Housing as ‘infrastructure’ – what would reclassification mean for sector investment?

The case for reclassification

 

One of the strongest arguments for reclassification is its potential to provide long-term funding certainty. Affordable housing in the UK is predominantly financed through the Affordable Homes Programme (AHP), which operates on a five-year funding cycle. However, as it is linked to the government’s three-year Spending Review, the AHP is vulnerable to mid-cycle adjustments that, according to sector leaders, create uncertainty and hinder housing delivery.

 

In contrast, national infrastructure projects benefit from longer-term funding commitments. This has been further reinforced by Labour’s commitment to publishing a 10-year infrastructure strategy this spring/summer.

 

Nick Atkin, chief executive of Yorkshire Housing, highlights the impact of this instability: “If you look at the number of starts and completions in England and Wales, and then you map that to when the AHP starts and stops, you’ll see it’s like a roller coaster. What we’re making the case for is that reclassification gives, in effect, 10-year certainty over what’s going to be delivered and when. That enables you to move away from that boom-bust cycle of delivery.”

 

Homes England serves as an example of how housing delivery can benefit from long-term settlements. Its strategic partnerships have allowed for multi-year funding agreements, demonstrating how greater certainty can facilitate more consistent delivery.

 

Most recently, this has included the launch of the MADE Partnership in September 2024. A £150m joint venture, it involved Homes England, Barratt Developments and Lloyds Banking Group, which each contributed £50m in equity funding. The partnership aims to act as a master developer for large-scale housing projects, with delivery anticipated to range from 1,000 to more than 10,000 homes.

 

The combination of essential skills and expertise and a long-term approach means the partnership will be able to unlock and scale the capital required to bring larger sites into production, enabling both major and SME house builders to build new homes.

 

Ed Farnsworth, executive group director of finance at L&Q, echoes this need for long-term funding.

 

“The current AHP ends in 2026 and we don’t yet have a grant settlement beyond that. As long-term businesses that appraise sites over 30-plus years and with long-term development pipelines, having a stop/start relationship with government around where the funding is going to come from doesn’t help,” he says. “If you think about other vital infrastructure like roads or water, they have a far longer-term strategy. If you have that longer-term certainty in relation to housing and housing strategy, the [sector] will attract more investors because investors want certainty.”

 

He adds that more broadly, housing remains undervalued in the UK and calls for a change in the government’s fiscal rules. “The government’s fiscal rules mean they consider housing benefit expenditure the same as expenditure associated with grant funding. Fundamentally, they are two very different expenditure lines. One is an investment that provides a return to the government. So, every £1 they put into social housing grant, we can leverage in private financing on the back of that and deliver a far more efficient way of providing affordable homes rather than the subsidy model, which is through housing benefit.

 

“From our perspective, recognising there’s a difference between paying a housing benefit bill and investing in grant is something we’d like the government to acknowledge. There is good and bad debt. Debt to pay the bills is very different from debt to invest in assets that generate a long-term return.”

What would reclassification entail?

 

When it comes to the technical aspects of making such a change, there are multiple potential approaches that could be taken, says Simon Century, head of capital investing at Legal & General. “This includes designating housing as an infrastructure investment or bringing it within the remit of the National Infrastructure and Service Transformation Authority to encourage long-term policy approaches and integration with other infrastructure classes, unlocking greater investment and facilitating more thoughtful housing delivery.”

 

Yorkshire Housing, meanwhile, is advocating for elements of the National Significant Infrastructure Projects (NSIP) programme to be brought under Homes England’s oversight, such as its longer-term funding structures.

 

As Jo Russell, policy and insights manager at Yorkshire Housing, explains: “What we’re talking about isn’t actually necessarily bringing the whole housing investment into the NSIP programme and therefore having to make changes to the way that NSIP works in terms of development consent orders and those sorts of things (because there has been research done on the barriers that creates for housing). What we’re talking about is taking the best bits [such as financial modelling] and bringing that into something that works more efficiently for housing. So the legislative change [required] would be around funding specifically not related to planning. We have structures for planning which have been proven to work and Homes England has proven large-scale housing delivery over decades.”

 

Mr Century adds that while technical mechanisms could be explored, the biggest shift would be in mindset – adopting a long-term strategy and incorporating housing into mainstream infrastructure thinking.

 

“Realising the government’s housing ambitions will require investment on a scale we haven’t seen before,” he says. “Think public sector and institutional capital working together to generate levels of investment needed to turbocharge housebuilding. A change of mindset could generate the right kind of thought and action to catalyse this additional investment.

 

“Viewing housing as infrastructure could move us towards more long-term decision-making, create opportunities for more integration between housing and other essential infrastructure, and ultimately offer greater reassurance and opportunities to encourage investors.”

 

Open the door to new investors

 

For smaller-scale housing associations like Yorkshire Housing, reclassification could open doors to previously inaccessible investors, Mr Atkin says. “At Yorkshire Housing, we build between 500 and 700 homes a year, and we know that for some investors that excludes us from being able to access funds from them. We’re just not big enough.”

 

He explains: “We do a combination of traditional funding finance and bond markets; there are several investors who have minimum amounts below which they won’t invest. For some investors, that can be £300m to £500m. At the same time, the maximum we’ve been to market for is £250m and several potential investors fell away because we weren’t offering a high enough level of investment opportunity for them.”

 

Mr Atkin believes reclassification would give Yorkshire Housing the long-term certainty it needs to seek larger investment sums and attract a wider pool of investors.

 

Mr Century reinforces this point, while pointing to research from Campbell Lutyens’ H2 2023 Infrastructure Market Update. “Shifting our thinking about classification of housing is crucial for unlocking greater investment. Investors often have set allocations for their investments; 48 per cent of investors believe they are underweight in their infrastructure allocation, which usually doesn’t include housing. Putting housing in the same category could spark more interest from investors whose infrastructure allocations could be used to dial up housing supply.”

 

At G15 member The Hyde Group, chief executive Andy Hulme agrees: “Investors typically have separate allocations for real estate and infrastructure. Social housing tends to sit in real estate, where allocations are generally quite ‘full’ after 20 years of rapid growth. Infrastructure is attractive to long-term investors due to its reduced market risk exposures – which is supported by longer-term income certainty.

 

“If social housing was also classed as infrastructure, more capital would undoubtedly be accessible. Plus, investors will have greater certainty when underwriting their exit assumptions and liquidity, over a longer timeframe – lower-risk income would mean a lower cost of capital, and so more social housing.”

 

For Hayley Rees, managing director of PIC Capital at the Pension Insurance Corporation, however, a reclassification wouldn’t change the fundamentals of why her organisation chooses to invest in the housing sector.

 

“The key question when we’re looking at any investment is: what is the robustness of those cash flows? What are the risks associated with them? And are we being paid enough to take those risks?”

 

She points to PIC’s £130m Wirral Waters build-to-rent scheme as an example where investment is guided by cash flow rather than classification.

 

“That project has built over 500 homes – 20 per cent of which are affordable. Effectively we did that on a regeneration lease. So, when I look at cash flows there, I’m looking through to the local authority. So if you do structures like that, you are going to attract a lot of money from institutional lenders like ourselves. So it’s more about the cash flows and coming back to that question of will it really make a difference of whether you call it infrastructure or not.”

 

On this, Ian Fletcher, policy director at the British Property Federation (BPF), says that on an informal level “[the sector] doesn’t necessarily need the government to come out and say ‘this is infrastructure’, it’s more their actions and how they treat the sector through the various [existing] mechanisms [such as the AHP and the sector’s rent settlement]”.

 

This is echoed by L&Q’s Mr Farnsworth, who says a short-term approach to the sector’s rent settlement, for example, hinders investor appetite. He says: “A key fundamental element of the cash flow from social housing is the rent regulation and the rental uplift. So while we have a risk that rents will not track inflation CPI+1% beyond a five-year horizon, any investor without that level of insight is going to take a view of what’s going to happen to rents beyond that time horizon. Whereas if you had a longer-term rent settlement, you’d have a great level of certainty.

 

“Ultimately, the more certainty you’ve got, the more likely you’re going to get a flow of capital into the asset. If you’re going to build a nuclear power plant, the government will underwrite the fact that the UK is going to require energy demands over a significant long period of time and we don’t have that same kind of underwrite for social housing assets beyond, say, five years.”

 

A co-ordinated approach

 

Elsewhere, there is a consensus that reclassification could help to integrate housing more effectively with transport, utilities and health services.

 

A study by Centre for Cities backs up this claim. It found that many new homes are being built in areas poorly served by public transport, highlighting the need for a more joined-up approach to planning. It says that since 2011, a total of 47 per cent of all suburban neighbourhoods located near rail, tram and underground stations have built fewer than one new home every year.

 

The BPF’s Mr Fletcher says, however, that while reclassification would help to integrate services into new housing development, it wouldn’t satisfy voices from a local level who would want to be involved, with planning remaining a controversial area.

 

“Where [reclassification] gets trickier is when you think about formal mechanisms underpinning it,” he says. “If it’s treated as a nationally significant infrastructure planning regime, [it might] utilise the Planning Inspectorate rather than a local authority. So, you can see why that would be controversial. When it comes to housing, local politicians want to have their say over where housing is consented.”

 

Looking ahead, it is clear that innovative solutions will be required to meet our housing demands, with reclassification offering the potential for greater funding stability and improved integration. As the government weighs its options on the best way forward, the debate over housing as infrastructure will continue.