Adrian D’Enrico, fund manager at Edmond de Rothschild REIM, outlines how investments in affordable housing can deliver stable, inflation adjusted income streams.
A growing population is placing increasing pressure on the UK housing market, exacerbating a pre existing shortfall of both private and affordable homes. Over 123,000 children do not sleep in a permanent bed each night1 and more than 1.2 million households are on local authority waiting lists2 – equivalent to the population of Manchester, Liverpool and Cardiff combined. The scale of the problem is
self-evident.
The solution? We need to build more homes. Across all tenures. Of the 300-400,000 new homes estimated to be required to meet demand each year, around 150,000 should be affordable. Yet over the last 10 years, new affordable housing completions have averaged just over 50,000 – a third of the required amount3 – despite considerable efforts to encourage investment, including £7.4bn of grant funding through the Affordable Housing Programme. The shortfall of investment is material – estimated at almost £17bn each year4. This is a scale, multi-year opportunity for investors.
Housing associations and other traditional providers of affordable housing are facing competing pressures for available capital – fire safety remediation costs, maintenance and improvement works to meet new consumer standards and refurbishments to reach energy efficiency requirements (both EPC regulations and net zero ambitions). These pressures are restricting development, with more than half of England’s housing associations having halved forecast completions5. Meanwhile, demand continues to rise, driven by demographic forces and the fallout of the cost-of-living crisis. New sources of capital are required – at speed and at scale.
Public sector equity investment into social and affordable housing has increased materially over recent years, from virtually zero in 2012 to £3.8bn in 20216. But further support is needed – the sector demands more, and for those investors willing to commit capital to acquire and develop new, affordable homes, there are three attractive benefits: income, inflation-alignment and impact.
Dependable income
With a supply shortfall and durable, demographically-driven demand, affordable housing can deliver long-term, dependable income, in many instances supported by public sector funding. Relative to economically-driven, cyclical sectors, occupancy and rental income streams in housing are largely insulated from external shocks. Rents continued to be collected in full during the Covid-19 pandemic and occupancy saw little variation – void rates remain low, at just 1.2% across the 12 members of the G157, comparing favourably to the UK commercial property market where vacancy rates have risen to 7.6%8. Dependable income with low volatility is a valuable diversifier in investor allocations.
Inflation alignment
Not only is the income resilient, it is also inflation aligned. Social housing rents are permitted to increase by CPI+1% annually under the current rent settlement. Given the recent upward spike in CPI inflation (reaching 10.1% in September 2022 which would have predicated an 11.1% rise in 2023), a consultation was launched by the government9 to control rising rental costs, seeking to cap uplifts. Following the consultation, in April 2023 a 7% cap was implemented for one year – a positive outcome and maintaining the attractiveness of sector relative to the wider long income market. Looking at other real estate assets offering long-term, inflation-aligned income, more than 90% of all RPI and CPI-linked leases are capped at 5% or below10. Robust income, growing with inflation, can help match long-term liabilities.
Positive impact
Whilst the financial characteristics alone are attractive, the sector can also provide tangible, positive social impacts for residents and communities in which homes are built. These impacts can deliver on investors’ impact or responsible investment ambitions – or obligations. The UK government has, for example, targeted LGPS’ participation in ‘levelling up’ through the allocation of 5% of their assets in ‘projects which support local areas’. Affordable housing is an almost perfect fit for this ambition and the LGPS 5% allocation alone could provide £16bn in new, much-needed dry powder.
The opportunity
Affordable housing can deliver attractive benefits to investors: durable income with public-sector backing, inflation-alignment, and tangible, positive social impacts for residents and communities. Underpinned by demographic-driven demand, occupational performance is well insulated from economic cycles, with investments exhibiting a low correlation with other real estate sectors and the wider economy11. A strong diversifier, affordable housing offers a scale opportunity to invest in a regulated sector, achieving both dependable, long-term financial returns and positive social impact – benefiting both stakeholders and the residents alike.
- Shelter, press release, January 2023 (England only) ↩︎
- DLUHC, Live Table 600 (end-2022) (England only) ↩︎
- DLUHC, Live Table 1000 (end-2022) (England only) ↩︎
- House of Commons Library, Tackling the Under-supply of Housing, February 2022 ↩︎
- Regulator of Social Housing, Quarterly Survey Q3 2022 (March 2023) ↩︎
- Big Society Capital, Mapping the market, November 2022 ↩︎
- G15 Housing Associations annual reports & accounts, 2021/22 (EdR calculation, March 2023) ↩︎
- MSCI, UK Annual Property Index 2022 (financial vacancy) ↩︎
- DLUHC, press release, August 2022 ↩︎
- CBRE, UK Long Income Index, Q1 2022 ↩︎
- Impact Investing Institute, “Is there an investment case for social and affordable housing in the UK?”, October 2021 ↩︎
