I know it’s not everyone’s hot topic, but give me a minute – it’s important.
The affordable housing sector took one heck of a kicking this summer. A renewed Right to Buy programme followed by a 1% reduction in chargeable rents for each of the next four years has been followed by direct criticism of this “not particularly impressive” sector by chancellor George Osborne. It is the sort of knock-down-punch combo from the playground bully to the kind, shy kid in the corner that makes you feel a bit of sympathy, even if part of you is wondering whether he brought it on himself.
Except the sector isn’t taking it – and that’s important for anyone in housing delivery. Why? Because that “not particularly impressive” sector could become one of the most important drivers of growth for new housing development over the next few years.
Registered providers already deliver one in 10 homes for private sale in London. A recent JLL survey suggested that one-third also now have a build-to-rent programme in place. Given that build-to-rent didn’t even exist prior to 2009, that is a notable change for a sector generally characterised as being more tortoise than hare. The survey also suggested that governance structures are a little behind the curve and need improvement, but there is clear momentum behind this transition that shows little sign of abating.
So what are the likely implications of this sea change for affordable housing delivery? Less of it – almost certainly. Less activity – almost certainly not.
“Making money instead of taking money” will be the sector mantra for the foreseeable future. The chancellor has left it little room for alternatives, offering a more confrontational relationship as his threat should the sector not step up delivery.
The dawning realisation for a growing cohort of registered providers is the only way to drive their respective affordable housing delivery programmes forward is to engage more effectively – and aggressively – in the private market.
As it turns out, the largest registered providers are already pretty good at market delivery and have a few important USPs that they can bring to bear on the market.
Lower borrowing costs, lower return requirements and, in the case of build-to-rent, an existing management platform. This set of factors is being galvanised with great effect to win bids for the best development sites.
A drive for efficiency will invariably lead to scale, lending credence to many of the M&A rumours that circle. Indeed, JLL expects to see an increase in the number of mergers; perhaps even among some of the larger registered providers.
Returning to the implications for the wider housing market, there is likely to be a strong growth in competition for mid-tier housing sites from registered providers. This will keep upward pressure on land prices in exactly the locations that developers and housebuilders are focusing attention over the next few years. This is probably a net positive for overall delivery numbers, with a bit of healthy competition in the sales market representing good news for the purchasing public.
In addition, registered providers will compete in the build-to-rent space. This market is already experiencing a significant overweight of capital against the churn of available opportunities across the country. The more nimble investors will be looking to form joint ventures with registered providers to gain access to stock and to leverage management talents that have erstwhile felt a bit mucky for many institutions.
Whether the chancellor has been fair in his criticism or not, housebuilders and developers should be on notice. The affordable housing sector has had its lunch money taken away; now it is coming after yours.
Adam Challis is head of UK residential research at JLL
