Scott Kingsley, Senior Wealth Advisor
It’s fair to say that the incoming UK government has hit the ground running with an ambitious housebuilding target. Broadly speaking, the target is an additional 1.5 million new homes over the next five years, which will include affordable and social housing. Planning restrictions are also likely to be lifted in green and grey belt areas, although this will come with an obligation to ensure that 50% of new properties are “affordable.”
While we currently await social housing targets - which will legally obligate councils to build a specific number of properties - there are some interesting statistics. More social homes (77,239) were built between 2010 and 2012 than over the last decade and housing charity Shelter believes 90,000 social homes are needed each year for the next decade to reduce pressure on the private rental market. The potential opportunities for investors are already emerging?
As the figures above show, there has been a significant shortfall in new social housing for a number of years. Many look back to the Right to Buy scheme introduced by the Conservative government in 1980, which gave council tenants the option to buy their property at a significant discount to the market value. While this move ignited the homeownership revolution in the UK, it diminished social housing stock with subsequent council budget restraints restricting reinvestment into housing.
Before we look at the benefits of investing in social housing, it is interesting to look at the various investment options available today:
As you can see, there is a broad range of options available, from building or purchasing social housing stock and leasing back to the council or housing association to financing bonds and more.
Social housing statistic: Investment in social housing could add over £50 billion to the UK economy.
The previous government put aside £12 billion for investment in affordable and social housing over the next five years, and the current government are expected to introduce additional funding. This will be backed by a range of private-sector finance and initiatives, opening the door for numerous investment opportunities.
Whether injecting much-needed social housing stock into the system or taking a less direct approach, such as investment in housing associations or local authority funding, it’s essential to know the fundamentals of investment in social housing.
Social housing properties are often leased back to government agencies, councils and non-profit organisations, providing a reliable and consistent rental income. Due to the ongoing shortage of social housing, the risk of vacancies is significantly reduced, as is landlord spending on advertising for new tenants.
Rental income is likely to be below the market rate, which is an investment hedge against a more stable income stream and the volatility of the open market. We will likely see restrictions on rental increases, but this would be balanced against an underlying shortage of social housing.
Social housing statistic: Over 2 million homes have been acquired under the Right to Buy scheme
There is an argument to suggest that the value of social housing property is less volatile than that of its open-market counterparts. On one hand, the presence of a long-term agreement with the local authority or housing association will limit the options. Alternatively, a structured approach to rent increases will give more visibility, especially where a property is valued at a multiple of income. Unlike the private rental sector, where the open market dictates house prices and rental levels, this is not necessarily the case for social housing.
Statistics also show that there is likely to be increased demand for social housing in more economically challenging times. While not necessarily benefiting from the price of property in the open market, social housing could provide a more stable long-term investment.
In recent years, we have seen a significant increase in community investment and the provision of affordable housing. Perhaps best positioned under the ESG (Environmental, Social, and Governance) umbrella, this has given rise to what is referred to as impact and responsible investment.
While sometimes portrayed as a charitable investment style, this is not true. For social housing projects to continue, there needs to be stable, regular income and an element of appreciation to fund future projects. Many developments will also have a knock-on effect on the local community, enhancing the look and feel of an area and having a positive impact on property prices.
In 2021, the previous government announced a £12 billion Affordable Homes Programme, which was expected to provide up to 180,000 new homes across the UK. The programme was structured to unlock an additional £38 billion in public and private investment, allowing individuals and companies to invest in affordable and social housing projects.
Tax credits and subsidies have incentivised those directly involved in funding and managing social housing projects. This ensures a constant flow of capital and continued interest in the sector, which can make traditionally unviable projects financially viable. There is also a knock-on effect on the broader economy with a more active building sector, additional employment opportunities and increased consumer spending.
Social housing statistic: Between 1979 and 2022, social housing let numbers fell from 5.5 million to 4.1 million (despite the UK population increasing from 56.2 million to 67.6 million)
As we mentioned above, while there are some restrictions regarding the value of social housing compared to open-market properties, they can provide a degree of diversification for investment portfolios. A relatively secure income stream, with local authorities and housing associations desperate for more social housing, is beneficial when economies struggle.
Reducing volatility can be useful in this situation, offering something of a hedge against weak economies and unpredictable demand for private rental properties.
The UK population is expected to increase from 67 million in 2021 to 73.7 million in 2036, a 10% rise. This compares to an increase of just over 10% between 2006 and 2021 and creates a very different landscape for social housing. Aside from a growing population, increasing urbanisation and a lack of low-cost housing will pressure governments and local authorities to increase spending on social housing.
We already know that the UK government is set to introduce legally enforceable housebuilding targets for local authorities across the UK. As demand continues to grow, and with the building sector unlikely to keep pace, this will provide attractive investment opportunities for housebuilders, shareholders, and their financial backers.
The greatest asset for any investor is a quasi-guaranteed income stream, visible well into the future. While nothing is guaranteed, and government policies can and will change, a lack of social housing will give governments little room for manoeuvre. Many social housing projects now depend on long-term tenancy agreements with local authorities or housing associations, creating an added degree of certainty for all parties.
Social housing statistic: In March 2023, local authorities owned 52% of social housing stock and housing associations 48%. In 1981, local authorities owned 97% of social housing stock.
Following on from the benefits of social housing investment, in particular diversification, this type of asset also offers a degree of resilience in economic downturns. At worst, demand for social housing is likely to remain constant but more likely to increase as individuals face financial woes and look elsewhere for assistance with their living arrangements.
Part of the resilience of social housing investment in times of economic challenges is the lack of development activity in recent years. This has created a situation that is unlikely to be rectified for some time to come. Against this backdrop of ongoing demand for social housing stock, many investors are now looking at the financial resilience of this readily available asset class.
Earlier, we highlighted the relative lack of volatility when comparing the value of social housing property against open market assets. This is due to numerous restrictions, long-term leases, and, very often, a cap on rental increases. Looking further down the line, there may be potential for significant long-term capital appreciation above and beyond the multiple of rental income.
Focusing on urbanisation, in particular, future property market trends could see less popular locations grow in popularity. This could lead to redevelopment of the area or even an enhanced open market value when a lease or tenancy arrangement ends and restrictions are lifted. In what is often described as a ripple effect, the growing popularity of a central area could lead to properties becoming unaffordable, with demand then expanding to other bordering regions.
There are many different ways in which you can invest in social housing, directly and indirectly, benefiting from an uptrend exacerbated by an ongoing shortage of social housing stock. Long-term demand for social housing is on an uptrend and offers an element of protection against volatile economies. In exchange for guaranteed income streams, i.e. rents guaranteed by the local authority or housing associations, investors may need to give up an element of income and potential capital appreciation. This might be a downside when property markets are in demand and capital values are appreciating quickly, but it is a welcome defensive characteristic in challenging times.
A chronic shortage of social housing and more affordable properties has prompted the UK government to rip up the planning rulebook and threaten councils with mandatory housebuilding targets. As we saw with the recent government Affordable Housing Scheme, the authorities are not able to provide all of the funding required. However, initial seed funding by the government is attracting private investment.
It is essential to appreciate the difference between private sector property investment and the potentially less generous but less volatile benefits of social housing developments. They’re not the same, but the characteristics of social housing investment bring a welcome element of security and diversification to what has been a challenging financial world in recent years.
For specific opportunities within social housing, please get in touch so we can discuss this further.