The lack of availability and affordability of housing in large parts of the UK is well publicised and is attracting increasing policy focus. Housing associations are increasingly seen as important in delivering more housing as emphasised by the PMs speech in September 2018 where she said that ‘This Government values housing associations’ and ‘ I want to see housing associations taking on and leading major developments themselves’. She also confirmed the Government’s commitment to invest a further £2 billion investment for long term partnerships for associations to deliver more. Savills estimate that the required figure however is closer to £7 billion.
Local authorities are also becoming more active in the delivery of housing using a variety of structures and the Government accordingly announced lifting the HRA cap in the autumn budget 2018.
In his review Sir Oliver Letwin noted phrases such as virtually limitless to describe the demand social housing. The Government has a target of 300,000 new homes per annum. Whilst it is estimated that 100,000 should be affordable only 43,000 were in 2017/8 indicating that local authorities and housing associations will have to increase delivery.
In the case of Housing Associations, reduced grants and their borrowing capacity impede their ability to deliver greater numbers of housing completions. Private sources of quasi-equity capital are expected to help to unlock and facilitate the delivery of more housing.
The Housing Sector
There were 23.95 million dwellings in the UK in 2017, comprising of 19.9 million private homes and 4.05 million social housing units. Of the private homes, 4.8 million are rented privately and 15.1 million are owner occupied. Of the social housing units, 2.44 million are owned by Housing Associations and 1.6 million are owned by Local Authorities. There are 200,000 shared ownership homes.
Investment in the full range of housing sectors is increasingly recognised by Government as necessary in order to increase housing supply. There is also increasing recognition of the positive role that institutional investment can play, both in terms of accelerating housing delivery and increasing the capacity for UK social housing providers to deliver new homes at scale across a range of sectors.
Government Housing Grant has Declined Substantially...
Government Housing Grant Expenditure
End of 5-years grant
End of 5-years grant
Source: Homes and Communities Agency
Housing Associations became more dominant in housebuilding from the 1970s and from 1974 to 1988 they enjoyed government grants up to 100% of the cost of development and as a result the housing association sector grew significantly. From 1988 and the introduction of the mixed funding model, Government grant has declined with Housing Associations taking on more debt to facilitate development.
Similarly many Local Authorities in the UK are focusing on increasing housing stock in their jurisdiction and are seeking capital to facilitate this development and create new revenues streams to offset reductions to grant funding from the UK Government.
From 1988 and the introduction of the mixed funding model, Government grant has declined.
Last year 22000 affordable homes through section 106 were delivered with zero grant. Housing associations are taking on more debt and are increasingly pursuing cross subsidy models by selling open market homes, to facilitate development. Market sale homes built by associations grew 24% between 2016/17 and 17/18 increasing risk as well as debt.
Housing Association Gearing
Increasing leverage is restricting development capacity and driving demand for Housing Associations to recycle assets to facilitate more development
...and Housing Associations are becoming increasingly geared
The erosion of grant and increase in debt means some individual housing associations are approaching their own gearing limits or facing other financial constraints.
Housing associations’ average debt per home has increased from £17226 per home in 2012 to £25871 in 2018. Total debt rose 4% to £72.5 billion in the last year 2017/18.
The total investment by associations in new and existing housing was up 8% in 2017/8 to £12.5 billion whilst future capital commitments rose 17% to £28.6 billion.
These circumstances, and the competing demand of government that Housing Associations materially increase their contribution to housing supply, is encouraging them to re-cycle assets in order to re-invest in new developments. To this end housing associations transferred 4 thousand homes to other providers in the last 18 months.
Source: Homes and Communities Agency.
Gearing = Net debt /(Net debt + Reserves + Capitalised Grant)
... This provides opportunities for investors such as ReSI to participate in the acquisition and development of Social Housing assets
ReSI was created in response to demands from Housing Associations and Local Authorities for:
An equity-like financing route to support their development ambitions
Investment partners to facilitate their provision of housing
The changes in the ability of Housing Associations and Local Authorities to finance future growth (as a result of reductions in grant and cuts in Local Authority funding ) coupled with long-term structural undersupply of housing across all housing sectors are expected to create more investment opportunities for investors such as ReSI.
In addition, the growing imbalance between the availability and affordability of UK social housing should mean that demand for this accommodation remains high.
Creating a highly scalable, long-term investment opportunity to generate secure, inflation-linked returns