Written evidence submitted by the British Property Federation [FSS 053]

Introduction

  1. The British Property Federation (BPF) established an Affordable Housing Committee two years ago. This was to reflect the needs of the growing For-Profit sector. This submission is made from the perspective of For-Profit providers. We have not attempted to answer all the questions posed, many of which are not applicable. Instead, we have added commentary under the three broad themes of the Committee’s inquiry: financial resilience, new challenges, and regulation.

The current state of financial resilience of social housing providers:

  1. Last year the British Property Federation and Legal & General issued a paper (“Delivering a Step Change in Affordable Housing Supply”) which aimed to explain the reality of the critical funding situation in the affordable housing sector. It went on to paint a picture of the increasingly significant need for new long-term and aligned investors to enter the sector.

 

  1. The paper highlighted the reality at the time that at best, housing associations do 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.

 

  1. Sadly, since then, due to a mixture of higher debt servicing costs, capped rents, escalating management and maintenance costs, and larger programmes of on-going capital works, the position has become significantly worse and the need for new entrants has only increased.

 

  1. Positively, the paper highlighted how investors, Government, and housing associations can build upon the significant progress in the partnerships already made in recent years which we are now seeing beginning to be scaled, filling the vital new supply gap.

 

  1. Chart 1 (Savills May 2023) shows the growth of For-Profit Registered Providers. In the same publication, Savills predict the near-term future growth of the For-Profit sector to be c. 100 FPRPs, and 113,000 homes by 2028 – a fourfold increase in homes provided by the sector in the next five years.

 

  1. The Select Committee asks a question about the quantum of private equity in the sector. Chart 2 (Savills May 2022) shows the type of capital invested. It illustrates that private equity makes up a very small percentage of private sector investment in FPRPs, about 2% by number of FPRPs, and 5% by number of homes.

 


Chart 1

 

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Chart 2

 

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  1. The predominant source of private capital in the sector is institutional investment - pension funds, insurers, and endowment funds. There has been growth in private equity investment, largely in shared ownership. Some of the private equity funding in the sector though, is debt provision, rather than equity.

 

  1. Turning to current market conditions, history has shown us 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 the current environment, although housing association capacity is more limited, there is a significant amount of long-dated private institutional capital looking to be deployed into the affordable housing market. 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 our report, we believe this needs to go much further and a significant increase in levels of Government subsidy (though as we will set out that can take many forms) should be at the heart of any Government agenda.

 

New challenges to the social housing sector:

  1. Most of the challenges the social housing sector faces require some form of funding to resolve. The private sector can help with expanding supply and alleviate some of the multiple funding challenges currently facing housing associations. We think the For-Profit sector could also play a role in supporting sustainable retrofit.

 

  1. The adage remains true though, that you cannot have subsidised housing without some form of subsidy. The most apparent form of subsidy in the sector is grant. Government subsidy alongside private capital reduces the housing benefit bill, increases construction output and perhaps most importantly, it 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 only become harder to achieve and critically, inequalities and life chances have further deteriorated. Our paper last year called for, £9bn - £14bn of additional subsidy provided by Government towards new affordable housing each year. This investment would deliver 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.

 

  1. More immediately, we would note that long-term institutional investors still cannot access the debt guarantee schemes that housing associations have been able to for nearly a decade. For existing providers, the benefits of guarantees are marginal, 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.

 

  1. Rent policy also does not support investment as much as it could. 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 scrapped and replaced with a 1% nominal fall in rents for each of the following 4 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. Secondly, it deeply undermined investor confidence in the sector. The 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 private rented sector market. 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.

 

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

 

  1. 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 15 years. Given current worries about the impact of high rents, this could be further focussed through a cap / floor.

 

  1. 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 our Paper, we previously estimated this would attract a value of up to c. £2bn a year at the larger output levels needed.

 

  1. The Select Committee asks a question: to what extent is this form of tenure (shared ownership) desirable for potential purchasers and for social housing providers?

 

  1. Shared Ownership is an attractive market for FPRPs. It makes up 59% of total FPRP stock now (Savills 2023) and is projected to be 63% in five years’ time. Some investors focus exclusively on Shared Ownership, because it offers both a steady stream of rental income and some exposure to house price inflation through staircasing.

 

  1. Shared Ownership also requires minimal management when compared to Social and Affordable rented stock. It also fills an important role in the housing market – housing those unable to access social housing for rent and priced out of market housing for sale. However, rented stock is also of interest to investors, given the structural undersupply, steady income it delivers, and contribution to meeting housing need this tenure offers – ESG factors increasing in importance in investment strategies, and therefore what is invested in.

 

  1. There are some challenges for For-Profit providers in investing in shared ownership. For example, shared ownership grant repayment clauses for for-profit providers are a poor use of public subsidy. The requirement to pay back a ‘profit share’ upon staircasing events simply means that more grant funding is required by any rational investor up-front. Given the limited size of the grant programme that simply means less affordable housing being delivered. More widely, it means that investors and not-for-profits are not on a level playing field. Typically, we would expect Government to provide financial stimulants to crowd in new investments – the current set-up does the opposite, and we recommend should be removed.

 

  1. A further challenge in the shared-ownership market is the consumer experience, and there is recognition in the sectors (For-Profit and Not-For Profit), that what shared ownership is, and what rights and obligations it entails could be better communicated.

 

  1. We had mentioned in our opening remarks the prospect of private sector investment also supporting retrofit funds. Specifically, we believe that Government could also focus some of this investment, possibly with additional targeted guarantees or ‘green premiums’ on rental levels to kick-start a retrofit fund of affordable housing as part of an aggressive acceleration of the millions of homes in the sector that require greening.  The fact that an average social rented tenant can currently pay c£100 per week on rents plus pay up to £70 per week on energy is poor value for money for the customer, the state, and the environment.  ‘Green premiums’ on rents would redirect money spent on energy to wards money on improving the environmental performance of buildings, aiding residents and the environment (and stimulating a green retrofit revolution’.

 

  1. The Committee asks a question about the Infrastructure Levy - will the introduction of the Infrastructure Levy and changes to section 106 significantly affect the capacity to develop affordable housing?

 

  1. We have concerns about the Infrastructure Levy. What started as a simplification exercise seems to be leading to very complex outcome.

 

  1. A prime concern, shared across the sector, is the extent to which the Infrastructure Levy will deliver at least as much affordable housing as the existing system of s106 obligations and CIL. It is difficult to answer that question with any degree of certainty, given the number of variables in play. The rates and thresholds set by local authorities. The extent to which local authorities prioritise affordable housing delivery through the Right to Require over other infrastructure provision (and possibly at the expense of placemaking). The interaction between the Levy and wider planning policy.

 

  1. Given such uncertainties, it is understandable that the Government is proceeding cautiously through a ‘test and learn’ approach. We are not convinced, however, that such major reform, will deliver substantial benefits. The long-drawn out nature of the ‘test and learn’ approach also creates a long-period of uncertainty for all involved in the sector, including investors and developers.

We have several other more technical concerns about the Levy:

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

  1. The Regulator of Social Housing plays a vital role in the stability of the sector and is welcomed by all participants in the market. We believe it needs to be grown further, bringing in expertise to help create and then implement a new regulatory framework for institutionally backed Registered Providers.

 

  1. Current codes of conduct in the sector, such as the National Housing Federation Code, cover a lot of practices that will be common across the sector. However, existing Codes are not fully attuned to practices in the For-Profit sector. The British Property Federation, with support of its members, is currently compiling a code for For-Profit providers.

 

  1. Long-term investors, like pension funds or insurance companies will often have the practical requirement of creating separate ‘clean’ entities for specific products or risk profiles. This means, unlike housing association, multiple Registered Providers will often have to be created through time. At present, both authorisations for a first Registered Provider and new Registered Providers (within the same group) require the same long process to be undertaken – typically at least a year. This process makes the time it takes to raise capital extremely long and in turn slows down the pace at which new affordable housing can be delivered.

 

  1. We do not believe the first authorisation should be watered down. It’s a first key deep dive into the proposed new providers and is a robust process. However, we would strongly suggest that new Registered Provider created within the same Group, should go through a much more stream-lined approach where only the differences between the existing and new entities should be scrutinised.

 

Chart 3

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Final remarks

 

  1. There is fertile ground to further expand partnership working between For-Profit and Not-For-Profit sectors. The movement towards investment supporting wider social and environmental objectives means more institutional investment is being considered in the sector. Recent research by Savills illustrates that more housing associations are also considering partnerships with FPRPs. In 2019, a Savills survey found that just 62% of housing associations thought that FPRPs had any part to play in solving the housing crisis. But its survey this year, found that 89% would now consider some form of partnership with an FPRP, and 43% of housing associations surveyed already have some form of partnership with a FPRP. Chart 3 illustrates this evolving picture of partnership working. To encourage and support partners, the BPF issued a toolkit to partnership working, aimed at those working in the sector, and learning from those who have already pursued partnerships.

 

 

May 2023