Affordable Housing’s Perfect Storm Is A Challenge And Opportunity For Investors
It is not an easy time to be in the affordable housing sector in the UK.
“For as long as I can remember, we've been modelling what the perfect storm in our sector would look like, and it feels like we've been in it for some time now,” Elly Hoult, Notting Hill Genesis Group director of assets and sustainability, told the audience at Bisnow’s UK Living Sector Update event at the Leonardo Royal Hotel Tower Bridge.
The shortage of affordable homes in the UK is well known, as is the inability of both the private and public sector to build enough homes to meet sustained demand across the country, particularly in London and the south east.
Experts from the UK’s not-for-profit housing association sector and the traditional real estate sector identified the opportunity for the two worlds to come together, combining the expertise of housing associations with the finance of pension funds and insurance companies.
It is not easy to forge such partnerships, but where they can be created, it meets a social need and provides the opportunity to make good returns.
“You're right, it's a perfect storm, but it provides opportunities — at the moment there's a lot of new capital looking at the sector,” M&G Real Estate Investment Manager Annabel Harmsworth said.
M&G has struck a partnership with housing association Hyde Group to build 2,000 new affordable homes for shared ownership, with a goal of investing £500M in the sector.
“It attracted us because from we're long-term investors, we have a focus on wanting to have a social impact," Harmsworth said. "And from a risk-return perspective, it is comfortable, low return, but also low risk. There’s a lot of other investors also looking at new ways to enter the sector.”
Hyde has also formed a joint venture with AXA that will see the French insurer buy half of Hyde’s for-profit registered provider of social and affordable housing, as well as buy into a development joint venture with Hyde and Homes England. That JV will have £200M of equity and £200M of debt.
Hyde CEO Andy Hulme said that between the partnerships with M&G and AXA and its own balance sheet, it was aiming to deliver 20,000 new homes over the next 10 years.
“We always build to a minimum of 50% affordable homes as a policy, our average on a site is actually about 75%,” he said.
“Some of our existing customers don't like us building new homes, they think we’re distracted by it, they think it drags money away from their homes. But for us, it throws off and throws back into the business about £100M a year. Without that we have a gap of about £100M a year. Every penny goes back in.”
The government announced in November that social housing rents will be capped at 7% next year, below the level of inflation. Hulme said that felt fair, summing up the paradox of rent rises in a time of high inflation by explaining a 7% rise was both the biggest single-year increase in rents for tenants in more than 20 years, and, against inflation at 11%, is was at the same time the biggest real-terms decrease over the same period.
A group of housing associations has pointed out that a 7% increase meant as many as 2,600 affordable homes would not be built. In that sense it fits with the findings of multiple studies on rent caps: They are good for existing tenants, but hinder the creation of new affordable housing.
M&G’s Harmsworth said below-inflation rent increases create a barrier to entry for pension funds, but the challenge is not insurmountable.
Financing new developments would be the first way for these institutions to enter the affordable housing sector, she said, but the need to retrofit older properties to meet sustainability standards would be an opportunity, too. The best structure for doing so is not clear, but outside investors could provide the capital in exchange for a share of the ownership.
“Because I know at the moment there's a weight of capital looking at new affordable housing delivery,” she said. “And eventually we'll also be looking at probably retrofit as well.”