Comment12.05.23by Steve Partridge and Helen CollinsSavills research has shown that the economic climate, inflation and the rent cap are affecting both traditional housing associations and new for-profits providers. Steve Partridge and Helen Collins explain the findingsPicture: AlamySharelinesSavills research has shown that the economic climate, inflation and the rent cap are affecting both traditional housing associations and new for-profits providers #UKhousing The English affordable housing sector isn’t immune from the effects of macro-economic volatility. A subdued end to 2022 continued into the first quarter of 2023, as rising interest rates and high inflation have driven a slowdown in residential development and investment, and a flight to quality investment opportunities.
It was clear at a recent event we ran that all landlords operating in the regulated social and affordable housing sector have felt the impact of the 7% rent cap, with all costs (day-to-day revenue, asset management and development) running ahead of income.
The volatility in debt costs and gilt rates (the cost of government borrowing) has also caused some new entrant for-profit registered providers to pause their housing acquisition programmes, as highlighted in our recent research.
Business plan pressures
Amid the market uncertainties, many housing associations have been relatively insulated against rising interest rates as they refinanced or raised cheap, fixed, long-term debt prior to the economic turmoil in September 2022.
This advantageous funding position has allowed liquid, proactive, development-focused housing associations to dominate the Section 106 and grant-funded development market in recent months. Yet, most housing associations are facing significant business plan pressures associated with existing stock investment for building safety and asset management. This has led to around half cutting back on development activity.
So, while some are continuing to develop strongly and capitalise on a less crowded market, overall sector capacity to invest in new homes is reduced.
What does this mean for the future of new housing supply and the availability of private capital in the affordable housing sector?
Research results
As our latest research notes, our projections for for-profits’ stock ownership are down on last year’s number, reflecting the impact of current market conditions on appetite and, in particular, capacity to develop.
The underlying investment thesis and appetite to invest in the sector remain unchanged.
Yes, there is regulation – this is rightly regarded as a benefit by all serious investors.
Yes, pricing has yet to fully adjust to create a level playing field, but this will come in time.
Yes, there is policy volatility, but not as much as in other sectors.
Rent policy key
Policy uncertainty around rental income is however a real concern. Our sector must compete with others for patient capital. Serious investors will look through short-term market challenges to look at the long-term performance of the social housing sector.
But further changes to rent policy that undermine inflation-linked increases will in turn undermine the confidence of investors that long-term trends are secure. To quote Warren Buffett: “It takes 20 years to build a reputation and five minutes to ruin it.” New partnerships
One of the key takeaways from our research – and seen in the course of our advisory work – is the appetite among housing associations to partner with private capital in new ways. This can be a partnership with an existing for-profit registered provider, or setting up their own for-profit provider to partner with investors.
Another is their need – and increasing desire – to unlock capital from sales of older housing, releasing capital to reinvest for growth and in retained stock quality. The opportunity for new entrants to build portfolios at scale, in a sector with the strongest environmental, social and governance credentials, has never been clearer.
The government and the affordable housing sector need private capital to continue to flow in all forms if new housing supply and stock investment needs are to be met. This includes traditional lending to housing associations, debt and equity via new entrants, and debt and equity through housing association and FPRP partnerships.
Which brings us full circle to rent policy. The agreement with the government of a 10-year policy confirming a continuation of inflation-linked rent increases would go a very long way to helping maintain the flow of private capital into undersupplied social and affordable housing.
Helen Collins, head and Steve Partridge, director of affordable housing consultancy, Savills
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