work found that this will realistically cap the number of homes delivered by the traditional affordable housing sector at 65,000 per year. Once multiple other are taken into account such as organisation-specific covenants, risk appetite levels and varying levels of development expertise, the true realistic long-term number may be significantly smaller.
Therefore, to meet the real long-term target of around 145,000 more affordable homes, we will require £34bn of additional capital funding each year. This needs to come from a significant increase in the level of Government grants as well as major volumes of both new equity into the sector and debt.
What’s the solution?
Whilst debt is readily available, supply cannot be increased without increasing the provision of both subsidy and equity.
The funding model of affordable housing across the country has evolved over many decades with provision dominated by Government and local authorities and then housing associations. In the 1980s we saw the successful introduction of private debt finance which helped sustain output with reduced levels of grant funding.
The next iteration of the funding model that we’ve seen start to grow at pace in recent years is long-term patient equity capital investment coming together through partnerships between housing associations and institutional investors. As understanding and experience has grown, market appetite has developed and matured. There are now real opportunities to seriously explore equity investment in affordable homes as one of the solutions to the supply and funding gaps that exist.
What do we do at L&G?
At Legal & General, we use the money people have invested with us through their pensions and put it to use in areas of the economy where it’s desperately needed – and there are few areas with a greater need for funding and a greater potential benefit to society than affordable housing. It’s a win for our pensioners and it’s a win for society and the customers we serve.
Through our Registered Provider Legal & General Affordable Homes, we currently have a portfolio of over 7,000 homes in development or recently completed. We are looking to continue to expand our portfolio significantly for years to come in partnership with a range of housing associations and other wider organisations.
Housing associations have a great opportunity now to work in innovative partnerships with institutional investors. They can consider which models work best for the delivery of additional affordable housing and assist in achieving their other organisational goals. Partnership with institutional investors could be a great way for housing associations of all size to scale up, and now needs to be considered side by side as a productive alternative to merging two capital constrained entities together.
Government policy can support and facilitate private capital to drive the step-change needed in supply. Growth in the number of FPRPs exploded in recent years, with an exponential rise in homes owned. However, there is room to do more to encourage further private capital to enter the sector.
Arguably, the most powerful support Government could provide outside of significant greater subsidy provision is a longer-term rent settlement to provide the sector with greater certainty around the rates at which future affordable rents will be set. Our research estimates that providing this certainty could be worth the same as providing £2bn of subsidy per year.
Fundamentally, making a step change in supply isn’t something that can be done by any one stakeholder group in isolation. We will need Government, housing associations and institutional investors to work together to meet this urgent need.
To read the report “Delivering a Step Change in Affordable Housing Supply”, click here
Simon Century, Managing Director of Housing at Legal & General Capital
Speaking in Symposium session 9 – Plenary: Innovative financing partnerships