Written evidence submitted by Homes England [FSS 070]

 

Homes England has a long and successful track-record of supporting affordable housing providers to increase the delivery of new affordable homes. We primarily achieve this through delivery of the government’s affordable housing grant programme (outside of London) but also have a wider range of interventions through which the Agency supports the delivery of affordable housing.

 

In the ten years to March 2022, Homes England has supported the delivery of around 270,000 new affordable homes[1] (outside London) through various incarnations of the affordable housing grant programme. This represents an average of nearly 50% of all new affordable homes delivered each year.

 

In addition to the affordable housing grant programmes, Homes England supports the delivery of new affordable housing through a combination of: specialist grant programmes; lending guarantees; equity investments land disposals; and brokering relationships and intelligence sharing between partners.

 

The critical importance of increasing affordable housing delivery, as part of Homes England’s wider remit, is well established and well-recognised – and embedded across a number of key documents, including the Agency’s Strategic Plan, that underpin its work. The 2023-2028 Strategic Plan will be published on 16 May.

 

The current state of financial resilience of social housing providers:

 

What pressure has high inflation, increased energy costs and any other additional costs placed on the finances of social housing providers?

 

  1. Social housing providers face a number of competing pressures and trade-offs when defining their strategic objectives, such as supporting existing tenants, investing in existing homes and investing in new homes. High inflation and increased energy costs will impact on their ability to deliver those priorities, as well as directly and indirectly affect their customers. Whilst some of these pressures are not new, over the last 12 months they have become acute.

 

  1. At Homes England, we regularly engage with social housing providers to understand how the external economic environment (such as higher interest rates and borrowing costs, higher construction and labour costs, labour shortages, planning delays, building and fire safety costs) are affecting their ability to deliver new affordable homes – and understand how we can provide support through our investment levers to mitigate some of those challenges and risks.

 

To what extent can social housing providers maintain output levels in housing development to provide a counter cyclical balance in otherwise tightening market conditions?

 

  1. Through our annual Partner Perception Survey, we have seen that social housing providers have experienced high demand for their homes in the 12 months to December 2022, with demand expected to increase through the 12 months to December 2023. Additionally, 33% of those social housing providers involved in the survey expect to grow over the 12 months from December 2022. Whilst this is down from 75% who thought they’d grow when asked in December 2021, it is more positive than private housebuilders.

 

  1. However, our Survey has also reflected the challenges social housing providers are facing to deliver new homes, citing current and future inflation in the cost of labour and materials; the shortage of labour and skills; and planning delays and local authority capacity as the key issues.

 

  1. Through the AHP, we are seeing social housing providers reassess the scale and nature of their development programmes. Whilst the number of new affordable homes our partners are planning to deliver through the AHP are reducing at an individual partner basis, there remains strong appetite for development.

 

  1. Due to the interplay of demand and ambition, together with market challenges, potential changes to the AHP have been the subject of ongoing discussions by Homes England with the Department for Levelling Up, Housing and Communities. These potential changes would better enable social housing providers to maintain affordable housing delivery at a time other parts of the housebuilding industry may be slowing down.

 

Does the cross-subsidy model, by which market housing helps pay for social and affordable housing, have any continuing viability?

 

  1. Allocations under the AHP 2021-26 show providers are continuing to forecast cross-subsidy – from the surplus on social housing lettings and sales activity – supporting the cost of delivering new affordable homes - alongside grant funding, debt finance and equity investment. However, in a more challenging environment, where social housing lettings are affected by higher operating costs and lower rental income, and sales activity is affected by possible lower sales values and profit margins, the level of cross-subsidy that can be generated is likely to become more constrained.

 

  1. From Homes England’s perspective, affordable housing providers have continued to report strong demand for shared ownership through 2022/23. This has been supported by increased interest from traditional first-time buyers now unable to access open market sales due to increased mortgage costs. However, some are expecting values to fall in 2023/24, with an associated risk to first tranche sale income assumptions. Homes England will continue to work closely with social housing providers to understand the effect of this and how we can use the remaining AHP funding to support tenure changes where required. 

 

To what extent have private equity investors, and in particular international investors, been entering the sector? What challenges does this present?

 

  1. Over the last five years the number of for-profit RPs backed by investment platforms has grown. Investment in housing offers a stable income stream that is typically correlated with wage growth, which proves attractive to many of these investors seeking assets that can match their long-term liabilities to pay pensions or insurance policies. These investors are deploying equity as opposed to debt (which is how institutional investors have chiefly invested in affordable housing to date).

 

  1. Whilst investors will have differing financial return objectives reflecting their individual risk appetite, in Homes England’s experience all are ultimately financing the development or ownership of homes in affordable tenures, with a view to creating long term ownership platforms capable of existing in perpetuity.

 

  1. As with any new participants in a well-established sector, many are on a learning curve to understand the affordable housing sector and the approaches, strategies and platforms best suited to their objectives. From Homes England’s perspective, when deciding whether to use our equity or debt capabilities to support the development of these investment platforms, we focus on those groups that our due diligence demonstrates are aligned with our objectives for the affordable housing sector.

 

  1. One challenge is that both domestic and international capital investing through for profit registered providers typically use a wide range of financial models and structures than the relatively homogenous not for profit providers.  To unlock this capital it is important for all stake holders to appreciate the need for different and new approaches and be able to interrogate these appropriately.

 

  1. In addition, we look at those who are capable of delivering on our wider strategic objectives such as the use of Modern Methods of Construction (MMC), working with SME house builders and delivering energy efficient and sustainable homes. Furthermore, ESG (environmental, social, governance) analysis will help to improve the understanding of the wider benefits of affordable housing – a matter of importance to Homes England and all RPs.  The fact that affordable housing in particular demonstrates strong social and governance credentials additionally provides a significant draw to the sector from institutional capital.

 

  1. In Homes England’s experience, much of the investor appetite for UK affordable housing has been from domestic capital although we have seen an increase in interest from international investors. Although the volume delivered by for-profit Registered Providers has been low to May 2023, we consider that a growing appetite for investment in housing from UK and international investors offers a significant opportunity to the affordable housing sector. Local Government Pension Schemes in particular have been active and early adopters investing through investment funds.

 

  1. The opportunity also presents for existing Registered Providers to work with new, institutionally backed entrants deploying capital on behalf of pension funds and insurers, that are willing to own and develop affordable homes (both as potential sources of finance to unlock development pipelines and acquire homes in stock transfers, as other Registered Providers do).

 

  1. At a time when not-for-profit RPs (i.e. housing associations) are managing competing pressures and trade-offs in how they use their financial capacity to invest in existing and new homes, Homes England welcomes new sources of well aligned capital coming in to the sector.

 

New challenges to the social housing sector

 

How do social housing providers choose whether to undertake new development or to focus on maintenance and upkeep of existing stock? Is it currently possible to achieve both objectives?

 

  1. Homes England would expect social housing providers to focus on being a high-quality landlord and on the quality and safety of their existing homes, and then focus on delivering new homes. Like all strategic decisions, we would expect them to be Board-led, aligned to a clear business plan, and within a robust financial and governance framework.

 

  1. Social housing providers have always had a range of strategic priorities which has required them to balance competing pressures and trade-offs in how they use their financial capacity. In recent years, the investment needed in building safety, fire safety and decarbonisation has risen significantly (alongside wider pressures in terms of the inflation and availability of materials and labour). Indeed, spending on building safety, fire safety and quality is non-negotiable to meet statutory obligations, whilst spending on new homes and, to a lesser extent, decarbonisation is discretionary and will be prioritised differently between providers).

 

  1. The impact of investing in existing homes on providers’ ability and capacity to invest in new homes will vary across the sector, according to the location, age and condition of existing homes. However, it is likely that, for some social housing providers, the investment they are making in existing homes will far exceed the investment they are making in new homes. Social housing providers are currently facing unprecedented challenges, but their ambition to invest across these priorities simultaneously remains strong.

 

  1. Where social housing providers are delivering new homes, they will work closely with local authority partners to deliver homes that most accurately meet local housing need, including where the local authority themselves is delivering the homes. within the constraints of the site. This will include the best tenure mix, as well as the appropriate mix of houses and flats. Where social housing providers are receiving grant funding from the AHP, Homes England requires them to demonstrate they have engaged with and gained the support of the relevant local authority.

 

  1. Homes England operates across a diverse national geography (outside of London) with providers having to consider local housing strategies, planning conditions and local political priorities. Compared to London, providers deliver housing in rural locations as well as urban, and will want to and be expected to deliver more family sized housing.

 

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

 

  1. Given the small but growing proportion of overall stock owned by the for-profit RPs, Homes England does not consider it possible to assess their impact on the financial robustness of the sector as a whole.

 

  1. We consider there is an opportunity for existing participants in the affordable housing sector to work with new and aligned sources of institutional capital, in addition to their existing debt funders. At a time when housing association balance sheets are balancing new development with the need to invest in asset management/estate improvement to meet fire safety and energy efficiency requirements, we consider that new sources of well aligned capital coming into the sector are to be welcomed. This can be done in a number of ways, including; the acquisition of delivery from not-for-profit registered providers which would release capital, the sharing of risks and development activity and housebuilders creating their own specific delivery vehicles for affordable homes.

 

  1. To ensure the maintenance of the current build rate, and support the growth in the levels of affordable homes which are built each year, there is a need to diversify the sources of investment and types of provider of affordable housing. Homes England’s interest is in ensuring that the sector evolves in a sustainable and responsible way that is aligned with the government’s objectives and the broader objectives of those operating in the sector.

 

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?

 

  1. Housing associations and councils have a long track-record of working together to deliver new affordable homes. Whilst these arrangements may not necessarily be driven by efforts to improve financial resilience, they are effective ways of harnessing the respective strengths of each organisation, for example the financial capacity and development experience of housing associations with the land and planning powers of a council (recognising that direct building of new homes by councils remains low).

 

  1. Through the AHP, Homes England provides funding to a number of consortia which are typically led by a housing association, but include councils (such as the Wayfarer Partnership led by Abri, one of our Strategic Partners). Consortia are an effective way of opening up access to the AHP to councils who may be less familiar with its requirements. Equally, other Strategic Partners will be working in more formal partnerships with councils, for example Hyde Housing Association have a partnership with Brighton and Hove to deliver 1,000 affordable homes over the coming years.

 

  1. More recently, Homes England has launched an initiative to support a small number of ambitious councils deliver new homes. Whilst this is designed at boosting councils’ capacity, one of the early success stories has been the joint work in Sheffield. Alongside supporting the Sheffield Housing Growth Board to identify a pipeline of over 1,000 affordable homes to be directly delivered by the council by 2026, Homes England has also worked with housing associations active in the city to develop a plan which could see their affordable housing delivery increase from c.100 homes a year to c.900 homes a year.

 

  1. In Homes England’s experience, there is good collaboration between housing associations and councils when developing plans to deliver new affordable homes – though the effectiveness and strength of this will vary across the country. Where it works well, housing associations and councils will work closely to identify and understand local housing need and bring forward shared plans that best meet that need.

 

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?

 

  1. When the AHP was launched, one of the key Government housing priorities was supporting people into home ownership, so the programme was expected to deliver around 50% shared ownership. In light of changes in the housing market and the wider economy, alongside changes in the government’s affordable housing priorities, there is now a renewed focus on social rent and we would expect that – and the proportion of the homes delivered as shared ownership – to be reflected in future delivery numbers.

 

  1. As noted elsewhere in this submission, affordable housing providers continue to report strong demand for shared ownership, with sales rates and values holding up well despite wider challenges (e.g. higher interest rates). Whilst they will be mindful of taking on too much sales risk, a number suggest that they see high levels of demand continuing following the end of Help to Buy.

 

  1. Government has also sought to promote home ownership for those on lower incomes – accordingly shared ownership provides an option for those households who are unlikely to be in priority need for social/affordable rented housing; seek more security than available in the Private Rented Sector; but are unable to afford to buy outright. Indeed, Heriot-Watt University’s research for Crisis and the National Housing Federation indicates that c.27,000 shared ownership homes a year are needed in England[2].

 

  1. Shared ownership is important for social housing providers beyond the high levels of demand and need for this type of tenure. As noted, shared ownership sales receipts allow for the early release of capital for further investment in the development pipeline to support the cost of delivering further social and affordable rented homes. It also supports the creation of mixed tenure and mixed income communities.

 

  1. Shared ownership as a tenure also contributes to mixed and balanced communities. Both local authorities and Government will want to ensure that affordable housing sites have mixed tenure and contribute where possible to wider place-making objectives.

 

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

 

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

 

  1. Homes England is commissioned by the Department for Levelling Up, Housing and Communities to deliver the Affordable Housing Programme outside of London in a way which both reflects and meets the government’s priorities for affordable housing supply. In doing so, Homes England provides detailed analysis and feedback on the likely cost and deliverability of those priorities.

 

  1. The working relationship between the Department and Homes England affordable housing teams is an extremely positive one, as reflected in the conversations about potential changes to the AHP in response to changes in the housing market and wider economy, as well as ministerial priorities

 

  1. As noted by the National Audit Office last year in its evaluation of the Affordable Homes Programme since 2015, Homes England has reasonable processes in place to provide an appropriate level of grant funding to social housing providers, and robust processes in place for assessing bids.

 

  1. The National Audit Office also noted that improvements were needed in the Department’s oversight of Homes England’s delivery of the Affordable Homes Programme. As a result of that – and alongside a wide review of how the two organisations manage programme delivery – governance changes have been made with the establishment of an Affordable Housing Delivery Board, chaired by Homes England’s Chief Investment Officer and attended by the Department, Treasury and Infrastructure and Projects Authority.

 

It is already accepted that the numbers of dwellings likely to be produced under the 2021 Affordable Homes Programme will be less than initially forecast. Will the financial challenges that the sector faces reduce these numbers even further?

 

  1. In response to challenges in the housing market and wider economy, alongside changes in the government’s affordable housing priorities, and as outlined earlier in this submission, Homes England has been discussing with the Department for Levelling Up, Housing and Communities potential changes to the AHP to better enable social housing providers to maintain affordable housing delivery at a time other parts of the housebuilding industry may be slowing down.

 

  1. Options under consideration include a reduced focus on affordable home ownership; an increased focus on social rent; higher grant rates where viability is challenging; allowing a higher proportion of delivery to come via acquisition of new build homes; and, funding replacement homes via estate regeneration.

 

  1. Whilst there is an understanding that changes may lead to lower overall delivery numbers, a drop in these numbers is likely to have occurred without these changes due to the external environment being experienced by the sector as previously described. However, we have confidence over the resilience of the Affordable Housing Programme and the likelihood of delivery coming forward as planned. Homes England also expect any changes to enable social housing providers to manage the competing pressures and trade-offs they face in the use of their financial capacity.

 

May 2023

[1] https://www.gov.uk/government/collections/housing-statistics

[2] ‘Housing supply requirements across Great Britain for low income households and homeless people’ https://pure.hw.ac.uk/ws/portalfiles/portal/24741931/HousingSupplyMay2019.pdf Pg. 148