Strengths

Regulation will insulate early movers from competition

We already know there is huge investor appetite for environmentally friendly, regulated assets that provide tangible social benefit. That gives existing FPRPs (for-profit registered providers) a deep well of capital to draw on as they grow.

We can see the depth of appetite for FPRP status in the length of the pre-registration queue. There are around 60 applications for for-profit providers sitting with the Regulator as of April 2022.

However, as the FPRP sector grows, the RSH (Regulator of Social Housing) has strengthened its scrutiny of applications to reflect the increased expectations arising from social housing regulation review. We can expect to see more investors and developers submit applications to register FPRPs but the often lengthy process means it will take time for interest to translate into additional competition. That gives the early movers significant competitive advantage.

New entrants don’t have legacy stock liabilities (for now)

Acquiring new build homes has been the main route to market for most FPRPs, which lowers their exposure to stock investment costs and risks.

Some may choose to remain focused on building and acquiring new stock. With modern, energy-efficient homes, they’ll enjoy predictable and lower repairs and maintenance costs and a lower cost of capital as they refinance later.

As FPRPs and their capital partners become more established and familiar with the sector, some, particularly those with experience in other residential sectors, may seek to acquire legacy rented portfolios from HAs.

The result is a win-win. HAs (housing associations) unlock equity to fund the core parts of their business and manage the repairs/decarbonisation costs in their business plans. And FPRPs get to build up scale more quickly, at a lower price that reflects the required retrofit costs.

Weaknesses

Still not a level playing field with HAs (but this is changing)

FPRPs enjoy some benefits over not-for-profit providers, but there are disadvantages too. The framework for taxes and exemptions is, as one FPRP put it, “a dog’s dinner”.

They must also navigate greater challenges securing access to grant funding. In 2021, Homes England opened the Strategic Partner bidding to FPRPs for the first time, awarding funds to four of them. However, whilst Housing Associations were able to bid for up to £250m in the latest round of grant allocations; FPRPs had a cap of £150m. Our research demonstrates some FPRPs have the appetite to deploy significantly more grant than this.

While the Regulator of Social Housing can fine HAs that don’t meet its standards, to date it has avoided this, viewing it as taking away money that could be used to support tenants. Reporting to DLUHC, representatives from the RSH suggested they may choose to use these powers on FPRPs should they fall short of the Regulators’ standards.

Debt finance

Development debt is expensive. This is manageable for private developers selling homes on the open market, where the returns justify this cost. It’s a greater challenge when building affordable housing for start up FPRPs.

Opportunities

Joint ventures and partnerships

On one hand, you have large HAs with decades of experience building and managing affordable homes, large and capable development teams, but facing growing financial constraints. On the other, you have private investors with plentiful equity, but with limited track records and development experience.

Joint ventures between FPRPs and HAs appear to be an obvious opportunity. A growing number of HAs have asked us to help explore the risks and opportunities presented by partnering with FPRPs and investors. Some HAs are weighing up whether to register FPRPs of their own to unlock investment to fund development; others are considering working with existing FPRPs.

We have advised on a number of sales of Shared Ownership stock from HAs to FPRPs, and expect this market to grow. The appetite of HAs to sell legacy social and affordable rented stock to FPRPs is in its infancy, as is the appetite of FPRPs to buy, but this is also an area we expect to grow.

As FPRPs gather scale and experience, further opportunities will arise for partnerships with local authorities. Here, the flexibility and funding of FPRPs can help unlock council-owned land and fill skill gaps, while helping the authorities tackle their housing lists.

The key to more joint working is mutual trust and understanding. As the FPRP sector matures, and undergoes the In Depth Assessment and Regulatory Judgement processes, HAs and local authorities will grow more comfortable working with new entrants. We expect to see far more of these partnerships emerging.

Threats

Inflation

FPRPs aren’t alone in facing the threat of inflation. Rising labour and materials costs could erode margins: materials costs for new dwellings rose 19.5% in the year to March 2022, according to data from the Department for Business, Energy and Industrial Strategy.

HAs with large development programmes may be able to negotiate better terms with contractors because they’re operating at scale. The same is true of some of the larger FPRPs with a national footprint and established relationships. But there is no escaping rising cost pressures. Pricing volatility and developer cost uncertainty will be challenging for all investors.

There is a further risk that the Bank of England raises interest rates too quickly in an effort to contain inflation. This would have a negative impact on affordability for Shared Ownership buyers at the point of purchase. Unassisted buyers would face these same barriers, however, which should underpin demand for Shared Ownership.

Policy risk

Policy changes over the last few years have highlighted how vulnerable the affordable housing sector is to the changing priorities of government. Rewritten rent settlements and changes to the Shared Ownership model lease have presented challenges to HAs and FPRPs alike.

While the sector has been able to weather these changes, new entrants and HAs share a need for stable rent and funding policies to support long-term investment. First Homes risks cannibalising affordable housing supply while discussions around replacing Section 106 with an Infrastructure Levy could disrupt delivery entirely.

A longer-term rent settlement and commitment to a clear, consistent housing strategy would give confidence to providers, lenders and investors, unlocking more affordable housing delivery.

_{Read the articles within Spotlight: Equity investment in affordable housing below.}