Affordable Housing

The Affordable Housing sector will be resilient in the face of economic pressures. Due to the inflation linked nature of the revenue stream and the strong ESG credentials, private capital will continue to target the sector in 2023.

Key Takeaways

1. Housing associations are resilient, so the sector will remain robust as an asset class over the next year. Arguably, the need for affordable housing increases during an economic downturn.
2. The number of For-Profit Registered Providers (FPRPs) will continue to expand, which will drive investment in the sector. This will also be driven by the strong ESG credentials of affordable housing.
3. It is anticipated that there will be an increase in mergers between Not-For-Profit Registered Providers (RPs). There have been many mergers over the last few years, and this is predicted to continue throughout 2023.
4. The Government’s 7% rent cap will mean the sector needs to act in a more effective and cost-efficient manner, but this could have an impact on values.
5. There will be an increase in joint ventures and partnerships between local authorities, housing associations and investors. As we see more investment from private capital, organisations will explore more creative ways of investing in the affordable housing sector.

Increasing interest in affordable housing

There is a great deal of uncertainty currently facing the affordable housing sector. The wider economic environment is challenging, and the political environment has been in a state of flux, which will have a potential impact on policy. The 2022 Autumn Statement also confirmed that rent rises would be capped at 7% from April next year. This will at least help to reassure investors looking to deploy capital in 2023. However, from a tenant point of view, this level of rent inflation could lead to an increase in arrears. This may lead to voids and bad debts, which could translate into a value adjustment in 2023.

Regardless of any short-term rent caps, the CPI and RPI linked nature of the sector will still attract interest in 2023, particularly from private capital.

We are anticipating yields to move out over the course of 2023. However, affordable housing has some unique characteristics which may mean it fares better in a downturn relative to other real estate sectors. These include:

• Inflation linked revenue stream
• Low voids and bad debts
• Inelastic demand
• Counter-cyclical demand
• Robust ESG credentials

Figure 19: For-Profit Registered Providers, England

Source: Regulator of Social Housing

Additional mergers

The rent reductions of the Welfare Reform and Work Act 2016 has driven many mergers between Not-For-Profit RPs over the last few years. We predict that this will continue throughout 2023.

RPs are broadly resilient, but a continued consolidation will help further strengthen smaller and less agile RPs. These new organisations can pool resources and are ultimately better equipped to weather the financial and operational impact resulting from an economic downturn.

We forecast that 2023 will see smaller scale mergers. This will be driven by RPs with less than 1,000 properties looking for increased financial stability that comes with being part of a larger group. This could also lead to further stock rationalisation in 2023.

Shared ownership faces challenges

Currently, there is no rent cap and/or Government intervention proposed for this tenure. However, the National Housing Federation has discussed potentially matching the general needs rent cap of 7% for the sector. Market risk is spread across both rent and house price inflation, and although RPI linked rent growth will be strong, falling house prices could soften yields across the sector.

In addition, only a limited number of lenders offer shared ownership mortgages. This, combined with higher mortgage rates, will be a challenge for prospective buyers in 2023 and curtail demand.

Private capital and institutional interest in the sector will remain strong

The affordable sector continues to appeal to private capital, which is attracted by the demand and supply imbalance, indexed linked rents, and strong ESG credentials. Given the illiquidity of the sector, partnerships between housing associations and private capital are likely to increase.

Despite the financial uncertainty in 2022, and the recently announced rent cap, institutional interest in the sector remains strong. This will continue to grow in 2023, given the underlying need and demand for affordable housing.

The continued growth of FPRPs means that, according to the Regulator of Social Housing (RSH), there are some sixty applications registered for FPRPs, waiting to be completed. These providers, combined with additional new entrants, will add a significant number of new affordable homes to the UK market in 2023 and beyond.

Significant built cost inflation will impact the financial viability of new schemes, resulting in a slowdown in building activity and supply. In addition, a continued focus on fire safety is an issue for traditional RPs with significant amounts of legacy stock, but this is also impacting on some RPs' appetite for acquisition. Finally, we expect a slow start to the new year, with the bulk of acquisition activity expected in H2 2023.

Strong ESG credentials will drive investment

The strong ESG credentials of the affordable housing sector remain attractive to investors.

According to figures from Big Society Capital, social impact investment in the UK has grown nearly tenfold over ten years, from £830m in 2011, to £7.9bn in 2021. It states that around £1.6bn of investment was committed across approximately 1,300 investments in 2021. Social and affordable housing funds continue to account for the largest segment of the total market at £3.8bn.

However, we predict that in 2023 there will be a trade-off between ESG targets and the rent cap, which is expected to cost RPs £1.3bn next year.

RPs represent a good, socially responsible investment. As such, more RPs will publish their own ESG reports to help investors understand their credentials, and ultimately, attract further investment.