As Investors Eye Affordable Housing, Provider Plans £500M Spending Push

A Manchester-based affordable housing provider is planning to buy up to £500M of new assets next year, but it could face heavier competition as investors look to put more money into the sector. 

HSPG this year bought £200M of new-build housing from developers operating under section 106 agreements with local planning authorities, Chief Investment Officer Michael Pearson told the attendees at Bisnow’s UK Living Series: UK Affordable Housing Conference, held at the Stand Palace Hotel.

Next year, it plans to at least double that figure.

“That will make us one of the biggest UK buyers of new-build affordable housing in the UK,” Pearson said. 

The company is a for-profit registered affordable housing provider and works with outside investors on deals, having partnered with firms such as Octopus Capital and CBRE Investment Management.

It was set up by CEO Guy Horne and Chief Operating Officer David Searle in 2015 with the aim of buying properties to provide accommodation for people experiencing homelessness. It has since expanded into affordable housing and, in 2020, bought Park Properties Housing Association. 

“In terms of institutional investment into the affordable housing sector, I'm a massive optimist, tempered by a bit of realism about the speed to get there,” Pearson said. 

Local government pension schemes, in particular, are putting significant amounts of their real estate allocation into affordable housing, drawn by the chance to provide additional housing stock, especially in their home regions.

LGPS investors also like the granularity of income provided by residential assets, particularly when that income is backed by the government in the form of affordable housing grants. 

Such investors are coming into the sector in multiple ways, the event heard — through regulated affordable or social housing, shared ownership providers, or single-family housing that is targeted to be more affordable accommodation for families. 

“It has a very stable income. If you're looking at it from a rental point of view, you've got thousands of tenants paying a rent, and it roughly goes up in line with inflation,” Thriving Investments CEO Cath Webster said. “And those sorts of characteristics of an income stream are really what the pension funds, insurance companies, etc., are looking for as much as an inflation hedge. If they can get that, they'll lap it up.”

Institutional investors have a long history of lending to housing associations. But Webster said with the price of debt having gone up, those associations are now less keen to borrow, and those same institutional investors are less versed in providing equity to the sector. 

The flow of institutional investment into UK affordable housing is also being slowed by the management complexity of the sector, Pearson said. The regulatory complexity is also a factor — the fact that buying a registered provider can take more than two years has a huge chilling effect, he added. 

But at the end of the day, as with most things in real estate for the past three years, it mainly comes down to interest rates. 

“When gilt rates rose two or three years ago, that pricing change wasn't reflected on a one-to-one basis in affordable housing,” Pearson said. 

“That's created a challenge. So what's beginning to be a kind of solid wave could become a massive wave of capital with relatively small reductions in gilt rates over the next year or two, if, fingers crossed, that happens.”