Number of new affordable homes to drop by 22%

A new report has outlined the funding challenges facing the affordable housing sector.

The research from Octopus Real Estate found that it’s now harder to make affordable housing development projects financially viable; increased build and finance costs have led to a third of Housing Associations reporting a deficit of 11-25% on individual development schemes.

It also predicts that fewer affordable homes will be built using traditional financing methods. Housing Associations anticipate a 22% reduction in the number of new affordable homes built over the short term.

More money is also expected to be diverted towards managing, repairing and maintaining existing homes, with repairs and maintenance expenditure across the sector increasing by over £1.5bn in just four years.

This research crystalises recent anecdotal evidence regarding the challenges faced by the sector, and indicates that there will be a slowdown in the total development and, in turn, delivery, of affordable housing in the UK in the years to come. In fact, in the survey Octopus commissioned, 47% of respondents said they were ‘not confident’ they will be able to maintain their development at the same levels as last year.

Octopus says much of this can be attributed to the ‘perfect storm’ of pressures the social housing sector is facing, including: inflation, construction costs, higher interest rates, decarbonisation work, regulatory and policy-related pressures, and cost of debt. Octopus’s research shows that the net effect of this is a 22% drop in new affordable homes being developed, at a time when record numbers of people need affordable homes.

More recently, the social housing sector has had to react to the onset of a 7% rent cap, which is estimated to equate to a £3.2bn loss in rental income for registered providers. The G15 - which represents London’s largest Housing Associations - confirmed that its members are reducing development programmes by as much as a third. Some registered providers Octopus spoke with have cut back development by more than 40% because of financial conditions.

Another challenge the Octopus report explores is around the cost of debt. Debt facilities were particularly popular in the last decade as registered providers sought to make the most of a low interest rate environment. However, interest rates have soared since the mini Budget in September 2022, resulting in very few registered providers now being active in the debt capital markets. In many cases, registered providers are avoiding raising debt altogether until rates return to a more favourable level.

For the last decade, the sector has built affordable homes by using its surplus to service what was previously low, fixed-rate debt. Not only are surpluses squeezed, but they also do not go as far as the price of debt has risen. This is making interest payments higher, ultimately reducing the amount of debt that registered providers can — and, prudently, want — to take on.

As a result, registered providers of affordable housing are biding their time and looking to alternative finance. Octopus’s research suggests this is leading to a significant reduction in the delivery of much-needed new affordable homes.

Jack Burnham, head of affordable housing at Octopus Real Estate, said: “Registered providers have historically relied on private finance to support their development ambitions. But changing economic conditions mean that the cost of debt has soared and social landlords must now pay more to access the finance they need to build new homes. This pressure has been compounded by the enormous investment required for landlords to hit net zero targets as well as addressing issues of disrepair in the sector.

“In producing this report, we’ve had many conversations with key figures in the social housing sector. This has provided valuable and reliable insight into the position that many registered providers find themselves in today.

“When considering the competing pressures in the affordable housing sector, it’s clear that a crucial decision needs to be made. Registered providers can continue business as usual and hope for increased grant rates from government, or they can look for innovative solutions — as they have done in the past — which can help deliver the homes the country needs. Consensus suggests that registered providers are now looking towards equity partnerships as a solution.”

Ed Clough, managing director at Octopus Real Estate, added: “Registered providers have the skills, experience and track record to deliver vast numbers of affordable homes, but are under significant pressure to invest in their existing homes. This is set against a backdrop of rising costs, a rent cap, and a freeze on the Local Housing Allowance, which is squeezing registered providers’ surpluses and reducing the capacity to utilise surpluses to service the debt needed to build new affordable homes. Housing Associations and Local Authorities need trusted partners with long-term capital to help them keep delivering new homes whilst they address net zero and building safety costs on their existing portfolios.

“The sector and its investors have an opportunity to engage in a process to find more sustainable funding solutions that can bridge an era of lower grant funding levels and more expensive debt. Partnerships with for-profit registered providers (FPRPs) can support greater additionality at a time when traditional funding methods are not feasible in the sector. Our research shows that half of Housing Associations are now more likely to work with FPRPs/equity partners compared with just 12 months ago.

“As the operator of our own registered provider, NewArch Homes, we take a long-term approach to investing in affordable housing. We aim to build lasting partnerships to provide sustainable private capital alongside our partners to make a meaningful impact on the provision of affordable housing across the country. We believe that equity partnerships represent the next wave of innovation in the sector, comparable to the 1980s when registered providers were given access to the debt capital markets. While some may be sceptical about this new way of working, ultimately, we hope that registered providers can unite around our common goal: building affordable homes for the people who need them.”