Other sectors have a lot to learn from HAs’ expertise at securing future income streams
The year 1989 was notable in real estate. Most people will remember it for the Housing Act, which revolutionised the housing market through the deregulation of rents and the introduction of assured shortholds and assured tenancies.
The impact took time to be realised but three decades on residential property is an established asset class and the private rented sector has grown from 9% of stock to 20%.
However, 1989 also saw a much less talked about change in the housing sector. The transfer of local authority housing stock to housing associations (subject to a majority vote by residents) not only spawned a new breed of registered provider landlords but also the need for a new way of looking at their value.
New methods were needed to value housing stock that would be permanently tenanted. I believe that the valuation methods established to help facilitate the financing of new registered providers have the potential to change the future of world real estate in the commercial as well as residential sectors.
Social housing cashflows behave more like long-dated index-linked gilts
This unexpected potential global impact stems from the fact that social housing valuation methods in the UK are much more closely aligned to the needs of commercial, global investors in the 21st century than the backward-looking comparable methodology currently employed to establish capital values.
In ageing advanced economies where institutional investors have to pay pensions out of real income streams, it matters less what theoretical price you could sell a building for but matters far more how much net income you can derive from that building. It matters little what the historic estimated rental value and investor yield is, but it does matter if void rates, capital expenditure and holding costs erode the income available for distribution.
This is where the experience of housing associations and other social housing providers over the last three decades is so valuable. The sector is now expert at raising significant amounts of capital by first characterising and then securitising net income streams. While the commercial property world has been busy trading real estate using valuation practices established in the 19th century, the social housing sector has been modelling future income streams in a way much better suited for the 21st-century global investor.
When social housing rents are amassed at scale and all income and expenditure is modelled 20 or 30 years into the future, the resultant cashflows behave more like long-dated index-linked gilts and quite unlike capital values in volatile owner-occupied markets.
If the same practices were applied to commercial property, it would highlight which investments and management practices are likely to prove more sustainable over the longer term and would say much more about likely future values than valuation practice currently allows.
We all know the environmental, social and economic challenges of this century will require new and different patterns of expenditure and will require much more hands-on management and curation than was traditional in the 20th century.
Housing associations have shown that net income streams can be significant, robust and long-lived if whole neighbourhoods are properly managed and all these factors are taken into consideration. It is a real estate sector where social and environmental factors can be much more explicitly considered. The commercial property world could learn a lot from it.
Professor Yolande Barnes is chair of the Bartlett Real Estate Institute at UCL