As noted in the introduction to this response, in March 2022 Legal & General and the British Property Federation authored a white paper (“Delivering a Step Change in Affordable Housing Supply”). XXXThat paper outlined the lack of financial capacity of housing associations to build more affordable homes. It identified the deep need to bring in new sources of capital through long-term and aligned investors into the sector.

The paper highlighted the reality, at the time, that at best, not-for-profit housing associations did not have the capacity to deliver more than around 65,000 homes a year against a long-term need of 145,000 homes and 1.4 million households on social housing waiting lists across the UK.

Sadly, since then, due to a mixture of significantly higher debt servicing costs, capped rents, escalating management and maintenance costs and larger programmes of on-going capital works (dealing with amongst other things, the greening of stock), the position has become significantly worse – leading to a further reduction of 15-20,000 homes a year in our best sustainable estimates of between 45,000 - 50,000 affordable homes a year at most. Given the heightened volatility in economic markets we would note that significant further down-side risk exists on these estimates.

Given this context, the need for new entrants with new funding has rapidly increased. Institutional investors have already shown themselves to be highly reliable partners in the provision of affordable housing with multiple new entrants in recent years. This includes our own significant platform in Legal & General Affordable Homes which has already delivered over 3000 homes in the last few years across all social and affordable housing tenures and is in the process of scaling further; it aims to grow to deliver 3,000 affordable homes on an annual basis in the coming years.

Wider investment from institutional investors can unlock more homes and improve the quality and sustainability of existing and new affordable homes. Savills have recently shown the growth of For-Profit Registered Providers (FPRPs), predicting the near-term future growth of the For-Profit sector to be c. 100 FPRPs, delivering some 113,000 homes by 2028 – a fourfold increase in homes provided by the sector in the next five years.

Our view is that, with a more permissive environment, institutional investment could deliver even more than the 113,000 affordable homes by 2028 that Savills forecast. The potential of Solvency II reforms could release significant additional long-term capital to fund additional affordable housing, with the total UK Pension Risk Transfer (PRT) market estimated to be worth between £30-40 billion per year. This reform needs to be implemented alongside the housing policy changes set out in this document.

We would additionally highlight a number of additional key points based upon our view of the key economic drivers of delivery in the sector:

The case for affordable housing subsidy. A paper by Capital Economics (2019) estimated that for every £1 spent on construction output, £2.84 of additional GDP is created and an additional 54p benefit is generated for the Exchequer. This is due to the additional wage income, corporate revenue, and new jobs created through the supply chain. There is an even bigger impact if that same £1 is used to develop new affordable housing, rather than construction more generally, due to savings on other public expenditure (principally housing benefit from lower-income households in private rented homes).

Government subsidy alongside private capital reduces the housing benefit bill, increases construction output, and—perhaps most importantly—improves the life chances of many of those most in need in society through providing a safe and stable place to call home. Unfortunately, the significant fall in real grant levels since 2010 has had the opposite effect. True waiting list sizes have significantly expanded; construction levels in the sector have not grown; home ownership has become less affordable, driving up the average age of the first-time buyer; and critically, inequalities and life chances have further deteriorated. As the white paper calls for, £9 billion - £14 billion of additional subsidy should be provided by Government towards new affordable housing each year. Given the direct benefits (Housing Benefit savings), the indirect financial benefits (additional GDP), and the social benefits (reduced social exclusion), Government should see subsidy investment into affordable housing delivery as a net gain to the UK exchequer rather than a cost to the taxpayer.

Investment in social housing building of all affordable tenures therefore delivers outstanding value for money for the Exchequer. In addition, a long-term commitment to an affordable housing grant programme (say 10 years) would allow institutions of all forms to plan the long-term growth of affordable housing delivery, helping to grow the capacity of the sector to develop more affordable homes.

Importance of affordable housing in a falling market. History has shown that when the mainstream for-sale market slows down, the longer time is left to encourage intervention through other tenures, the greater the ‘shrinkage’ of the construction sector and the longer the build-back time is to get to pre downturn levels. Affordable housing is the vital tenure in this scenario as it was in 2007-9. It provides housebuilders and developers with alternative purchasers to keep building through the downturn given the guarantee of sales to Registered Providers. In 2011, for example, Housing Associations delivered over 40% of new build housing supply – helping to underpin housing markets and mitigating against what would have otherwise been the even greater shrinkage of the sector.

In the current environment, although housing association capacity is limited, there is a significant amount of long-dated private institutional capital looking to be deployed into the affordable housing market. Partnerships between housing associations and institutional Registered Providers (RPs) are likely to grow. Work by Savills published in May 2023 concluded that nearly 90% of not-for-profit RPs wanted to partner with institutional RPs to do more than was being delivered through current plans.

We note and welcome that Homes England have recently invited Strategic Partners to re-bid their programmes to take account of the current economic reality on affordable housing development. As per the white paper report, we believe this needs to go much further. Significant increases in levels of Government subsidy per year, coupled with a 10-year grant programme, should be at the heart of any Government agenda.

Subsidy type. Historically, the UK has been focused on providing subsidy either through grants, via housing benefit, or indirectly through section 106 planning obligations. Whilst all subsidy is both welcome and absolutely required, we would strongly recommend reviewing other mechanisms that have been used globally. We believe debt guarantees for instance, which take an infrastructure approach to housing, can provide significantly better value for money than capital grant, reducing the impact on the national debt and potentially also acting as a catalyst to crowd in further, additional investment into the sector.

We would specifically note that long-term institutional investors still cannot access the debt guarantee schemes that housing associations have been able to for nearly a decade. Sector analysis has continuously shown the limited impact those guarantees have for housing associations given their existing capacity constraints—whereas for new entrants, the impact can be a radical increase in new affordable housing delivery, often either with no or lower levels of capital grant being required.

Other tactical areas should also be reviewed, including either long-term or tactical changes to tax legislation to further incentivise new entrants into the affordable housing sector.

Rent policy. There have been multiple changes to rent policy over several decades, despite the basic premise that any rent settlement would be in place for the long-term. Key highlights have been in 2015 when the then existing rent policy was cancelled and replaced with a 1% nominal fall in rents for each of the following four years. The impact was twofold.

Firstly, it wiped out a huge amount of capacity of housing associations at the time – a position that unfortunately has only become significantly worse since. Our calculations later in this paper conclude that c£2.3 billion of annual net income has been taken out of the sector – to put that in context, that’s a 20% net decrease in net income than would otherwise be the case if the reductions and caps had not been implemented. This amount of funding could have provided the subsidy to fund c.500,000 affordable homes through time or to retrofit c1.9 million affordable homes to EPC B (saving each customer c£30/week on their energy bills)

Secondly, it deeply undermined investor confidence in the sector because stable, ‘boring’ cashflows could no longer be relied upon. With this lack of confidence, real affordable housing values fell and subsidy requirements significantly increased – thereby actually increasing the burden on Government. Recently, we have seen similar interventions in Scotland through the rent restrictions put in place in the wider PRS market. Advisors believe this policy proposal has resulted in between £1 billion and £2 billion of investment in private rented housing being ‘paused’ as a result of policy actions. As has been seen in other countries, the impact has been one of reduced investor confidence and thereby likely reducing the scale of much needed new development going forward. The IPF are commissioning research into this area and we strongly advise the Committee and Government to consider the evidence base before implementing policies that can have material adverse consequences on the customers they seek to serve and the business sectors they aim to support.

This year, for far more understandable reasons given the cost-of-living crisis, the existing CPI + 1% framework has again been overridden. Consideration should be given to allow Registered Provider rents to ‘catch-up’ to ensure this capacity for new delivery is not permanently lost.

The rent cuts from 2016, and then rent cap in 2023 have undermined the ability of the sector to deliver growth (new homes) invest in their existing stock, and importantly to withstand the impacts of severe adverse market movements (stress events). Before the 2016 rent cuts, the operating margin on social housing lettings, a key measure of financial ‘headroom’ of the RP sector, was at 31%.

By 2022, according to the global accounts, the operating margin on social housing lettings had fallen to 25%. Analysis by Barclays indicates that due to the exceptional cost inflation in 2022 and rent caps at 7%, in the 2023 global accounts, the operating margin on social housing lettings could fall to c19%. At this reduced operating margin, the business plans of many RPs will start to fail at much lower levels of market shock than was previously the case. This reduction in the financial stability has been noted by the Regulator (over 20 organisations recently downgraded to V2) and the downgrade in the ratings of the sector by the credit agencies. All of these downgrades will feed through to higher borrowing costs, will increase the proportion of spend on debt financing, and in turn reduce the spend on new homes and maintenance.

These aspects are a clear indication that the lack of long-term thinking when making policy decisions over rent increases is undermining the viability and financial standing of the sector, and the value for money it is able to deliver.

The current rent settlement ends in 2025 and the sector is now waiting to hear Government thinking on the new settlement. We would strongly urge a new, genuinely long-term settlement of CPI + 1%, ideally for at least 10 years. Given current worries about the impact of high rents, this could be further focussed through a cap / floor. A long-term plan is essential to rebuilding operating margins within the sector, and to allow them to rebuild the capacity to properly maintain existing homes and build new homes.

This settlement would also be one of the strongest ways for Government to make subsidies go much further. As risks to cashflows are reduced through the settlement, the subsidy required per home also further reduces. In the White Paper, we previously estimated this would attract a value of up to c. £2 billion a year at the larger output levels needed.

Cross subsidy model. We would treat with significant caution any belief that a cross-subsidy model generated through open market sales can generate any significant additional capacity. In reality, whilst in a rising market it may generate additional free capital for re-investment, there is large additional risk of open market sales exposure compared to the lower risk activity of affordable housing.

This has a direct impact - it can (and has) led to both credit rating downgrades from the rating agencies which in turn leads to a higher cost of debt. In extremis, it has led some organisations to default on debt covenants and with it, significant repricing of the debt to take account of the higher risk profile of the housing association. What is often misunderstood is that the benefit of this additional margin through time can often be greater than the upfront financial returns being made by activities. This in turn actually reduces the total level of new affordable housing that can be provided.

The planning system is not working – whilst the failure of the planning system is not specifically the business of this committee item, its impact on affordable housing delivery needs to be taken into full account.

Given the lack of capacity in local planning authorities, the current uncertainty over housing targets and plan making, technical issues such as water and nutrient neutrality and other changes to the local planning system, housing output is, unsurprisingly being deeply affected. As an example, c.50% of the sites we are currently delivering are delayed 12 months or more because they are ‘stuck’ in the planning system. This backlog will result in less homes being built, and more capital being used to progress slow moving projects through the planning system and significant additional effort being applied to manage schemes through the planning process.

It now takes much more time to take a scheme through the planning process than building the homes. Our recent announcement to cease new production at our modular factory is partly as a consequence of the failure of the planning system to allow us to progress schemes on multiple sites. To address all these problems, the planning process needs a bold rethink, rather than continued tinkering.

New challenges to the social housing sector:

Has the lifting of the cap on the Housing Revenue Account made a difference to supply or improved housing from Local Authorities?

A limited amount of additional housebuilding has been delivered through the lifting of the cap. However, when the cap was lifted, Government stated 100,000 new council houses a year could be built. On average, in the 10-years to 2018, prior to the cap being removed, c1,400 homes were built by councils each year. Since 2018, the average number of council homes built has increased to just over 2,000 homes per year – a yearly increase of 600 council homes. Whilst a welcome increase, there is no doubt that councils having access to finance can enable more homes to be built than would otherwise be the case. However, there are many other factors limiting the ability of Councils to build more housing. These include the availability of land, development and financial skills, design and procurement capabilities and commercial acumen which all need to be available for successful affordable housing delivery.

A research project into the success of the Council housebuilding programme by CIPFA identified other factors at play included greater capacity is particularly needed in land identification and acquisition. Overall, whilst the lifting of the HRA cap has helped to stimulate some increases in housebuilding, the policy has delivered less than 1% of the targeted 100,000 affordable housing completions that the government was indicating this initiative would achieve.

Have for-profit Housing Associations made the sector, as a whole, more financially robust?

New institutional investors have fundamentally strengthened the sector as they bring an additional equity financing route into the sector that was previously not available (and therefore increase the total equity in the sector).

As noted above, together with further subsidy, the only way that an increased level of new housing development and/or maintenance of existing homes can take place beyond current forecast levels is through these new entrants investing long-term funding. Therefore, additional subsidy coupled with more institutional funding should be broadly welcomed.

There are some key challenges for new players entering the market, as there are with the wider housing association sector. Specifically, the sector enjoys and requires close regulation. This, in our view, is an absolute imperative to ensure that no entities (housing association or new investors) take excessive risk and to ensure entities operating in the sector remain well governed. As new models are used across the sector, the Regulator of Social Housing needs to continuously evolve its approach, to ensure social housing is protected and the residents are well served by their landlord.

We have all seen some of the risks and wider problems attached with some entities in the supported housing using lease-based models alongside thinly capitalised smaller entities. We welcome the Regulators’ work in this area, noting the considerable difference in these models compared to the wider investment community work. The Regulator needs to remain vigilant to others with less aligned, short-term objectives with models transferring undue risk to lessee counterparties that can, in extremis, put individual entities and customer homes at risk.

Traditionally, struggling Housing Associations have merged with stronger, sometimes complementary, Housing Associations. Will this continue to be possible?

To what extent can mergers result in the creation of an umbrella group too large to discharge its duties and responsibilities to its tenants?

From the empirical evidence we have seen over the last few decades, the out-turn evidence of gains in financial capacity and improvements in customer services for typical associations once merged is mixed. This fact is often also the case in the wider (non-housing) mergers & acquisitions market. There is no clear direct correlation between size and quality.

As per our wider experience, the key markers of success have been around the strength of the organisational objectives, a Board with a clear vision and governance structures combined with a comprehensive yet agile plan. If the sector becomes more experienced at transacting larger mergers successfully, then there is the prospect for the outcomes from mergers to generally be more positive than not.

For struggling organisations, the Regulator plays a supportive role in helping these entities move to be controlled or owned by strong organisations. By playing this role, the Regulator has played an important part in ensuring the on-going financial stability of the sector continues.

We would additionally note that, in the future, the new institutional entrants could also be stable organisations to take-on failing organisations, either directly and/or through asset sales to help support the sector to be one where lenders can be assured that the risk of default is low.

Has the emergence of partnership working between councils and housing associations in local areas made the sector more resilient? What encouragement has the Department given to such partnerships?

Partnership working between housing associations and local authorities is still, in our view, the exception, rather than the norm. The small number of homes being delivered by local authorities means that the scale of the market is limited. Secondly, councils sometimes find the creation of partnerships difficult, given the desire to follow rigid procurement processes which turn partnership intent into a contractual relationship. The exceptions have been the regeneration of former council estates – particularly in London – where the regeneration market is mature, where contractors and housing associations form bidding consortiums to deliver sustainable regeneration, and where high land values allow regeneration to be delivered without the need for gap funding (which is a further problem which government needs to address).

We would specifically call-out the good-work of the West Midlands Combined Authority, and the constituent local authorities, which have all worked collaboratively together with affordable housing providers to seek to stimulate the sector to deliver more. The devolution of grant funding to regions can also help focus investment in areas most needed and can stimulate affordable housing developers to work harder to deliver housing in those areas of greatest need, through devolved grant programmes being focussed on local priorities.

To what extent do local authorities and Housing Associations collaborate when considering development plans for housing locally?

Our experience is there is very little collaboration between local authorities and housing associations on plan making. In many cases, housing associations are viewed neutrally or negatively by Councils (particularly members) given that dissatisfaction with service delivery is expressed through the postbag of a local councillor. In addition, only a few RP’s tend to be involved in strategic land planning at any scale, given their limited development skills, limited funding capacity and risk-aware nature of the businesses. Exceptions to this view are organisations like Barking & Dagenham; Enfield and Birmingham City Council, (and the West Midlands Combined Authority) all of whom see housing associations as partners that work with the council to enable the council’s housing vision to be delivered. Local authorities have strong housing powers but are tending not to use them given the lack of funding and the lack of skills (as local authorities have been reduced in scope and scale through successive budget cuts).

The Affordable Homes Programme includes a high proportion of shared ownership properties. To what extent is this form of tenure desirable for potential purchasers and for social housing providers?

Shared Ownership housing development is an important cornerstone of affordable housing delivery and should, in our view, be significantly expanded as a programme. Institutional players are well placed to drive that growth. The explicit inflation-linkage and long-dated cashflows make Shared Ownership a very compelling asset class for investors.

25% to 30% of new homes have been traditionally purchased by first time buyers. House prices have historically outpaced wage inflation, and this is not likely to stop whilst new build levels remain significantly below long-term need. In turn, homes have become progressively less affordable. When households cannot afford to buy, they typically have to rent.

Shared ownership is a product that allows a household to gain access to home ownership at lower deposit levels than open market purchases and has undoubtably been a huge success in the 40+ years it has been running. It is an important component of the affordable housing sector and should be grown to help the large proportion of renters who wish to progress into home ownership but cannot find the full mortgage deposit (which excludes many would be first time buyers from the market).

We expect that Shared Ownership will only increase in importance as alternative programmes for first time buyers, such as Help to Buy, come to an end.

What contribution have council owned housing companies made to increasing social housing supply?

Is the collapse of Brick by Brick – wholly owned by the London Borough of Croydon – a one off or the tip of the iceberg?

A small number of councils have been successful in the formation and operation of Local Housing Companies (“LHCs”) (e.g. Barking). A much larger number of Councils have spent significant funds with limited outcome whilst some Councils have failed significantly (e.g. Croydon). Building houses is complicated and risky - it requires skilled teams with extensive experience who have worked together. The analysis above indicates that notwithstanding the large number of LHC’s formed, the average output per LHC has been relatively limited. See also our response to question 1 on the issues that have resulted in only small increases in the building of affordable housing following the rise of the housing revenue account caps – the same issues apply to the relative lack of delivery through LHC’s.

Will the introduction of the Infrastructure Levy and changes to section 106 significantly affect the capacity to develop affordable housing?

We have seen no evidence to suggest that the infrastructure levy will increase the number of affordable homes built. As a comparable area, we looked at CIL. When we last reviewed the evidence, at any time, c30% of CIL is held as cash and is not being spent on much needed infrastructure. There is nothing to suggest that the same problem will not apply to the levy.

Secondly, we are concerned that the creation of the levy will require 319 grant regimes to be established across the country (one for each Council) compared to the current regime which has two grant managers (Homes England and the Greater London Authority). This human infrastructure to create the policy, implement and police the policy and manage the grant programmes will need to be built, managed, funded and administered, and is, in our view, unlikely to make the system more efficient than the current s106 process. Finally, the planning minister stated in April that it was likely the infrastructure level policy framework might take up to 10-years to deliver.

The effort to create a system which requires 10-years or longer to implement at a time when planners are in short supply, will result in a system which currently has two grant providers, replaced with a system of 319 grant providers and is unlikely to deliver more affordable homes. Rather, it is highly likely to result in the underpinnings of the current affordable housing development sector being undermined.

Our reflection is that whilst the current section 106 process is cumbersome, it works. We think time could be better spent on standardising the current section 106 system with model clauses to reduce the cost per transaction, rather than replacing one (imperfect) system with what is likely to be a highly problematical system to operate – in the form of the Infrastructure Levy.

What are the policy and regulatory challenges to the Department and the Regulator?

Is the current Departmental policy on social housing and affordable homes appropriately focused?

Is Homes England being directed appropriately by the Department, and is it achieving its objectives?

There is limited long-term strategizing to devise policies which seek to efficiently grow the annual output of the sector, or to progressively improve the customer experience of the sector. There are targets to improve the energy performance of the sector but no matching strategy to fund those improvements (improving the sector to get to EPC C will cost c£30 billion but the current decarbonisation funding programme is only c.£3.8 billion). The lack of joined up policies is a problem for the sector, and indirectly, Government.

Rent cuts and caps have all too-often been made without any true assessment of the long-term costs and consequences. Some policies are poorly thought out and focus sometimes on big headlines rather than making meaningful progressive change. Examples are lifting the housing revenue account cap to allow 100,000 new affordable homes to be built each year by Councils, the First Time Buyer initiative (no homes built) and then First Homes (homes only built on Homes England land).

As an example, we have extrapolated data from the Regulator of Social Housing’s regulatory returns and ONS data on CPI and RPI. We calculate, that the rent cuts from 2016-2019 inclusive, plus the rent caps of 2023 have taken £2.3 billion of net revenue per year out of the sector. This money could have provided the subsidy to support c500,000 new affordable rent homes through time or could have retrofitted 1.9 million homes (which is 44% of the affordable housing sector) to EPC B standards (saving each household c£30 per week on energy bills). This is a good example of short term policy making not fully considering the long-term consequences of the policy decisions.

There is a need to have an affordable housing strategy that is longer term, with ambitious goals, builds progressive improvements and reduces risk and uncertainty so the sector can invest for the long term. The crisis around housing unaffordability is now at a level where, in our view, this should be defined as an ‘affordable housing emergency’. The policy response and policy focus should carry a similar emphasis as climate change. To stand the best chance of success, addressing the affordable housing emergency requires a 20-year plan. Successive governments should be measured against their ability to progress towards the 20-year goal outcomes.

Independent commission: As a sector we are very conscious of the sheer number of housing ministers that have come and gone in very short order over several decades. This has been combined with the regular changes in positions on key areas like rent settlements or planning policy. This instability causes all market participants – both charitable and private investors – to have to add on significant risk buffers to any appraisals of new housing development. The impact is a direct one: lower affordable housing delivery.

To overcome this instability, we would strongly support the extension of this Committee’s work though the creation of a government-backed affordable housing commission or working group to scrutinise the key ideas to accelerate the growth of affordable housing delivery. At its most basic, it could make an independent and public recommendation on the required social housing rent policy through time, but we would hope it could be set up with a truly ambitious agenda, and work over longer periods than parliamentary elections.

May 2023