With a new Labour government now in place, there are hopes that tackling the decades-long crisis in housebuilding will be firmly back on the agenda.
In the King’s Speech on Wednesday, the prime minister Keir Starmer confirmed a key pledge to build 1.5million homes over the next parliamentary period. This will be supported by updating the National Policy Planning Framework, prioritising the development of used land and speeding up the process of approval to develop urban brownfield sites.
While these are ambitious plans, they have been welcomed as a positive development for housebuilding activity in the UK, which could potentially go a considerable way to alleviating some of the cost pressures and the increasingly tight supply.
The background
The volume of available social housing has fallen steadily over the past few decades, due to the failure of successive governments to meet new home building targets. This, combined with soaring house prices, has left more than a million people on the waiting list for social housing.
Despite government targets of 300,000 new homes being built every year, in fact since 1991, there has been an average net loss of 19,000 homes from social housing stock as a result of selloffs and demolition overtaking the number of new homes being built.
Of the target of 300,000 new homes a year nearly half – 145,000 – need to be affordable homes in order to meet demand. Yet the lack of supply saw a record 109,000 households in England living in temporary accommodation last year. The graph below highlights this social housing stock deficit.
Net Social Housing Supply
Source: The Department for Levelling Up, Housing & Communities, June 2024
At the same time, house building has shifted to the private sector. Since 1990, developers have been required by law to allocate 25% of new builds to affordable housing. But over this time construction has fallen sharply.
Developers typically have to provide a range of affordable homes as a condition of getting planning permission. These are then sold to housing associations. If housing associations aren't buying, this puts developers in a difficult position. Selling the affordable homes is important for cash flow and many developers won't even begin developing a site until they have a housing association on board. This is because the risk of not selling a notable proportion of the new homes is considered too great, especially at a time when higher interest rates have affected sales.
However, if developers are not developing properties then the affordable homes do not get built either and the housing shortfall becomes still worse. to make matters worse, over the past 30 years or so real house prices have climbed dramatically across much of the UK, exacerbating affordability issues. This has led housing associations to warn that building new homes is becoming financially impossible, worsening the downturn in the property supply.
The challenges of decarbonisation
The cost of decarbonisation has also added further financial pressures to the sector, with landlords required to upgrade their properties to an EPC standard of at least ‘C’ by 2030. The challenges of sourcing the materials and labour have intensified and it is estimated that the total cost of decarbonising the sector is around £36 billion.
Meanwhile, government grants have been declining drastically. Funding also tends to be on a short-term basis which doesn’t help housing associations plan for a longer-term decarbonisation strategy. The current Social Housing Decarbonisation fund has provisioned for £1.4 billion of funds towards energy saving measures, with an additional £1.1 billion in matched funding from social landlords bringing the total investment up to £2.5 billion. This, however, only covers a small portion of the total estimated cost of £36 billion and capital markets will likely play a role in bridging this funding gap. According to the Regulator of Social Housing (RSH), associations are planning to agree £47 billion of new debt over the next few years, including refinancing, increasing the sector’s debt facilities to £12 9billion by 2026/27.
Consequences
The biggest consequence of the challenges described above, has been the reduction in the development pipeline. HAs have cut their forecasts for building over the next five years by 64,000 homes. This has already started taking place as the housing starts in the fourth quarter of 2023 were half the 10-year average. Southern Housing, for example, has stopped all new development for 2024 and 2025, while a few social landlords have now expressed their concern over the financial viability of building for the next couple of years, widening the gap between affordable housing needs and supply.
Our holdings
We are exposed to the largest HAs, which have the capacity, due to their scale, to build more homes and alleviate the problem of homelessness and declining affordability. Across our holdings, the total number of homes managed is around 660,000 homes. To put that into context, there are four million social homes in the UK, therefore the names we support hold more than 15% of the social homes stock.
Even though HAs have scaled back their development pipeline over the next couple of years, their plans for the next decade remain ambitious and their contribution to the housing market supply is important. Our holdings aim to deliver more than 60,000 homes in the next decade, most of which will be towards affordable tenures.
Our holdings spend more than 30% of their revenues on maintenance, which is also expected to increase further, while on average 75% of their stock already meets the EPC criteria, compared to an industry average of 60%. They are also on track for meeting the 100% target by 2030. Data collection for carbon emissions purposes, although still in the preliminary phase, seems to have taken a priority in their agenda and we should expect to see further developments in the area.
We have also seen positive developments in terms of reporting in the sector. Uniform reporting, which has recently been adopted by HAs, will lead to better decision making and efficient resource allocation. Also, increased regulation and oversight by the Social Housing Regulator and the Housing Ombudsman will help landlords improve their services to tenants and ultimately their lives.
Even though financial metrics have deteriorated in the past couple of years due to all the factors described above, these seem to be currently stabilising. In general, we like the HA business model, as it is underpinned by levels of government support and a steady and secure rental income stream. This makes them more insulated than others from economic storms.
We believe that supporting the sector is crucial, as the benefits it provides to society are of great importance, especially at a point in time where the cost-of-living crisis and affordability are having a toll on people’s lives.
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