Affordable Housing: the latest darling of institutional investors and lenders?

Affordable housing has been the watchword of 2020 and is likely to be thrust further to the fore in 2021 as institutional investors’ and lenders’ appetite for this increasingly staple asset class continues to grow. You could be forgiven for feeling surprised by this turn of events given, historically, affordable housing has been treated as a disposal asset of little value, typically sold by developers at a very early stage of a development to local authority landlords and to forward fund development of more lucrative open market housing.

What is all the fuss about?

Successive governments have grappled with the so-called ‘housing crisis’, grabbing headlines with ever more ambitious housing targets in a bid to ensure that supply meets demand. However, the need for more housing stock in the UK represents only one side of the coin, with the lesser known ‘affordable housing need’ representing a more challenging hurdle for Government as house prices continue to rise year on year. As a result, the affordable housing sector has grown in importance in recent years.

A safe harbour in choppy waters?

The long shadow of the 2008 financial crisis, coupled with uncertain market conditions stemming from political events such as Brexit, and the Covid-19 crisis, have been some of the driving factors behind the large-scale investment into residential real estate (particularly the sub-sectors of student accommodation, retirement living and build to rent) which we have witnessed over the course of the last decade, with investors seeking out dependable cash flows and returns. 

Affordable housing now appears to be the new kid on the residential block, generating ever-increasing amounts of interest from institutional investors (such as insurance companies, private equity firms, and pension funds) and proving popular with lenders too. Indeed, in its quarterly survey for Q1 (April to June) 2020, the Regulator of Social Housing reported a year on year increase in agreed borrowing secured across the affordable housing sector (which currently stands at £107.1 billion – and is set to continue to grow throughout 2021/2022).

What makes affordable housing so attractive as an asset class?

Affordable housing offers an asset class which is both dependable and conservative in nature. Combined with a robust regulatory system, a low risk profile, a low default rate among registered providers and a quasi government-backed income stream (in the form of both grant funding and the welfare system), the affordable housing sector is experiencing a ‘Cinderella’ moment with investor sentiment expecting to remain favourable over the coming year.

  • Low risk profile: With assets considered to be secure, typically counter-cyclical and supported by stable and long-term income streams, coupled with a chronic undersupply in the face of increasing demand, the affordable housing sector is generally considered to be low risk by investors and lenders alike (particularly against a backdrop of continued market volatility).
  • Robust regulatory framework: The affordable housing sector is regulated by the Regulator of Social Housing which has a reputation for competence. It has a credible track record, stepping in as and when necessary to ensure that the interests of all parties are protected; due to such proactive regulatory oversight, there have been very few defaults amongst registered providers. 
  • Environmental, Social and Governance credentials: Notably, the affordable housing sector is prized by institutional investors and lenders for its environmental, social and governance credentials that have a positive social impact in the communities they operate in and wider society – it therefore offers a natural home to those seeking to evidence their “inclusive capitalism” credentials by making ESG-based loans and investments.

We believe that these factors will continue to allow affordable housing to flourish as a sector and remain an attractive asset class for both institutional investors and lenders alike.

What is affordable housing? 
- Affordable housing is an umbrella term, comprising ‘social rented’, ‘affordable rented’ and ‘intermediate’ housing’. It is offered to eligible households who are unable to access the open residential market. 
- Household eligibility for affordable housing is determined with reference to local incomes and house prices and is often subject to various restrictions requiring that it remains affordably priced for future eligible households. 

 

Key terms
Affordable rented housing: comprises a form of housing which is let to those that are eligible for social rented housing; the rent is generally higher than social rented housing (at no more than 80% of the local market rent).
Intermediate housing: comprises homes available for sale or rent at a cost above social rent, but below market levels. This can include shared ownership housing and rent to buy housing, but not those subject to affordable rent.
Registered provider: comprises local authority landlords and private registered providers (such as not-for-profit housing associations and for-profit organisations) which offer a range of ‘affordable housing’ products and which are regulated by the Regulator of Social Housing;
Shared ownership housing: permits occupants to 'part buy, part rent' a property with the possibility to buy a greater share of the property over a period of time from the registered provider - this is called 'staircasing’;
Rent to buy housing: comprises homes available at subsidised rent levels, typically four-fifths of their market value. The property remains at below-market rates for up to five years;
Social rented housing: comprises low-cost housing, which is prioritised by need, and for which guideline target rents are determined through the national rent regime.

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