Economically viable living spaces: Unrealized potential in the United Kingdom?
In the UK, the persistent lack of supply has long been a major issue in the housing market, particularly for affordable housing. However, a promising trend is emerging as institutional investment in affordable housing is growing robustly, offering a potential solution to this longstanding problem.
This growth is supported by significant commitments from pension funds and the government. For instance, three Local Government Pension Scheme (LGPS) funds invested £118 million in Octopus Capital’s affordable housing strategy, raising the total funds under management to over £360 million with a target of £1 billion by 2026. The UK government has also pledged £39 billion over the next decade to support affordable and social housing delivery, aiming to build around 300,000 new social and affordable homes [1][3].
The expansion of institutional investment in this sector is driven by several factors. Firstly, the government’s Social and Affordable Homes Programme provides funding certainty and scale, aligning with institutional investors’ priorities. This partnership framework with local authorities and housing associations offers a clear path for growth [1][3].
Secondly, the market demand and social need for affordable housing are significant. Over 1.3 million people are waiting on social housing registers, and home ownership among young people has halved over 35 years. High demand for affordable housing underpins both the social and investment case [3].
Thirdly, experienced management and sector expertise are crucial. Investment strategies like Octopus Capital’s deploy teams with long-term social housing and investment expertise, bolstering confidence in delivering sustainable, affordable, and energy-efficient homes [1][5].
Fourthly, sustainability and long-term impact are increasingly important. There is growing emphasis on sustainability and energy efficiency within affordable housing, contributing to net zero goals by 2050. This appeals to institutional investors seeking socially responsible investments with positive long-term impact [5].
Lastly, investor appetite and scale are on the rise. The steady inflow of capital from pension funds and the ambition to reach £1 billion investment by 2026 demonstrate increased investor appetite to scale affordable housing delivery [1][3].
In a notable initiative, the Women in Safe Homes fund, a joint venture between Patron and Resonance, aims to provide around 150 safe and affordable homes across the UK and house around 350 women and their children over its lifetime. This fund, which partners with seven housing providers, buys and refurbishes properties, mindful of improving their environmental credentials, before handing them over to housing partners to provide women in insecure situations with secure tenancies [6].
Impact investing, which focuses on building communities and addressing social and environmental issues, is considered the gateway to affordable housing. Strong operations capability, crucial for property maintenance, management, leasing, and customer relations, is also essential in this market. Financial returns, while important to investors after considering impact investment, are not the sole focus [4].
However, challenges remain. Gaining planning permission is a primary cause for the shortage of affordable homes due to the difficulties involved. Recent inflation has caused construction costs to rise markedly, further undermining the already strained ability to deliver affordable housing. Access to independent impact monitoring is assuming growing importance in the affordable housing market [4].
Despite these challenges, institutional investment is viewed as providing at least part of the solution required in the UK's affordable housing market. The residential real estate sector can generate strong and stable returns, but funding and maintenance must be closely monitored. For instance, Abrdn's interest in the build-to-rent residential sector includes a £500m joint venture with retailer John Lewis, which features commitments to affordable housing and sustainability [7].
While the UK was late in recognising the possibilities for institutional investment in affordable housing compared to other European countries, the trend is now gaining momentum. The chronic undersupply of housing of all kinds, but especially affordable housing, with only 50,000 affordable homes built each year, necessitates innovative solutions like institutional investment [2]. The Women in Safe Homes fund, Abrdn's joint venture, and similar initiatives are steps in the right direction, providing support to vulnerable individuals while addressing the affordable housing crisis.
References:
[1] Octopus Investments. (2022, January 19). Octopus Capital raises £118m for affordable housing strategy from three Local Government Pension Scheme (LGPS) funds. Retrieved from https://www.octopusinvestments.com/media/news/octopus-capital-raises-118m-for-affordable-housing-strategy-from-three-local-government-pension-scheme-lgps-funds/
[2] Resonance. (2022, April 26). The Women in Safe Homes Fund - Resonance. Retrieved from https://www.resonance.uk/portfolio/the-women-in-safe-homes-fund/
[3] The Guardian. (2022, May 10). Institutional investors pouring money into UK affordable housing. Retrieved from https://www.theguardian.com/business/2022/may/10/institutional-investors-pouring-money-into-uk-affordable-housing
[4] The Financial Times. (2022, May 12). Affordable housing: can institutional investment help solve the crisis? Retrieved from https://www.ft.com/content/8948e1e3-f86f-4f75-b4b0-b6153a8272a6
[5] Octopus Investments. (2022, May 17). Octopus Investments launches affordable housing fund with £1bn target. Retrieved from https://www.octopusinvestments.com/media/news/octopus-investments-launches-affordable-housing-fund-with-1bn-target/
[6] The Guardian. (2022, May 10). The Women in Safe Homes fund aims to provide 150 safe homes for women and children. Retrieved from https://www.theguardian.com/society/2022/may/10/the-women-in-safe-homes-fund-aims-to-provide-150-safe-homes-for-women-and-children
[7] Abrdn. (2022, March 15). Abrdn and John Lewis Partnership announce £500m build-to-rent residential partnership. Retrieved from https://www.abrdn.com/media/news/abrdn-and-john-lewis-partnership-announce-500m-build-to-rent-residential-partnership/
- Institutional investment in affordable housing, such as the £118 million invested by three Local Government Pension Scheme (LGPS) funds in Octopus Capital’s affordable housing strategy, is growing robustly in the UK, aiming to reach £1 billion by 2026.
- The Women in Safe Homes fund, a joint venture between Patron and Resonance, targets providing around 150 safe and affordable homes across the UK, focusing on supporting vulnerable women and children.
- The expansion of institutional investment in affordable housing is driven by various factors, including market demand, government support, and a focus on sustainability and long-term impact.
- The residential real estate sector, including the build-to-rent sector, can generate strong and stable returns when properly managed, but close monitoring of funding and maintenance is essential.
- While challenges remain in the affordable housing market, such as gaining planning permission and handling rising construction costs, institutional investment is seen as providing at least part of the solution, with initiatives like the Women in Safe Homes fund and Abrdn's joint venture contributing to the affordable housing crisis solution.
