The new government has set a target of building 1.5 million homes between now and 2029. This is more or less the same as the previous government’s target, coming to 300,000 units per year.
The sector has faced significant financial challenges for years, which complicates both the development and maintenance of social housing. However, according to a House of Commons Committee Report on the Finances and Sustainability of the Social Housing Sector, finances are “stretched but resilient”.
The report states that the sector overall has been able to borrow funds on relatively favourable terms and that no housing associations have defaulted on loans so far. With that said, it’s also noted that the sector is managing higher costs and lower income.
This article explores several ongoing funding challenges and some alternative options that could potentially help developers get more projects going.
Challenges with government funding at national and local levels leaves housing associations less able to rely on this essential support. Councils are spending a large proportion of their budgets on temporary accommodation and with demand ever-increasing, it’s unclear how the government will be able to come close to meeting the target of 1.5 million new homes.
According to a 2023 report by UCL, more than 50% of councils are pessimistic about the prospect of increasing social housing stock in their area; a sharp increase from 2021, where only 23% felt this way.
Maintaining existing social housing is a substantial ongoing financial burden. Older properties require extensive repairs and upgrades to meet modern standards, including energy efficiency improvements.
How can housing associations and other stakeholders direct sufficient funds towards building while the backlog persists and tenants live in substandard conditions?
The cost of construction has increased, driven by rising material costs and labour shortages. The cost of constructing new residential properties has risen by 46% since 2014, and 251,000 additional workers are needed by 2028 in order to meet current demand. The impact of supply chain disruptions has further exacerbated these issues.
Securing affordable land is another significant hurdle. Land prices in the UK are high, compromising thefinancial viability of social housing projects. The competition for land is also problematic for social housing developers that may not be able to compete with other investors.
Various alternative funding models can reduce reliance on government funding, such as the following.
Forward funding is one of the most popular approaches for developers. It involves securing finance for a project before construction begins, typically through a pre-sale agreement with an investor.
The investor commits to purchasing the completed project, providing the developer with the necessary capital to undertake the construction without resorting to traditional loans. Funding is often paid in instalments throughout the course of the project.
With forward purchase, the buyer agrees to purchase the property or shares after the completion of construction, transferring ownership post-construction, thus protecting the buyer from construction risks and developer insolvency.
With forward funding, however, the buyer purchases the property or shares before the completion of construction, with the transfer of ownership occurring prior to construction. This allows the buyer to tailor the development and remain involved throughout the process, but it exposes them to more risk. There are also lower tax implications for investors using this structure.
Forward funding mitigates risks for housing associations and developers, allowing for more accurate budgeting and planning. However, despite the fixed end price, fluctuating development costs and interest rates are still a risk.
Social enterprises play a vital role in addressing the housing shortage. Many of these organisations focus on the regeneration of unused spaces into affordable housing units, while others focus on construction. Let’s look at several examples.
Better Society Capital fund projects around the UK, investing in charities and social enterprises to increase the supply of social housing as well as affordable homes for private rent. The fund managers they work with develop properties or refurbish existing ones, and provide relevant support services for vulnerable or disadvantaged people. According to their 2023 impact report, they channelled £2.6 billion to more than 3,500 UK enterprises across over 200 co-investors.
Cromwood Housing Group is a social enterprise operating in London and Greater Manchester, increasing the number of social housing units that are in a liveable condition. Since 2002, they have housed almost 35,000 people across the two cities.
They also collaborate with the Big Issue’s social enterprise investment arm. For example, in 2021, the two entities bought 135 homes through the Greater London Authority’s rough sleeping accommodation programme, with a further £19.5 million investment from a pension fund. They were then able to house rough sleepers at London’s affordable rent rate.
Another interesting approach is funding social enterprises that produce factory-built homes. North American company, NPHS, do exactly that, helping to deliver new housing units faster than with traditional construction methods.
With any type of social enterprise, ensuring that the interests of investors align with the social objectives of projects can be challenging. Balancing these interests requires careful structuring of agreements and robust oversight.
Social enterprises use various strategies to fund their housing initiatives:
PPPs have become a popular method to finance social housing. These partnerships leverage private sector investment to develop and manage housing projects, with the public sector providing land or subsidies. While PPPs can bring in significant investment and expertise, like social enterprises, they come with the risk that profit-driven motives may conflict with social objectives.
PPPs enable collaboration between local authorities, housing associations, and private developers to accelerate the construction of social housing. With public sector budgets constrained, these partnerships allow for shared resources and expertise, enabling more efficient project delivery.
Partnerships with institutional investors are increasingly common. It’s estimated that the residential share of institutional property portfolios in the UK is less than 10%, but this is expected to grow. The residential share for more mature markets such as the USA and the Netherlands are 25% and 50%, respectively.
Sharing risks between public and private entities can lead to more robust outcomes. For instance, the private sector can bring innovative solutions to construction challenges, while the public sector can provide regulatory support and community insights.
Successful PPPs often prioritise community involvement in the planning and development process. Engaging local stakeholders ensures that housing projects meet the actual needs of residents, which can enhance community acceptance and project success.
The financial challenges facing the UK’s social housing sector are multifaceted. Government subsidies are insufficient on their own; in order to meet demand, a combination of traditional and novel funding mechanisms are necessary.
Approaches such as forward funding, public-private partnerships, and impact investing are viable alternatives. Forward funding presents a promising solution by providing upfront capital, reducing financial risks, and enhancing project efficiency, while social enterprises and PPPs both leverage innovative funding models that enable organisations to scale their impact.
At SDS, we provide market leading housing development software for appraisals, land valuation and project management, as well as consultancy services. More than 400 customers currently use our solutions, including local authorities and housing associations. To learn more or request a demo, contact us today.