L&G and BPF: private capital can plug £34bn supply shortfall but £9bn+ subsidy needed

However, on top of these limitations, the impact of financial challenges including non-recoverable expenditure on fire safety repairs and decarbonisation is expected to further reduce providers’ supply ceiling to “at most, 65,000 homes a year”.

The report therefore estimates that increasing supply to the 145,000-home target will require at least a £9.2bn increase in the government subsidy consumed, with all else being equal.

Depending on the tenure mix delivered, this may need to grow further; for example, delivering the National Housing Federation’s proposed proportion of 59 per cent of homes for social rent would result in a £14.2bn extra grant requirement per annum, the report finds. It recommends that the government commissions a review to establish the best means of targeting subsidies to increase the supply of affordable housing.

On top of the additional subsidy, L&G and the BPF estimate that £10bn of new equity investment (assuming 50 per cent leverage) is required each year, in a ’serious change’ to the sector’s funding model.

To encourage this, it recommends that the government considers a range of measures including addressing current differences in the treatment of not-for profit and for-profit registered providers where tax and grant agreements are concerned.

It also makes the case for a longer-term rent settlement to provide greater certainty for institutional investors. “By providing this certainty, government can help drive funding efficiencies and attract the cheapest cost of capital to the sector, reducing the overall cost of provision,” it says.

The research suggests that a 10-year extension of the current policy, through to 2035, could result in a 10 per cent increase in affordable housing valuations, equating to a £16,000 to £22,000 reduction in subsidy requirement per unit, or £2bn overall.

Social Housing asked the report’s authors about the risks to the investment model of government tearing up a previously agreed rent settlement – as the sector witnessed in 2015.

Simon Century, managing director of housing at L&G, said that rent policy represents “one of the government’s biggest policy levers”, and that while it is possible the government could retrospectively change its tune, a statement would go a long way given that the sector currently has “no clear view post 2025”.

He said: “A clear statement would go quite a long way and would provide a lot of assurance to both debt and increasingly equity investors as well.”

Other recommendations in the report include the suggestion that housing associations find alternatives to mergers, with the potential for partnership with institutional investors to play a “potentially more productive alternative to merging two capital constrained entities together”.

Commenting on the report’s publication, Mr Century said: “The demand for affordable housing is huge – at best an annual shortfall through time of some 95,000 homes a year. The main existing players – housing associations – can only do so much alone given the huge and increasing demands they face.

“The only way to overcome the challenges in the years ahead is through a new coming-together between all players. Working together, we need to rapidly scale up the amount of long-term institutional investment into the sector, supported by further subsidy from government. This is the only realistic way to deliver more homes at the scale the country so deeply needs.”

Ian Fletcher, director of policy at the BPF, added: “We have seen that institutional investment can contribute to increasing affordable housing supply, but there is more that can be done to create the right policy environment to boost all forms of funding.”

Hear from L&G’s Simon Century and other sector experts at the Social Housing Finance Conference, on 11 May in London (see details below).