New research from Octopus Real Estate, part of Octopus Investments, has revealed the funding challenges facing the affordable housing sector in the UK.
According to the paper, it is increasingly difficult to make affordable housing development projects financially viable, with increased build and finance costs leading to a third of Housing Associations reporting a deficit of 11-25% on individual development schemes.
Accordingly, fewer affordable homes will be built using traditional financing methods. Housing Associations anticipate a 22% reduction in the number of new affordable homes built over the short term.
Jack Burnham, head of affordable housing, Octopus Real Estate, said: 'Registered providers have historically relied on private finance to support their development ambitions. But changing economic conditions mean that the cost of debt has soared and social landlords must now pay more to access the finance they need to build new homes.
'This pressure has been compounded by the enormous investment required for landlords to hit net zero targets as well as addressing issues of disrepair in the sector.'
More money will be diverted towards managing, repairing and maintaining existing homes, according to the research, as repairs and maintenance expenditure across the sector has increased by over £1.5 bn (€1.75 bn) in just four years.
This research crystalises recent anecdotal evidence regarding the challenges faced by the sector, and indicates that there will be a slowdown in the total development and, in turn, delivery, of affordable housing in the UK in the years to come.
In fact, in the survey Octopus commissioned, 47% of respondents said they were ‘not confident’ they will be able to maintain their development at the same levels as last year.
Much of this can be attributed to the ‘perfect storm’ of pressures the social housing sector is facing, including: inflation, construction costs, higher interest rates, decarbonisation work, regulatory and policy-related pressures, and cost of debt.
Octopus’s research shows that the net effect of this is a 22% drop in new affordable homes being developed, at a time when record numbers of people need affordable homes.
More recently, the social housing sector has had to react to the onset of a 7% rent cap, which is estimated to equate to a £3.2bn loss in rental income for registered providers.
The G15 - which represents London’s largest Housing Associations - confirmed that its members are reducing development programmes by as much as a third. Some registered providers Octopus spoke with have cut back development by more than 40% because of financial conditions.
Ed Clough, managing director, Octopus Real Estate, concluded: 'The sector and its investors have an opportunity to engage in a process to find more sustainable funding solutions that can bridge an era of lower grant funding levels and more expensive debt.
'Partnerships with for-profit registered providers (FPRPs) can support greater additionality at a time when traditional funding methods are not feasible in the sector. Our research shows that half of Housing Associations are now more likely to work with FPRPs/equity partners compared with just 12 months ago.'
