How private capital unlocks social and affordable housing development

by Rasheed Rahman, Senior Investment Manager

Why affordable housing is an attractive investment

One of the key reasons affordable and social housing are so appealing to institutional investors is their ability to generate stable, long-term cashflows. Matching liabilities with predictable income is essential to investors like PIC, and the regulated nature of the social housing sector provides just that. Rental income is typically steady, underpinned by demand, and linked to inflation.

The social housing sector has a strong investment history, offering good visibility into future cashflows and risks. Also, housing associations are well-regulated, adding an extra layer of oversight and providing reassurance that the sector will continue to be a reliable investment opportunity for years to come.

For PIC, investing in housing is not just a financial decision but also a socially responsible one. Investors are increasingly expected to play a role in addressing societal challenges, and the UK housing shortage is one of the most urgent. Our investment in this sector supports the delivery of much-needed social and affordable homes, helping to tackle the housing crisis and improve communities. 

What types of assets do investors like to invest in?

Rental tenures, including social rents, are attractive to long-term investors like PIC as they provide predictable income streams. While some investors explore other models, such as shared ownership, they present a challenge for insurers due to the potential for irregularity of cashflows, which can be problematic when trying to meet the strict regulations of the insurance industry.

Also, social rent aligns well with current government priorities, especially as there is an expectation that Chancellor Rachel Reeves will introduce a 10-year rent settlement in her autumn budget. This level of certainty is crucial for institutional investors who require predictable returns over long periods.

At PIC, we are also open to exploring investing in existing housing stock, provided that the properties meet our building safety and energy efficiency standards. Retrofitting homes to improve their energy performance is an area we are keen to grow, as it not only aligns with our investment strategy but also contributes to the UK’s broader environmental goals. By partnering with housing associations, we can help fund these improvements and support the transition to a greener housing sector.

How opportunities are originated

Investors in affordable housing have a range of avenues to explore when originating investment opportunities. A key route is through Section 106 (‘S106’) agreements. These agreements between local planning authorities and developers ensure that social and affordable housing are delivered as part of wider residential developments. However, while S106 agreements are an effective way to introduce affordable homes, they are often granular in scale. To fully address the housing shortage, the market needs to find ways to scale up these opportunities.

Another avenue is through stock transfers, which can offer mutual benefits for housing associations and investors like PIC.  In these deals, a housing association sells a portfolio of properties that no longer fit its strategic focus to another association that can better manage them. PIC can provide the capital for the acquisition and additional funds to improve the energy efficiency of the properties. The selling association typically will reinvest the proceeds into its remaining portfolio, enhancing overall housing quality and efficiency.

We also consider opportunities in additionality, where non-affordable housing units can be converted into affordable homes through the use of grants. This process helps make new developments viable by reducing costs, making it an attractive option for both developers and investors.

Challenges to investment in the sector

One of the main challenges to investment is changes to government policies that impact rent stability. For instance, the rent reduction policy of -1% introduced from 2016 significantly affected our ability to forecast rents over the long term. Such interventions create uncertainty and can deter investment by disrupting the predictable income streams that are crucial for long-term financial planning. To foster a more stable investment environment, it is essential that future policies support consistent and predictable rent frameworks.

The interaction between local authority planning departments and developers can also pose challenges. Local authorities are required to adhere to local housing plans, which can sometimes conflict with the goals of investors. For example, there are instances where we might aim to deliver a 100% affordable housing scheme, focus on a single affordable tenure, or not include shared ownership options. However, these aims may not align with the local housing strategies, creating friction and delays in project approval. Navigating these planning requirements while trying to meet the specific needs of affordable housing projects requires careful negotiation and flexibility.

Conclusion

For long-term, patient investors like PIC, affordable housing presents a compelling opportunity. The sector’s stable cashflows, social benefits, and alignment with inflation-linked liabilities make it a natural fit. By focusing particularly on social and affordable rents, and exploring opportunities in existing stock and additionality, PIC aims to support housing associations and local authorities in delivering the affordable homes the UK desperately needs. Although challenges remain, our commitment to flexibility and partnership means that we are well-placed to help drive progress in the sector.

This article previously appeared in Social Housing magazine.