Government 'must find extra £14bn of annual affordable housing subsidy'

An additional £14bn in annual government funding is required as part of a package of public and private investment to deliver 145,000 affordable homes each year, according to a new analysis conducted by L&G and the British Property Federation.

However, the study made clear that only a mixture of public money and the expansion of “for profit” providers will be likely to significantly boost supply, because of the way housing associations are constituted.

The study of the affordable housebuilding sector, launched this morning, found there was a 95,000-home shortfall between the number of affordable homes needed in the UK each year, and the average of around 50,000 actually built.

The report, “Delivering a step change in affordable housing supply”, said this amounted to a £34bn annual funding gap, which needed to be filled from a mixture of public and private sources. It took its 145,000-home annual target from the Bramley report on housing conducted for the National Housing Federation (NHF).

With debt funding in plentiful supply, the report found the main financial barriers to this expansion were the lack of sufficient grant funding, and the inability of housing associations, as charitable institutions, to take on equity finance.

It said government funding would have to increase from around £5.1bn annually today to a minimum of £14.3bn in order to deliver the necessary 145,000 homes at the current tenure mix. However, if the proportion of social rent housing is to increase in line with the recommendations of the NHF, the amount of grant and other government funding required each year would have to rise further, to £19.3bn.

The report called on the government to review its subsidy provision for affordable housing, and to set a more generous long term rent settlement to enable housing associations to plan for development.

In addition to the extra government subsidy, the report estimated an additional £10bn of additional equity funding to expand provision by “for profit” registered providers will be needed each year for the sector to stand any chance of getting close to the 145,000-home target.

Crucially, the report said the theoretical maximum number of homes deliverable by housing associations would be around 77,000 per year, however much public subsidy was made available, because providers would start to hit their debt interest covenants above that level, given the additional borrowing required when developing, even with government grant.

Simon Century, MD housing at insurance giant L&G, which funded the research and itself claims a 7,000-home affordable housing pipeline, said that given the need to invest cash in fire safety repairs and the net zero transition, the real capacity of the housing association sector was more like 65,000 homes per year. He said: “To get to 145,000 homes per year you need both subsidy and more equity. Subsidy gets you to 77,000 but beyond that needs more.”

Century said this reality was driving private investment, with Savills recently estimating for profit providers could invest £23bn in new supply in the next five years. “Investors are looking to deploy money in areas that have a good return and a wide impact – and we have the whole ESG agenda, which is not going to stop. Investing in affordable housing has huge impact.”

He added that there had been little resistance to this investment from established associations. He said: “When we went out looking for managing agents, so many came back. There aren’t that many housing associations that don’t want to be part of this. Our question to government is, ‘How are you going to react to this?’”

Ian Fletcher, director of policy at the British Property Federation, said: This analysis shows that we cannot hope to meet need through existing sources of funding alone. There is a funding gap, and if anything, it is getting bigger as other financial pressures increase on the affordable housing sector.

“Institutional investment can contribute to increasing affordable housing supply, but there is more that can be done to create the right policy environment to boost all forms of funding.”