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New developments to drop thanks to economic pressures

Nearly half (47%) of housing associations aren’t confident they’ll be able to maintain affordable housing levels this year, research from Octopus has found.

This is because of factors like inflation, construction costs, higher interest rates, decarbonisation work, regulatory and policy-related pressures, and cost of debt.

The net effect is there will likely be a 22% drop new affordable homes.

The analysis comes in a report, entitled Closing the gap: Unlocking investment to address the UK’s affordable housing challenge.

Professor Alex Lord, lever chair of town and regional planning at the University of Liverpool, endorsed the report.

He said: “How do you address the housing crisis without the essential evidence and analytical tools to plan proactively for new development? Octopus’s 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 — that 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; those surveyed expect a significant reduction in their development pipelines over the short-medium terms.

“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.”

One recently challenge is the social housing sector’s rents have been capped at 7%, which has resulted in a £3.2bn loss in rental income.

The G15 – which represents London’s largest Housing Associations – confirmed that its members are reducing development programmes by as much as a third.

Some registered providers Octopus spoke with have cut back development by more than 40% because of financial conditions.

Housing Associations have mostly chosen to focus on improving their current housing stock at the expense of uncommitted projects, as spending on repairs and maintenance has jumped from £5bn in 2018 to £6.5bn in 2022.

Spending on existing stock is set to further increase as a result of the Government’s review into the Decent Homes Standard, alongside increased scrutiny on disrepair in the social housing sector.

Another challenge is the cost of debt. Debt facilities were particularly popular in the last decade as registered providers sought to make the most of a low interest rate environment.

However, interest rates have soared since the mini Budget in September 2022, resulting in very few registered providers now being active in the debt capital markets. In many cases, registered providers are avoiding raising debt altogether until rates return to a more favourable level.

For the last decade, the sector has built affordable homes by using its surplus to service what was previously low, fixed-rate debt.

Not only are surpluses squeezed, but they also do not go as far as the price of debt has risen. This is making interest payments higher, ultimately reducing the amount of debt that registered providers can — and, prudently, want — to take on.

As a result, registered providers of affordable housing are biding their time and looking to alternative finance. The research suggests this is leading to a significant reduction in the delivery of much-needed new affordable homes.

Jack Burnham, head of affordable housing, 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.

“In producing this report, we’ve had many conversations with key figures in the social housing sector. This has provided valuable and reliable insight into the position that many registered providers find themselves in today.

“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 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.”