Bridging the gap between the UK’s affordable housing crisis and social equality
There are a number of factors contributing to the chronic shortage of affordable housing in the UK – and private capital can help to fill the void.
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The ever-growing shortage of affordable housing in the UK is resulting in increasing social inequality across the country. Demand for reasonably priced residential accommodation continues to grow but housing associations currently face several challenges that prevent them from delivering sufficient supply and offering a solution on their own. In this article, Christopher Santer, Fund Manager, Positive Impact Investment, Real Estate, outlines the key factors contributing to the UK’s affordable housing crisis and the role private capital can play to help alleviate it.
Government figures show that waiting list for people who are entitled to social housing in England alone comprises 1.3 million households. Assuming that an average household consists of between two and three people, this means that well over three million people are impacted. Between the end of March 2023 and the end of March 2024, there was a net increase of just under 43,000 homes in the social housing segment, according to data from the Regulator of Social Housing, a far cry from the number needed for these 1.3 million households.
Government targets are ambitious
The UK government has very ambitious plans to build 300,000 new homes annually over the next five years, with particular attention on the affordable housing sector. Historically, however, annual completions have generally fallen short of its targets. While the government’s plans are a tailwind, the problem is that the housing associations who are responsible for delivering the social and affordable homes that form part of the government’s target are using their capital to meet other pressing needs. These include rising interest bills (more on this below), but also new requirements to remediate existing stock to meet building safety and decarbonisation requirements.
The need for a far-reaching modernisation programme follows new safety and building requirements in the aftermath of two major events - the Grenfell tower fire, which exposed widespread use of unsafe cladding and insulation materials on residential buildings across the UK, and the tragic death of a two-year-old boy due to prolonged exposure to damp and mould in his family’s home in a social housing flat in Rochdale.
Housing associations are scaling back requirements
Since housing associations cannot issue equity, all they can do is reinvest rental proceeds or take out a loan. As interest rates and debt servicing costs have risen, sector capacity to finance and develop new affordable homes has fallen sharply. Indeed, more than half (53%) of the UK’s top 30 developing housing associations polled in a recent survey by advisor Savills, reported they were either no longer intending to acquire Section 106 homes or had reduced their requirements for them. With many providers scaling back their demand, the market for affordable homes has diminished significantly.
A housing shortage also prevailed in the UK during the post-war period, but a key difference with the situation today is that at that time the government was the main party responsible for delivering social and affordable housing. Thanks to local authority programmes, house building reached its peak in the 1960s and 70s with more homes built in the UK than at any other time. The post-war housebuilding programme was aimed at rebuilding housing lost during the Second World War and replacing old, redundant, and substandard Victorian housing with good-quality housing for low-income families.
In the 1980s, that responsibility was transferred away from the government to what we now call housing associations. Since then, new-build residential supply generally began to decline – and the percentage of social and affordable housing delivered by the new incumbents started shrinking as well. In other words, total supply is dwindling and reasonably priced accommodation targeting the social segment accounts for an increasingly smaller percentage of new stock. As of 2023, 15 percent of new housing developments in England are social and affordable, less than half the figure during the immediate post-war period.
More than two million social housing units lost to Right to Buy
Another factor that has contributed to the growing shortage of social and affordable housing is the Right to Buy scheme. The UK government introduced the programme in 1980 as part of the Housing Act at around the same time that the housing associations took over managing and delivering social housing from the government. This initiative, which was spearheaded by Margaret Thatcher’s Conservative government, allowed tenants of council housing and some housing associations to purchase their homes at a discounted price, depending on the length of their tenancy. As a result, a large amount of stock that had traditionally been part of the social and affordable housing segment fell away.
In total, 2,020,779 social housing dwellings were sold through Right to Buy schemes from April 1980 to March 2023, according to government statistics. The current government is looking at reforming that programme, but the key issue is that the affordable housing stock has been shrinking instead of growing over the past 40 years because a large proportion has been sold off – and that situation continues to this day.
Impacts of the affordable housing crisis
The housing crisis is also weighing heavily on local government authorities. When people who are entitled to social housing cannot find a home, they can end up going into temporary accommodation, which can mean a hotel room. Aside from hotel rooms not being a suitable place for a family to live, sleep, eat and study, the Joseph Rowntree Foundation notes that temporary accommodation is socially quite disruptive for a family as this uprooting can lead to a disconnection from support networks, schools and workplaces, creating further stress and instability, particularly for children.
Concentrated temporary accommodation usage in specific areas can also strain local services and infrastructure. Additionally – and this is an important point – the local authority pays for this accommodation at levels significantly higher than it would for housing, more akin to hotel rates on a nightly basis.
A key question in this context is why private house builders are not building more social and affordable housing. Private home builders are, in fact, compelled by law in the UK and planning permits under Section 106 to deliver a certain amount of social and affordable housing. In London, the figure is typically between 35 and 50 percent of all new developments. The problem the house builders are facing is that they need to sell their developments to the housing associations before people entitled to live there can occupy them. And, as described above, the housing associations do not have the resources to buy new stock coming to the market, meaning the development stalls and neither the social housing nor the open market housing, both of which are so desperately needed, are delivered.
Private capital can help
There is an opportunity for private capital to partner with housing associations and fund the delivery of new social and affordable housing to address local issues and deliver social impact, without compromising on financial returns. Helping to address the shortfall of affordable housing is an important first step in reducing broader social inequality and benefitting public finances, as well as society as a whole.
One way of doing this is in via For-Profit Registered Providers (FPRPs). First created in 2008, these companies operate within the regulatory framework for social housing in the UK but are allowed to distribute profits, mainly from rental income, to shareholders, in much the same way as lenders receive interest on their loans.
While FPRPs have been operational for some time, a recent survey by advisor Savills indicates they have only just started gaining traction in the last five to 10 years and that they now own close to 30,000 homes. Despite this increase, the shortfall in capital to deliver social housing for the current waiting list remains substantial.
New purpose-built, energy-efficient homes also offer an attractive risk-return profile for institutional investors. Typical total returns for funding these types of modern housing can currently be in the region of 7% per annum, generated predominantly from a 4% to 5% rental income return that can grow with inflation (either explicitly or implicitly linked) over the long term. The buildings are comparable in size and quality to private market housing but may feature simpler fittings, such as basic kitchens or bathrooms, making maintenance and capital expenditures more manageable.
Due to the significant imbalance between high demand and limited supply, combined with below-market rents that remain affordable for tenants, this represents a potential opportunity to achieve a suitable risk-adjusted return within an investment portfolio.
In our next article, we will explore how town centres across the UK can serve as ideal locations for diverse new housing developments, aiming to both alleviate the shortage of open market housing and revitalise central areas that have experienced significant decline in recent years.
Facts & Figures
1.3 million households are on the waiting list for social housing in England alone.
- 2,020,779 social housing dwellings were sold through Right to Buy schemes in the UK from April 1980 to March 2023.
Over 117,000 households in England were living in Temporary Accommodation in 2024 — a 145% increase since 2010.
More than 183,000 Londoners are estimated to be homeless and living in temporary accommodation.
- Local government spending on TA rose to £1.74 billion in 2022-23, with local authorities in London alone spending £114 million per month.
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