Key lessons from employer-led key worker housing

Simply treating key worker housing as another intermediate tenure would fail to cover the full range of uses key worker housing can provide. In particular, the potential for sharers accommodation as a useful typology has not been well-enabled in policy. There are three key lessons to be learnt from employer-led key worker housing:

1. Key workers have a variety of needs. There ought to be a wide range of homes available, both in the size and the type of property, for different lengths of time.
2. Not all key workers require the same level of discount. The level of discount may vary, depending on what is required for the targeted group.
3. Stable long-term returns and avoiding voids through cascade mechanisms are essential to secure involvement of third parties, such as developers and registered providers.

The supply backdrop

More homes, and affordable homes in particular, are needed across the country. This need is especially acute in London. Of the new homes that the Government estimates need to be built each year, nearly one in four (24%) is in the capital, while a recent Savills report estimated London needs nearly 51,000 new affordable homes of various kinds each year.

Yet development in London has become increasingly costly and complex, creating a challenging environment for developers and funders trying to make schemes viable. This has particularly affected the affordable sector. Statistics from MHCLG show that, while the number of affordable homes delivered reached the highest level in a decade in 2022-23, delivery subsequently fell by -16% the following year, faster than the overall decline in new home completions (-5%, Figure 1).

Worse still, the number of affordable homes starting construction has declined enormously, falling by -91% in 2023-24 (Figure 2). Just 582 affordable homes were started in the six months between April and September 2024, per the GLA.

Given this backdrop, it is therefore vital that Key Worker Living Rent does not discourage a recovery in starts and:

1. Meets genuine housing needs
2. Avoids complexity and duplication of existing affordable housing products
3. Is appealing to investors, developers and providers of affordable housing.

To find out whether it will meet these aims, we have looked at existing intermediate affordable housing products, their effectiveness and what can be learnt from existing employer-led efforts at delivering key worker housing.

Learning from the past

Historically, a patchwork network of key worker homes existed, provided either by employer-led schemes or housing associations. This could be in the form of accommodation for trainee nurses, or quarters and subsidised homes for police officers. As many of these efforts were phased out in the 1990s, central Government responded with a comprehensive policy. 2001 saw the Starter Homes Initiative, which aimed to help key workers enter home ownership, followed by Key Worker Living in 2004, a broad effort offering an array of support, including equity loans to purchase homes, shared ownership properties, and intermediate rental homes. These efforts were sometimes marred by slow uptake and complexity, and by the end of the 2000s, amid a more restrictive fiscal environment, dedicated government programmes for key worker housing were phased out. Improving housing affordability generally instead became the key aim of policy.

What can current policymakers learn from this experience? From the start, improving employment outcomes for the public sector was as important as the homes themselves. As a GLA report at the time noted, London’s public sector faced a “crisis”, with “key services suffering from severe staff shortages as employers struggle to recruit those people on moderate incomes”.  There were issues with previous initiatives: insufficient support led to relatively low adoption, limiting the effectiveness of the programmes, and defining “key workers” according to a formal government list made eligibility criteria politically contentious. Future policy should carefully consider the balance between what is required for improving recruitment and retention of key public services and providing affordable housing, as well as the eligibility criteria and ensuring tenures operate in a clear and predictable manner for developers, housing providers and the employees themselves.

Learning from current policy

There is no direct equivalent to the KWLR scheme as proposed by the GLA, but the proposal does share several characteristics with certain existing intermediate and shared ownership tenures, and particularly to London Living Rent and Discounted Market Rent, discussed in more detail below. 

Intermediate tenures are a form of affordable housing where homes are usually offered at a policy-compliant discount of at least 20% to the prevailing market rent. They may also include other specific eligibility criteria such as household income thresholds. 

Intermediate products have become an increasingly significant part of affordable housing supply in London, with an average of over 7,000 homes in the five years to 2023-24 (equal to 11% of all new affordable housing).

Two key intermediate products are London Living Rent (LLR) and Discount Market Rent (DMR). LLR is typically aimed at “middle-income households” who rent privately and are unable to afford to buy a home with a mortgage or though shared ownership schemes in their local area. DMR homes are offered at a 20% discount to open market rent. Both are subject to a £67,000 household income cap. LLR is aimed at increasing home-ownership in the long-run, with stabilised three-year tenancies enabling (in theory) households to use the money saved from paying lower rents to build up a deposit and ultimately buy the property through Shared Ownership. By contrast, DMR remains as a rental home in perpetuity.

Issues and challenges with intermediate tenures

The operation of some intermediate tenures have proven problematic for providers. As a case study, we have looked at London Living Rent. At present, the level of rent is set to be equivalent to one third of the average local household gross income, with regulated rental increases permitted annually within the length of the three year tenancy. In itself, this is not an issue, as it ought to provide a stable and predictable basis for rent increases while maintaining the discount offered to the tenant.

In practice, however, the incomes used to calculate rents did not change to reflect growth in either incomes or prices over time. No increases took place between 2017 and 2024, despite nominal earnings in London growing by nearly 29% between January 2017 and September 2024, according to the ONS. This meant the rent effectively reset to the original level at the end of the three year term, creating a “saw-tooth” effect. The value of the rent decreases in real terms over time, with the discount becoming steeper and the gap between rents and costs growing over the life of the home, as illustrated in Figure 4. The result is to create an difficult environment for housing providers, potentially leaving them unable to meet their operational costs.

The maximum income, another element of London Living Rent, also causes challenges. Without increasing this to reflect changes in incomes and rents, a similar effect occurs over a longer time period. Eventually, rent increases are unable to increase beyond a certain percentage of the maximum income cap, effectively capping rents at that level going forward. This leads to declining income over time. 

Avoiding this diminishment of value and income should be a key priority when designing a new intermediate tenure, therefore making it appealing for investors, developers and providers and enabling a much-needed boost to delivery of affordable homes. This is especially true for housing providers, who are already under significant financial strain and have limited capacity and appetite for new development.

KWLR Proposals

The Mayor intends to set eligibility criteria and expectations of boroughs and housing providers through planning policy and, where homes are funded, through funding guidance. These include maximum household income thresholds for accessing intermediate housing and where intermediate homes are funded, homes should go to households who live and/or work in London and who do not already own a home, or have the means to buy one on the open market. 

The policy ought to learn from the experience of London Living Rent. Initial rents should to be set at a level that is affordable to the relevant key worker population, and maintained at that level over the lifetime of the product. If incomes are used to calculate rents, these must be regularly updated. 

Alternatively, rents and services charges should be allowed to increase in line with simple benchmarks. The complexities of using incomes as an ongoing basis (during a tenancy) for an affordable rent would strongly recommend this approach. Benchmarks such as CPI plus 1% are well-tested, provide certainty to investors, and ensure stable incomes for housing providers. Subject to limits when inflation is substantially higher than income growth, they also allow for the discount offered to be maintained, ensuring value for money. 

Whether rent levels are set London-wide or by borough, it is vital to balance the reality of different market cycles between areas of London against setting rents at a level that may create viability concerns in more expensive parts of the capital.

Finally, the proposal suggests that tenants who become non-eligible (such as leaving a key worker profession) are allowed to renew tenancies. This can lead to inefficient outcomes, with homes no longer used to meet the need they were built for and failing to aid recruitment and retention of key workers. Potentially, eligibility could be assessed towards the end of a tenancy, with a shorter renewal on offer if circumstances change close to the end of an existing tenancy, to balance stability for the tenant with prioritising need.

What has worked in bespoke employer-led KWH examples?

Major employers and public sector organisations are increasingly considering provision of housing as part of their strategies for recruiting and retaining staff. How homes are developed and operated is typically bespoke to the organisation, to best fit the needs of a specific workforce with the occupation of the home linked to employment (as is provided for in the Renters Reform Bill). This is in contrast to the proposed Key Worker Living Rent tenure, which is a much more general form of submarket housing earmarked for a wide range of defined key workers. Existing employer-led schemes are aimed at several different groups of employees, who have different needs and require housing support for different reasons. Examples include workers who:

• Have long or unsocial hours and require either occasional overnight accommodation or accommodation within a reasonable commute. 
• Require a home for less than 12 months due to a short-term work or training placement, or due to regular relocation.
• Have been recruited internationally and require a “landing space” before securing accommodation in the local market.
• Cannot afford accommodation in the local market, or can only afford substandard accommodation. This may include younger workers with low salaries or families who cannot obtain suitable accommodation.

Importantly, only in the last example is providing quality, affordable homes the main reason for provision. As a result, key elements such as the size and type of homes offered and the level of discount to market rent can vary considerably, within a scheme and between different schemes.

As argued in a recent NHS White Paper, key worker homes ought to provide for a variety of needs, at rents necessary to support staff retention, so that the NHS can “recruit and retain the staff we need without a lack of decent, affordable housing being a barrier.” In the paper’s preferred model, the financial, development and occupancy risks of the home are borne by a third-party provider. In return for shouldering this risk, the Trust allows unoccupied homes to be rented freely, often using a “cascade” mechanism to determine priority, at rents which offer inflation-linked returns (such as through a CPI benchmark) for the partner organisation.

This means there is a trade-off between affordability and viability. If build costs are high or the discount required to make the homes affordable is large, the capital value and rental income may well be insufficient to cover the cost of delivering homes, even with free land. Such cases will require a specific Section 106 agreement or grant funding to unlock delivery.

Yet neither the most recent Homes England or GLA Affordable Homes Programmes allocate capital grant funding specifically for building homes for key workers.. National planning policy in England does recognise homes for “essential local workers” as a form of affordable housing, but implementation at a local level is mixed. One notable example (Oxford) identifies “employer-linked housing” as enabling employers to address recruitment and retention challenges. Subject to agreement and offering a sufficient discount, employers who develop their own land and provide 100% affordable housing to staff can waive their conventional affordable housing requirement.