CULS ARTICLES
A New Model of Affordable
Housing Investment T
he UK housing market has been afflicted with protracted supply shortages and chronic affordability constraints that have driven a housing crisis that has spanned several decades. The government has failed to meet its audacious 2019 manifesto pledge of 300,000 new homes in any year since the target was set, and this goal only appears more unattainable in the current high-rate environment that constrains housebuilders Oscar Miller and prospective homeowners alike. Graduate Analyst Broader housing supply and demand CBRE Capital Advisors disequilibria have inevitably resulted in even more pronounced dislocation in the UK affordable housing sector, which itself plays an integral role in improving economic mobility. The UK affordable housing sector has historically been dominated by Housing Associations (HAs), which deliver, own, and manage a considerable share of the existing affordable housing stock2. A majority of HAs are not-for-profit, with surplus income reinvested into the delivery of new schemes or used to service debt. These associations have struggled to address supply shortages, with the 2012-2021 10-year average of affordable housing delivery standing at 50,000 new homes per annum 66% below the 145,000 new homes needed to address current demand3.
HAs are also facing a number of headwinds driven by both idiosyncratic and systematic factors that are likely to hinder their ability to accelerate affordable housing delivery in the short to medium term. Essential decarbonisation and fire safety expenditures will reduce available liquidity for investment in new projects, with capital constraints only exacerbated by the limited availability of local authority grant funding. Balance sheet pressures may represent the largest obstacle for HAs looking to develop new homes. As of 2021, the 15 largest housing associations in London by homes under management had combined assets of £54.8bn and debts of £25.5bn, equating to a gearing ratio of 47%5. The same 15 HAs saw their interest coverage ratio, a metric used to assess a company’s ability to service debt, fall 36%-pts between 2018 and 2020 to 138%. Rising debt exposures, increased servicing obligations, and overall balance sheet pressures are only likely to have grown since 2020, pointing to the need for new sources of capital to stimulate affordable housing delivery. The involvement of private capital in the affordable housing sector is not a new phenomenon, but its role in the delivery of new stock may be more pertinent than ever. As of 2018, just 2% of housing associations in the UK were for-profit6, but investor
https://www.bbc.co.uk/news/61407508 https://centrusfinancial.com/will-private-capitals-love-affair-with-affordable-housing-last/ 3 https://reactnews.com/article/34bn-more-funding-required-every-year-to-meet-affordable-homes-shortfall/ 4 https://reactnews.com/article/building-safety-levy-extended-to-all-new-homes-as-35-developers-sign-goves-fire-safety-pledge/ 5 https://www.businessldn.co.uk/sites/default/files/documents/2022-10/BLDN_Report_Affordable%20Housing_1.pdf 6 https://www.ncvo.org.uk/news-and-insights/news-index/beyond-charities/focus-on-housing-associations/#/ 7 https://pdf.euro.savills.co.uk/uk/spotlight-on/spotlight---private-capital-in-affordable-housing.pdf 1
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CAMBRIDGE UNIVERSITY LAND SOCIETY 2023