The need for institutional investment in affordable housing

Yet, while the case for investment is growing, the UK’s affordable housing sector remains structurally underfunded. The UK has consistently failed to deliver enough homes to meet demand, and affordable housing has been disproportionately affected.

According to the National Housing Federation, England alone needs 145,000 new affordable homes a year until 2031 to meet current demand.

Yet, actual delivery has fallen far short, averaging below 55,000 over the past 10 years. Without a material increase in investment from the public and private sector alike, the UK risks deepening its housing crisis.

Traditionally, affordable housing has been dominated by non-profit housing associations. However, housing associations around the country are managing to create just a third of the new homes that are required to meet current need, and they cannot do it alone.

A growing number of institutional investors are entering the market by establishing for-profit registered providers, allowing them to own and manage social and affordable housing while still delivering financial returns.

Their commercially focused participation in the market and agile approach to acquisitions, partnerships and funding models enable them to scale housing delivery up and bring new high-quality, energy-efficient homes to market more quickly.

For institutional investors, the supply gap represents a clear opportunity to address a deep social issue while providing the necessary financial return.

Affordable housing supply has historically fluctuated with the economic cycle, given the reliance on the for-sale housing market for new stock.

For-profit providers, backed by long-term capital, provide a route to sustainably and consistently increase affordable housing delivery in the UK through economic cycles.

As an asset class, affordable housing offers two key financial advantages: high occupancy with stable income and inflation-linked rental growth.

Social and affordable housing rents are partially underpinned by housing benefit, which accounts for roughly £30bn annually in government spending. This means a significant proportion of rent payments are supported by income from the government.

While landlords take a credit risk as with any tenancy, default risk is generally lower within the sector compared with the private rental market.

Most affordable housing providers in England set rents according to the Consumer Price Index plus one per cent formula, ensuring income streams remain resilient even during inflationary periods. This is particularly attractive to pension funds and insurers seeking investments that match their long-term liabilities.

As for-profit providers take a larger role in the affordable housing market, it is pivotal that customer care and sustainability are at the heart of their operations.

Around one in five tenants is not satisfied with their landlord’s service, and only one third of affected tenants are satisfied with the way their landlord handles complaints, according to the Regulator of Social Housing.

Newer entrants into the market have an opportunity – and a responsibility – to challenge the industry on setting higher standards for resident experience, from build quality to responsive repairs and user-friendly engagement methods.

As competition and regulatory scrutiny increase, those that invest in a high-quality service that prioritises customer satisfaction will be the ones that attract trust and follow-on partnerships.

The UK housing sector as a whole has been slow to improve its energy efficiency in the face of net-zero requirements.

New housing developments and the acquisition of existing stock represent opportunities to set the bar through high sustainability standards on new builds and the retrofitting of assets to make them future proof.

The long-term nature and priorities of institutional investors embed this approach, but there are also financial and reputational imperatives.

The lower cost of maintaining a more energy-efficient home is a significant benefit to tenants, reducing bills and financial hardship, which in turn promotes stable tenancies.

The government’s clear commitment to increasing affordable housing in the UK provides the sector with reassurance of a stable policy environment. However, to plan for the long term and deliver housing at scale a truly long-term view is needed.

We saw positive steps in the Budget, such as the announcement of a consultation on a five-year rent settlement, as well as the £500m boost to the Affordable Homes Programme and further funding increases since. However, these are too short-dated and at too small a scale if we want to create certainty and avoid future cliff edges. 

Affordable housing is no longer just a social policy issue, it is an institutional asset class in its own right. For pension funds and insurers seeking stable, inflation-protected returns which create a meaningful impact on society, the sector presents a compelling alternative to traditional real estate investments.

While challenges remain, regulatory tailwinds and evolving investment and financial structures are making the market more accessible.

With the right policy support and strategic innovation, institutional capital can play a pivotal role in addressing the UK’s housing crisis while generating strong, long-term financial returns.

Ali Farrell, head of impact strategies for real estate, Legal & General