Housing Associations increasingly face greater internal pressure to find alternative sources of investment. This has coincided with a shift in attitudes towards FPRPs and their motives away from perceptions of FPRPs as competition in the market. Even more important is the increasing recognition of the role of equity investment in unlocking financial capacity in the sector.

After years of reticence, HAs are becoming a lot more comfortable with, and willing to engage in partnerships with FPRPs. Looking ahead, collaboration between HAs and FPRPs will be key to ensuring future growth of the sector.

In 2019, a Savills survey found that just 62% of HAs thought that FPRPs had any part to play in solving the housing crisis. But our survey this year found that 89% would now consider some form of partnership with an FPRP, highlighting the evolution of attitudes.

Partnerships between FPRPs and HAs are beneficial for both sides. FPRPs have significant volumes of capital to deploy and seek strong ESG characteristics but lack operational and development capabilities.

On the other hand, HAs have the in-house operational and management expertise but require access to investment capital to invest in existing stock whilst maintaining their development programmes. There is an increasing appreciation of the differences between FPRPs and HAs in how they operate. Partnerships also present a great opportunity to share best practice across the affordable housing sector and other living sectors.

With so much potential for partnerships to deliver affordable housing, the question becomes how best to target FPRP investment in the sector. In addition to greater appetite for collaboration, there is also a growing understanding of the different types of FPRP structures and partnerships. The most popular form of partnership is development joint ventures, which 85% of respondents would consider, while more than 70% would consider stock management arrangements. These are also the most popular partnership arrangements among FPRPs, with 70% of FPRPs surveyed already engaged in stock management deals with HAs.

Several HAs we surveyed either already have or are considering setting up an in-house FPRP to help fund their development ambitions. Being able to take on equity investment will open up a different pool of capital, particularly advantageous now that debt is more expensive. AXA has recently taken a 50% stake in Hyde Group’s FPRP Halesworth, for example, which will unlock up to £400m of development finance for the group over the next decade.

Strong investor appetite

Whilst the not-for-profit space has been focused on existing assets over the last 12 months, the FPRP space has seen a varied backdrop. We have seen strong growth from existing FPRPs but we have also had mixed feedback from potential new entrants noting the market backdrop.

Whilst there is strong support for the sector, there are fundamental challenges particularly as real yields on social housing haven’t repriced vs 2021 levels. There is also uncertainty in terms of inflation including the cap on rent increases and also the relatively high set-up and operational costs of running a Registered Provider. There remains strong appetite from investors to enter into the sector and establish FPRPs and demand for debt to leverage established structures although the market isn’t as strong as it was 12 months ago. The market volatility will be key to track with the stabilisation of real yields and more ‘normalised’ market conditions as potential catalysts to promote more new entrants to consider setting up FPRPs.

The development market

Whilst there continues to be appetite to grow amongst FPRPs and some traditional HAs, there has been an obvious flight to quality with the most attractive opportunities continuing to receive strong interest.

Looking ahead, in the short term, there is somewhat of an uneven playing field between traditional HAs of which many have raised significant fixed interest capital in a lower interest rate environment and FPRPs who have been more responsive to changing interest rates, resulting in offers in some cases being less competitive.

However, this is likely to adjust over the next 12 to 18 months as HAs begin new capital raises which will bring their pricing more in line with FPRPs. Further hikes in interest rates may impact FPRP competitiveness in the short term but the increase in the cost of traditional HA debt will lead to a more even playing field across bidders from late 2023/ early 2024 onwards.

_{Read the articles within Spotlight: Private Capital and Affordable Housing below.}