Affordable housing: where will housing providers get funding from?
Recently one of London’s biggest builders of affordable housing declared its “cross-subsidy model” for funding homes was bust. With private sales stagnating in London while costs and fire safety investments increase, L&Q claims it cannot sell enough homes at market value to continue funding the construction of affordable homes at its current rate.
Many other housing providers both in and beyond the capital also use sales and private rent to generate capital to fund affordable homes. If the squeeze being felt by L&Q is going to spread, beyond Section 106 contributions from private developers, where will funds for affordable housing come from next?
Potential affordable housing funds: the public purse
Government will continue to provide the major source of finance for housing providers. Homes England has been extremely active in pushing its £4.5bn Home Building Fund through different channels. But in juggling so many priorities, observers believe there is a risk that funding for affordable homes could get lost.
Speaking at a seminar to discuss funding routes for affordable homes at the recent UK Construction Week event, Caroline Cormack, Home England’s Head of Home Ownership and Supply for the Midlands region, said it asked for “ambition and pace” from developers, and reiterated the Government’s desire to support Modern Methods of Construction (MMC) and SMEs, many of whom disappeared from the sector following the financial crash.
As well as entering into strategic partnerships with housing providers, Homes England is supporting joint ventures, such as Urban Splash’s tie-in with Japanese MMC giant Sekisui and innovative products, including Sigma Capital’s PRS-orientated Real Estate Investment Trust, (REIT). “The debt market is immature in funding MMC, which is why Homes England is intervening,” Cormack explained at the seminar.
Homes England describes a number of case studies of developer funding here.
Potential affordable housing funds: financial sector vehicles
Ayesha Ofori has brought her investment manager background to Axion Property Partners, where as CEO she encourages investment into residential real estate. She believes the property finance sector can learn from the financial industry and make more use of existing investment opportunities that could help fund affordable housing.
Speaking at the same seminar at UK Construction Week, Ofori claimed just 5% of Homes England funding goes into affordable housing, and outlined four alternative investment channels:
- Crowdfunding: aimed at retail investors with the potential to take small investments, from £500, at volume. Ofori admitted that “more regulation” was needed to address the risks around crowdfunding
- Insurance-based schemes: They don’t exist in the property finance market at the moment but Ofori sees future potential if sufficient housing volumes (scheme aggregation) can be created for insurers to invest
- Securitisation: where loans (such as mortgages) are put in a special vehicle and issued as bonds for investors. Poorly managed securitisation played a big hand in the housing crash in 2007 and its reputation as a legitimate means of financing property is still recovering
- Hybrid instruments: using a mix of schemes to take equity stakes in property and convert those investments into equity
According to Ofori, “There is enough money to solve the housing crisis. We just need the right investment vehicles to get the investment into the sector now.”
Away from UK Construction Week, North of England housing association Your Housing Group is urging Government to support institutional pension fund investment into affordable social housing. They argue that returns from in-demand social-rent homes would make a reliable investment route for pension funds. Examples do exist at smaller scales, but Your Housing Group wants Government to invest £2bn into a scheme that would rapidly fund up to 30,000 homes for affordable rent.
Affordable housing fund 3: community-led developments
These remain a niche approach to housing and will likely continue to suit specific types of people looking for a home.
While the strategy uses “group buying power” to buy land and build homes (often with shared central facilities, such as kitchens and laundry), funding typically comes via four sources, according to Blasé Lambert, Chief Officer of the Confederation of Cooperative Housing:
- Self-funded: where proceeds from sale or rent effectively fund the project
- Developer enabled: a developer makes some investment in the property with the community funding the remainder
- Via Home England’s £163m Community Housing Fund
- Many local authorities make revenue and capital grants available for community housing schemes, such as Lancaster City Council and Dover District Council
Another potential cloud lurks on the horizon for housing associations and affordable homes. The Government recently announced plans to introduce a national model for shared ownership which, while broadly welcomed as a legitimate route to affordable home ownership, risks adding to housing associations’ ability to generate sufficient funds to keep building affordable homes.
The latest figures (April 2018 – March 2019) on affordable housing supply are due this month. It will be interesting to see if last year’s 12% year-on-year increase is maintained, and what percentage of affordable housing is provided via means other than Section 106 arrangements.
Every care was taken to ensure the information in this article was correct at the time of publication.