L&G: drop in housing associations’ development output may yet be curbed by scaled-up institutional capital

In February, LGAH became the first standalone for-profit to receive a compliant regulatory judgement, with top grades of G1* V1*. According to the report, LGAH owned 1,950 properties as at November 2022, and had also sold 938 properties to a sister RP focused on affordable rent.

Mr Denton said that L&G was continuing to have “lots of conversations” with people in the sector, but added “it takes time for conversations to turn into transactions”.

Recent analysis by Legal & General, submitted to an ongoing select committee inquiry into the financial resilience of the social housing sector, suggests that the annual development potential of the not-for-profit sector has been severely hampered by recent changes in the financial and operating environment. 

The submission updates figures from L&G’s 2022 ‘white paper’ delivered with the British Property Federation, which had suggested that housing associations acting alone had the capacity to build no more than around 65,000 homes a year. This was against a backdrop of an assumed need for a net addition of 145,000 affordable homes a year. 

In its updated analysis for the Levelling Up, Housing and Communities Committee, L&G suggested that this capacity has now been reduced by around 15,000 to 20,000 homes each year.

The document states: “Significantly higher debt servicing costs, capped rents, escalating management and maintenance costs and larger programmes of ongoing capital works have all resulted in the position becoming significantly worse. 

“This will lead to a significant further reduction of 15,000 to 20,000 homes a year of potential affordable housing output from the sector, meaning our best estimate sustainable range is between 45,000 and 50,000 homes a year – some 100,000 short of the current annual target. Moreover, there is further downside potential to these estimates. Given this context, the need for new entrants has increased even more.”

Speaking at the same briefing, Simon Century, managing director for housing at L&G Capital, responded to Social Housing’s query by referring to the accusation often levelled at institutions in the “pre-higher-interest [rate] days” of whether for-profits and housing associations are “essentially competing against each other”.

Mr Century said: “It’s a premise, I think, that we’ve always rejected – there’s been more than enough to do across the board. And we’ve never even got close to a third or even half of what’s required each year [as a country].”

Mr Century said his hope is that institutions will “pick up a lot of that slack going forward”.

He added: “And I think it’s more than hope, because we are seeing lots of big institutions coming into the sector over the last couple of years, with big ambitions and with big objectives to go away and make large impacts in into the wider resi sector and the wider affordable housing sector.”

Referring to how the firm arrived at its analysis of housing association development capacity, Mr Century said that the current conditions needed to “come out of the wash a little bit, in terms of what it means for pricing, [capital] allocation”.

But he added: “Undoubtedly in the long term, that 40-odd thousand to 45,000 [homes], we don’t really see a way in which that’s going to shift back again. “It’s very, very hard to see, as there is a finite amount of capacity that does exist in the housing association sector.”

In order to drive delivery back up, there is the need for private capital to come in on a growing basis over time, and through increased subsidy, Mr Century said. On this, he believes signs are positive in government.

“I would say what’s helpful is I think Homes England, Treasury, [the Department for Levelling Up, Housing and Communities] get it, they hear it; we are seeing adjustments to grant programmes to be more front-loaded right now. And that’s great.

“Clearly we are arguing that the overall subsidy programme has to be much, much, much larger through time. That’s what society needs, and we view that as just good economics. 

“But I think government more centrally is reacting to a limited but good degree right now in terms of making sure that the lights stay on and we do carry on delivering.”

Additional subsidy and support

In its 2022 ‘white paper’, L&G called for between £9bn and £14bn of additional subsidy towards new affordable housing each year, coupled with a 10-year grant programme to provide certainty.

Mr Century referred to recent Savills analysis into the impact of private capital in the sector. Applying the consultancy’s data and forecasts of affordable housing completions in the five years to 2028, between 30 and 40 per cent of annual new build affordable homes completions could be funded by investors – around 113,000 homes per year. 

L&G’s parliamentary submission sets out its view that “with a more permissive environment, institutional investment could deliver even more than the 113,000 affordable homes by 2028 that Savills forecast”. In particular, it cites the potential to reform Solvency II and release additional long-term capital from the UK pension risk transfer market into affordable housing. 

L&G summarises its four ‘key asks’ of government regarding the policy environment as: 

• A need to review tax and regulatory frameworks
• A long-term policy environment that reduces political uncertainty
• ‘Positivity’ from policymakers on the role of institutions and the affordable housing sector overall
• Create a policy environment to enable social housing retrofit to scale up

On the first point, Mr Denton said that although the desire for housing associations to partner with for-profits was growing, there are currently hurdles to achieving this amid a policy environment “created for a not-for-profit sector, being applied to institutions”.

The recent Savills research suggested that nearly 90 per cent of housing associations would consider partnerships with for-profit registered providers.

Mr Denton said: “There’s such a gap between the non-profit sector and the way institutions are managed through the regulatory framework that there needs to be, as we call it, ‘harmonisation’ of the regulatory and tax frameworks between those players. That will certainly help to crowd in much more money to be able to meet the gap [in funding]”.

Fellow speaker at the event Michael Adefuye, senior research manager at LGIM Real Assets, drew attention to the need for certainty on rent policy.

He said: “Uncertainty is probably the most toxic thing for an investor, and for a sector like affordable housing where the stability is the key driver, changes around government policy, around rent-setting policy, [make it] really quite difficult to know the future outlook of your income.

“Over the last decade, we’ve seen now two or three different changes to rent-setting policy. And we just need a little bit more clarity from government that there is a long-term policy in place.”