Paul Stevens, managing director at international corporate finance firm Centrus
The affordable housing crisis in the UK is a pressing issue that requires immediate and sustained attention. Whilst the new government has been quite vocal on ambitious housing plans, which were reaffirmed at the recent Labour party conference, strong consideration will need to be given to the financial infrastructure required to achieve these goals.
The Role of Institutional Capital
For over three decades, Registered Providers (RPs), commonly known as Housing Associations, have relied heavily on private finance to fund their growth and investment in existing stock. As of March 2024, total agreed borrowing facilities for RPs amounted to £129.1 billion: this significant figure underscores the critical role that institutional capital plays in the sector.
The introduction of private finance following the Housing Act 1989 is often hailed as one of the most successful examples of leveraging a sector across Europe, particularly in the UK context. Although RPs are non-profit organisations, the availability of relatively low-cost, long-term debt has enabled them to become the growth engines for new social and affordable housing. Importantly, this debt is off-balance sheet for the UK government, meaning it does not impact the Public Sector Borrowing Requirement.
The Appeal of Institutional Capital
Institutional investors and bank lenders have shown a robust appetite for the affordable housing sector, underpinned by strong sector regulation and fundamental credit risk strengths. Despite a general weakening of the risk profile over time – as reflected in a downward trend of credit ratings by the three main agencies – RPs remain firmly in the investment-grade category. This stability has attracted a variety of institutional capital, including public bond issues, aggregated bond finance, and private placements. Investors such as pension funds and life companies are drawn to the sector’s credit quality, long-dated issuance matching their liabilities, and strong ESG credentials.
In recent years, demand from RPs for institutional capital has been more subdued. This is largely due to the challenging operating environment, characterised by inflationary pressures and stubbornly high interest rates. Despite these challenges, the supply of institutional capital and bank finance remains plentiful, enabling RPs to access funding on competitively priced terms when required. Social Housing’s exclusive professionals league table reveals a 25% drop in deal volumes for the year ended March 31, 2024, although capital markets funding still increased by nearly £4.1 billion.
The Benefits of Institutional Capital
There are several key benefits of institutional capital investing in affordable housing:
- Scale: RPs have large capital requirements and institutional investors are well placed to provide the scale of funding needed to deliver large-scale affordable housing programmes. This is essential for efficiently meeting the growing demand for affordable housing.
- Long-term commitment: Institutional investors’ desire for long term assets matches the need from the affordable housing sector, an alignment that ensures mutual benefit. Long term cash flows for investors, predictable costs and returns on development for RPs, aiding confidence to invest.
- Expertise: Institutional investors have a wealth of experience in investing in real assets, ensuring mutual understanding between investor and issuer.
- Social Impact: Institutional investors, by providing a deep pool of suitably structured capital, have a significant impact on delivery of much needed affordable housing. There is a notable circularity for pension funds and life companies, where the investments tangibly support the communities their own members live within.
The Government’s Role
The ambitious house building targets set by the new Labour government are unlikely to be met by commercial housebuilders alone. Seasonally adjusted starts on site in 2024 Q2 reached one of the lowest levels in the last few decades and whilst sentiment has been improving there is a large gap between the target and output.
In contrast the affordable housing sector is one of the most effective tools the government can use to increase the supply of new homes. Countercyclical, with a long term view not influenced by potential house prices or mortgage rates, the sector has in past periods of slow economic activity acted as a starting gun. With government support leveraged by institutional capital the sector also offers great bang for the government’s buck.
The new government needs to fully appreciate the role that institutional capital plays in delivering affordable housing and should proactively provide increased certainty across rent and planning regimes. Such measures will drive borrowing needs and ensure that the sector remains attractive to all sources of private finance, enabling the sector to increase much needed development. Successfully achieving this would see more delivery of desperately needed affordable housing, but also help the government meet its objectives and benefit the economy more broadly.
Looking Ahead
The affordable housing sector has required innovation and dynamism in deal structuring, particularly where borrowing costs remain far higher than just a few years ago. Looking forward, increased certainty across rent, grant, and planning regimes will create a more stable environment for long-term investment decisions.
Despite the sector’s enviable track record over the past 30+ years, there can be no room for complacency. RPs must continue to operate with prudence in business plans to attract private finance that supports their growth and investment aspirations. The new government should be laser-focused on ensuring its policy agenda supports the sector in a way that helps preserve its attractiveness to all sources of private finance. Institutional investors are more important than ever to the delivery of much-needed affordable housing.
Institutional capital is a vital component in the quest to provide affordable housing. The government must sit up and take notice, enabling and ensuring that we have the right homes for people over the next decade. Many will now be turning their attention to the upcoming autumn budget, with the hope of seeing greater clarity and in-depth, detailed plans if the new targets are to be realistic.
