Octopus Real Estate, a leading UK specialist real estate lender and investor, has today published landmark research into the funding challenges facing the affordable housing sector.
The comprehensive report, entitled ‘Closing the gap: Unlocking investment to address the UK’s affordable housing challenge’, includes an analysis of Housing Associations’ finances in the face of interest rate rises, government statistics, interviews with the some of the largest developing registered providers of social housing and responses from industry leaders.
The research found that it’s harder to make affordable housing projects financially viable, with increased build and finance costs resulting in a third of housing associations reporting a deficit of 11-25% on individual development schemes.
As a result, fewer affordable homes will be built using traditional financing methods. Housing associations anticipate a 22% reduction in the number of new affordable homes built over the short term.
More money will be diverted towards managing, repairing and maintaining existing homes, with repairs and maintenance expenditure across the sector increasing by over £1.5billion in just four years.
Octopus’ findings indicate that there will be a slowdown in the total development and, in turn, delivery, of affordable housing in the UK in the years to come. In fact, 47% of participants said they were ‘not confident’ they would be able to maintain their development at the same levels as last year.
A perfect storm
Much of this can be attributed to the ‘perfect storm’ of pressures the social housing sector is facing, including inflation, construction costs, higher interest rates, decarbonisation work, regulatory and policy-related pressures, and cost of debt. Octopus’s research shows that the net effect of this is a 22% drop in new affordable homes being developed, at a time when record numbers of people need affordable homes.
More recently, the social housing sector has had to react to the onset of a 7% rent cap, which is estimated to equate to a £3.2billion loss in rental income for registered providers. The G15, which represents London’s largest housing associations, confirmed that members are reducing development programmes by as much as a third. Some registered providers Octopus spoke with cut back development by over 40% because of financial conditions.
The sector is at a crossroads, faced with the choice of investing in improving existing homes or building new ones. The data presented by Octopus suggests that Housing Associations have mostly chosen to focus on improving their current housing stock at the expense of uncommitted projects. According to the research, overall spend on repairs and maintenance has jumped from £5billion in 2018 to £6.5billion in 2022. This aligns with the interviews Octopus conducted with CEOs and CFOs in the sector, most of whom revealed they would be devoting more expenditure to this area.
Professor Alex Lord, lever chair of town and regional planning at the University of Liverpool, endorsed the Octopus research, saying: “How do you address the housing crisis without the essential evidence and analytical tools to plan proactively for new development? Octopus’ report represents an important step in addressing this question by presenting evidence on the effects of current housing policy on registered providers of social housing. It is these registered providers, numbering over 1,500 in the UK, which will be essential to delivering the new affordable dwellings that the country so urgently requires.”
“Yet the findings of this research suggest that these providers are unable to fulfil their purpose. There is a considerable gap between aspirations and what registered providers expect to materialise over the coming years. This timely and important intervention from Octopus presents a clear case that we need to think again about stimulating the delivery of new affordable homes.”
The cost of debt
The Octopus report also explores the cost of debt and the impact this has had on housing associations. Registered providers previously made the most of a low-interest rate environment, but soaring rates since the mini-budget have resulted in very few registered providers now being active in the debt capital markets. In many cases, registered providers are avoiding raising debt altogether.
Jack Burnham, head of affordable housing for Octopus Real Estate, said: “Registered providers have historically relied on private finance to support their development ambitions. But changing economic conditions mean that the cost of debt has soared and social landlords must now pay more to access the finance they need to build new homes. This pressure has been compounded by the enormous investment required for landlords to hit net zero targets as well as addressing issues of disrepair in the sector.”
“When considering the competing pressures in the affordable housing sector, it’s clear that a crucial decision needs to be made. Registered providers can continue business as usual and hope for increased grant rates from the government, or they can look for innovative solutions — as they have done in the past — which can help deliver the homes the country needs. Consensus suggests that registered providers are now looking towards equity partnerships as a solution.”
Ed Clough, managing director of Octopus Real Estate, concluded: “Registered providers have the skills, experience and track record to deliver vast numbers of affordable homes, but are under significant pressure to invest in their existing homes. This is set against a backdrop of rising costs, a rent cap, and a freeze on the Local Housing Allowance, which is squeezing registered providers’ surpluses and reducing the capacity to utilise surpluses to service the debt needed to build new affordable homes. Housing associations and local authorities need trusted partners with long-term capital to help them keep delivering new homes whilst they address net zero and building safety costs on their existing portfolios.”
“As the operator of our own registered provider, NewArch Homes, we take a long-term approach to investing in affordable housing. We aim to build lasting partnerships to provide sustainable private capital alongside our partners to make a meaningful impact on the provision of affordable housing across the country. We believe that equity partnerships represent the next wave of innovation in the sector, comparable to the 1980s when registered providers were given access to the debt capital markets. While some may be sceptical about this new way of working, ultimately, we hope that registered providers can unite around our common goal: building affordable homes for the people who need them.”