Octopus makes case for equity as firm’s research suggests 22% fall in HA development pipelines

In its report, Octopus described the pressures facing the social housing sector as a “perfect storm”, including inflation, higher interest rates, net zero commitments, and regulatory and policy-related pressures.

 

It referred to data from the Regulator of Social Housing (RSH) which showed that due to tight finances, providers are mostly choosing to focus on improving their current housing stock.

 

Based on the RSH’s quarterly surveys, forecasted spend on development has fallen from a peak of £17.1bn in 2020/21 to £16.8bn in 2022-23. 

 

Octopus noted: “Out of this £16.8bn, £11.4bn has already been allocated, leaving £5.2bn uncommitted. This is significant because if registered providers continue to channel more funds into improving existing homes, many may have to withdraw from uncommitted projects.” 

 

The report also cited the English regulator’s global accounts, which showed that output between 2015 and 2020 ranged between 41,000 and 49,000 of new social homes. This is a “significant shortfall” compared with the 145,000 a year recommended by homelessness charity Crisis and the National Housing Federation.

 

Equity partnerships

 

Octopus, which is an equity investor into social housing via its for-profit provider, argued that against the challenging backdrop facing housing providers, equity partnerships are the way forward for development to continue.

 

According to Peter Merchant, investment director for affordable housing at Octopus Real Estate, a move towards these models will signify a “wave of innovation” akin to changes initiated four decades ago as associations began to access the debt capital markets for the first time.

 

He added: “With growing demand from the finance community for social impact investments and registered providers looking for more finance, there’s an opportunity to give the affordable housing sector the financial boost it needs.

 

“We believe that equity partnerships represent the next wave of innovation in the sector, comparable to the 1980s when registered providers were given access to the debt capital markets. While some may be sceptical about this new way of working, ultimately, we hope that the sector can unite around our common goal: building affordable homes.”

 

The potential solutions rely on RPs, the government and investors working together and being prepared to tackle this situation with “new and innovative ways of thinking and doing”, the report stated. Octopus said these three actors have been vital in securing funding via the debt capital markets in the past, and it considers them crucial in new models such as equity partnerships.

 

It expects the government to ensure that these models are tightly regulated and monitored, in the same way that RPs currently are.

 

It added: “On top of this, the finance community should view equity partnerships simply as a new method of directing investment into affordable housing. For-profit registered providers which utilise equity partnerships can then be the conduit that converts private finance into new affordable housing.”

 

Referring to the wave of for-profits set up in the wake of the Housing and Regeneration Act 2008 (which enabled such organisations to register with the RSH for the first time), the report noted that the model depends upon income rising with inflation.

 

“The model is predicated on the idea that investors will receive consistent returns from inflation-linked rent income while the sector benefits from more affordable homes funded through private capital,” it said.

 

Such models have the potential to take on a “much more prominent role in funding the development of new affordable homes as traditional registered providers cut back on development”, it added.

Sentiment shift

 

The survey commissioned by Octopus found that almost half (49 per cent) of RPs said they were more likely to work with for-profits or equity partners compared with 12 months ago.

 

For-profits’ primary role, according to respondents, would be to take on development risk (36 per cent) and to forward fund schemes (28 per cent).

 

Similarly, in May, a report from Savills revealed that almost 90 per cent of housing associations would consider partnerships with for-profits, as sentiment has shifted and financial capacity is constrained.

 

Jack Burnham, head of affordable housing at Octopus Real Estate, said the firm is convinced that patient private capital can play a “significant role in building the affordable homes that the country so desperately needs”.

 

Prior to joining Octopus last year, Mr Burnham was executive director of growth and investment at housing association Thrive Homes. While there, he agreed a number of lease deals with CBRE UK Affordable Housing Fund designed to provide an “equitable ownership structure” between the parties.

 

Mr Burham said that Octopus has “ambitious plans” to invest across the country, to ensure additional affordable homes are still brought forward, without putting undue strain on its partners’ balance sheets.

 

“Our registered provider, NewArch Homes, has been created with partnership at the forefront of our ambitious growth plans and we are excited by the ongoing discussions with many traditional registered providers about the potential to collaborate to build much needed affordable homes,” he added.

 

Octopus’ report comes after recent analysis by another for-profit player in the sector, Legal & General (L&G), also suggested that the annual development potential of the not-for-profit sector had been severely hampered by recent changes in the financial and operating environment. 

 

In a submission to the select committee inquiry into the financial resilience of the social housing sector, L&G updated figures from its 2022 ‘white paper’, delivered with the British Property Federation, which 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, L&G suggested that this capacity has now been reduced by around 15,000 to 20,000 homes each year. The firm has argued that the “lead in” to the anticipated drop in output by the not-for-profit sector offers an opportunity for institutional players to scale up their own investment in the space.

 

Due diligence

 

Octopus’ Mr Burnham emphasised that when exploring options such as equity partnerships, it is vital that RPs conduct thorough due diligence.

 

“The growth of equity partnerships has the potential to be a turning point for finance in the sector as significant as the Housing Act of 1988,” he added.

 

“With this in mind, serious consideration needs to be given to those that registered providers choose to work with.”

 

The comments echo those of Richard Petty, head of UK living advisory at JLL, earlier this week. Writing for Social Housing, Mr Petty said housing associations should be “alive to the prospect of an influx of private capital” and must “give serious consideration to the models and partners on offer”.

 

Hear from expert speakers about partnership models for delivering additional homes at the Social Housing Annual Conference, co-located with the Inside Housing Development and Regeneration Summit, on 30 November in London. For more information, please click here.