Several Government changes relative to housing associations suggest they will cease to deliver homes as needed. Private investors might be the only builders.
Several significant factors in the UK housing association sector have cast doubt on whether the growing need for housing would be abated. Indeed, these factors suggest this need will not be met if trends continue.
The Government’s abdication from supporting housing associations comes at a time when private investors’ interest in house building is growing. Alternatively, from the private sector, real asset funds seek land where it can be acquired and where planning authorities will allow for building. This is where standard supply-demand dynamics play well: with high demand come higher real returns to those funds.
But at the lower end of the market, lower income families are seeing diminishing opportunities to find housing. Consider what has happened in 2015 alone:
• In October, the Office for National Statistics reclassified housing associations as non-financial public corporations. This effectively places £60 billion of privately procured housing association debt on the Government’s balance sheet. Observers speculate Chancellor George Osborne will then try to get this debt off the public books by selling it to private investors, or remove regulator burdens on housing associations that in effect enable them to become commercial property companies - setting rents as they wish. Note that Germany’s experience with privatisation (selling to large investors that included Vonovia, Fortress and Cerberus) resulted in one million fewer social dwellings and an overall increase in housing prices.
• A few months ago, Chancellor Osborne surprised many with a forced rent cut of 1% on housing associations, in contrast to the 1% increase plus inflation as they expected. Subsequently, a survey of providers by the Homes and Communities Agency found that the associations curtailed investment plans by about £1 billion for 2015, believed to be a consequence of this rent cut. This decrease is spread across more than 200 landlords, not due to a single large drop in individual plans.
• One of London’s largest housing associations - Genesis, which owns and manages 33,000 homes in the city and the South East - announced in August it would discontinue building social housing. Contributing to this, according to an article in The Guardian, were the Government’s decision in 2010 to cut funding for social homes by 60%, and welfare reforms that reduced tenants’ ability to pay rent.
To the dismay of social housing advocates, Genesis will build homes for sale and rent at full market rates. Real asset investing of this nature is considered mission creep in that the profits from market-rate building are ostensibly targeted at subsidising social-rent dwellings. But the extent to which organisations such as Genesis go into for-profit building is an unanswered question.
Without question, new homes are needed in the UK. Private investors are keen to enter real estate as an asset-growing opportunity, which it indeed is. But as the housing charity Shelter points out, the housing shortage at all price levels is affecting both the middle and lower classes equally. Buyers are favoured by such programmes as Right to Buy, Help to Buy and Starter Homes initiatives. But the experience in some European countries has been many owners lack the wherewithal to maintain the homes they own. Instead of appreciating value, large percentages of dwellings fall into disrepair and become an asset that is hard to sell.
Those keen on investing in UK land and building should consider it as any other asset class: a balance of risk and reward is uncertain. An independent financial advisor should be able to counsel the investor in how to identify manageable risk.
Several significant factors in the UK housing association sector have cast doubt on whether the growing need for housing would be abated. Indeed, these factors suggest this need will not be met if trends continue.
The Government’s abdication from supporting housing associations comes at a time when private investors’ interest in house building is growing. Alternatively, from the private sector, real asset funds seek land where it can be acquired and where planning authorities will allow for building. This is where standard supply-demand dynamics play well: with high demand come higher real returns to those funds.
But at the lower end of the market, lower income families are seeing diminishing opportunities to find housing. Consider what has happened in 2015 alone:
• In October, the Office for National Statistics reclassified housing associations as non-financial public corporations. This effectively places £60 billion of privately procured housing association debt on the Government’s balance sheet. Observers speculate Chancellor George Osborne will then try to get this debt off the public books by selling it to private investors, or remove regulator burdens on housing associations that in effect enable them to become commercial property companies - setting rents as they wish. Note that Germany’s experience with privatisation (selling to large investors that included Vonovia, Fortress and Cerberus) resulted in one million fewer social dwellings and an overall increase in housing prices.
• A few months ago, Chancellor Osborne surprised many with a forced rent cut of 1% on housing associations, in contrast to the 1% increase plus inflation as they expected. Subsequently, a survey of providers by the Homes and Communities Agency found that the associations curtailed investment plans by about £1 billion for 2015, believed to be a consequence of this rent cut. This decrease is spread across more than 200 landlords, not due to a single large drop in individual plans.
• One of London’s largest housing associations - Genesis, which owns and manages 33,000 homes in the city and the South East - announced in August it would discontinue building social housing. Contributing to this, according to an article in The Guardian, were the Government’s decision in 2010 to cut funding for social homes by 60%, and welfare reforms that reduced tenants’ ability to pay rent.
To the dismay of social housing advocates, Genesis will build homes for sale and rent at full market rates. Real asset investing of this nature is considered mission creep in that the profits from market-rate building are ostensibly targeted at subsidising social-rent dwellings. But the extent to which organisations such as Genesis go into for-profit building is an unanswered question.
Without question, new homes are needed in the UK. Private investors are keen to enter real estate as an asset-growing opportunity, which it indeed is. But as the housing charity Shelter points out, the housing shortage at all price levels is affecting both the middle and lower classes equally. Buyers are favoured by such programmes as Right to Buy, Help to Buy and Starter Homes initiatives. But the experience in some European countries has been many owners lack the wherewithal to maintain the homes they own. Instead of appreciating value, large percentages of dwellings fall into disrepair and become an asset that is hard to sell.
Those keen on investing in UK land and building should consider it as any other asset class: a balance of risk and reward is uncertain. An independent financial advisor should be able to counsel the investor in how to identify manageable risk.
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