Affordable Housing: The New £10B-A-Year Investment Market That Might Not Happen

A new affordable housing industry could be on the brink of emerging, capable of delivering 145,000 new homes a year.

But the £10B-a-year capital market opportunity that comes with it will depend on the UK government enabling an extra £14B in grants, guarantees and section 106 contributions.

Getting the government to respond will be “challenging” given existing policies, the promoters of a new policy initiative conceded.

The first blast in a campaign to win political backing for an expansion of affordable housing came this week with a British Property Federation report into the potential for private investment.

The aim is to enable private and institutional investors to fill a yawning equity gap holding back new development and an expensive programme of green retrofitting of existing housing stock.

Co-written with Legal & General Capital, and supported by a steering group including M&G Investments, PGIM, Federated Hermes and LaSalle Investment Management, the document, Delivering a Step Change in Affordable Housing Supply, argued that a mix of private and public funding can reshape affordable housing.

To increase affordable housing delivery to 145,000 new homes per year, the research found that £34B of additional funding will be required each year, which will need to be made up of £10B of equity from investors, the same from the debt markets and up to £14B from government grant. 

The research calls on the UK government to support a level playing field between both housing associations and investors if it wants to scale up the levels of institutional investment in affordable housing that are required to meet the deficit. These include targeted changes to the tax regime and the nature of capital grants.

But without substantial additional government funding, the private sector cannot move, the report's authors concluded. 

The group’s suggestion is that, as a first step, the government keep the existing affordable housing rental settlement until 2035, giving investors stability and in the process kicking up valuation.

But as the authors conceded, rents of CPI plus 1% risk becoming seriously unaffordable if inflation continues to grow as it is today. It is not clear that governments could weather the resulting political storm over 12 long years.

Legal & General Capital Managing Director for Housing Simon Century described the potential rent increases as “uncomfortable” but added: “The rental settlement is one of government's biggest policy levers to show what it wants.”

The lure for government is that extending the rental settlement could help cut its subsidy burden.

Asked if the government could adopt the report’s conclusions on the rental settlement, Century said: “I think it is possible. Housing is important politics, MPs hear about it day in, day out. An easy win would be to extend the rental policy. On its own it won’t get us to 145,000 new homes a year, but it will help grow it a lot."

“It doesn’t have to be grant funding — there are other options such as fiscal interventions, Section 106 [planning obligation] funding, looking at guarantees, so there’s a lot more in the government subsidy that purely grant funding,” British Property Federation Director of Policy Ian Fletcher said.

Institutional investors have strong appetite to inject new equity funding into the sector. Research from Savills forecast the level of private investment will grow to £23B by 2026, enough to fund 130,000 new affordable homes.