A mixed bag on policy

Government has committed £11.5bn in new funding to deliver 180,000 affordable homes between 2021 and 2026. At just under £64,000 per home, this scheme offers more than double the grant per home of the 2016–21 programme. While the previous programme focused primarily on home ownership, funding in the current AHP (Affordable Homes Programme) splits evenly between homes for sale and rent.

That increase in grant funding comes with constraints, however. Unlike before, where there’s been a substantial pot available across the whole programme through Continuous Market Engagement (CME), most of the funding in this pot has been allocated to Strategic Partners.

This is great news for those lucky enough to be named Strategic Partners. It’s less good news for those who missed the boat this time or prefer the flexibility of the CME model. For newly registered FPRPs (for-profit registered providers), or those in the pipeline, the availability of CME grant is a key risk and consideration. Some wishing to operate at scale may have to wait until the next programme in 2027 for a shot at substantial levels of grant.

Government can help fix this problem. Greater clarity on how it reallocates unspent funds will give FPRPs greater certainty about their options over the next five years. And reopening Strategic Partnership applications or settlements mid-programme would give new entrants the chance to access grant and accelerate affordable housing delivery.

First Homes

Earlier this year, Government introduced planning changes that require 25% of developer affordable housing contributions to be First Homes: a new discounted home ownership product.

First Homes will cannibalise affordable housing supply. Many local authorities want to preserve delivery of rented tenures, so this policy is likely to have a starker impact on Shared Ownership supply.

Our analysis suggests that First Homes could reduce the supply of Shared Ownership homes through developer contributions by 5,700 homes per year, with a further fall of 700 Affordable Home Ownership homes per year. That reflects 65% of annual supply through developer contributions.

With the increase in grant funding and a refocusing of grant toward rented tenures, we expect Shared Ownership supply to average 21,000 per year.

Off-the-shelf back on the shelf

The current Affordable Homes Programme sets limits on how much grant HAs (housing associations) can spend buying homes that are complete or already under construction. The limit reflects a desire for grant to support additional supply rather than change the tenure of homes that would be built anyway. However, the market is naturally limited by housebuilders’ willingness to sell to HAs.

But Help to Buy will end in March 2023. At this point, we would expect to see housebuilders grow far more open to selling stock to registered providers.

Changing this policy now will avoid a gap in housing delivery following the end of Help to Buy. Letting HAs and FPRPs buy housebuilder stock would help create truly sustainable, mixed-tenure communities. It would also increase developers’ certainty, allowing them to build more homes at a faster pace than they would in the face of Help to Buy ending.

Sources of capital

In our paper last year we noted some overlap between the investors lending to HAs and those funding new FPRPs. But while the types of fund targeting each type of organisation may be similar, the origins of that money may be very different.

HA/FPRP debt is a good fit for annuity investors: it provides stable, quasi-government-backed, inflation-linked returns. It is hardly surprising, then, that so many of the institutions buying HA bonds are domestic pension funds and insurers. But this type of investor is hardly unique to the UK, and there is plentiful appetite from equity funds too.

Evidence from our interviews with FPRPs suggest they are also seeing demand from equity in pension funds, insurers, and endowment funds from North America and Europe. The FPRP phenomenon is broadening the range of types and geographies of investors helping to deliver affordable homes. There are regulatory challenges for UK FPRPs raising funds overseas, which can act as a disincentive for investors. But as FPRPs grow in scale and the size of the opportunity for investors grows, so too does the incentive for them to overcome that regulatory barrier. The snowball has only just started to roll.

Older Persons Shared Ownership

It’s no secret that the UK’s population is ageing. The population aged over 65 will rise by 4.2 million between now and 2042, according to ONS projections. The older generation is also among the richest: homeowners aged 65 and over own 42% of all homeowner equity: £1.9 trillion.

But that equity is distributed unevenly. Over 1 million households aged over 65 live in social housing and a further 382,000 live in the private rented sector, according to the English Housing Survey.

The scale of need for affordable and intermediate housing options for this group is huge. So too are the barriers to meeting that need. Only 10% of overall grant is available for specialist and supported housing, including Older Persons/retirement housing.

Current grant models for Older Persons Shared Ownership are in need of updating to help open up new markets of supply. The current mainstream SO grant model, with the ability to apply an age restriction, would help this.

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