Show Me The Money
What will the Labour Government do to facilitate institutional investment into housing?
Matthew Waters
Partner
020 7880 4240
Ambition comes at a cost
When it came to housing in general, and social housing in particular, the Labour Manifesto went large on ambition. It prominently committed to “get Britain building again…with 1.5 million new homes over the next parliament” and to “deliver the biggest increase in social and affordable housebuilding in a generation”.
Delivering on that commitment will, amongst other things, take money - large amounts of it. And, with the only reference to the Affordable Homes Programme being to confirm that it won’t get any more of it, it is clear that Rachel Reeves will not be picking up the tab.
And that all means that delivering increased growth and investment from the private sector to enable improved public outputs was at the very heart of the Manifesto (even if it didn’t say so quite that clearly), and so now is at the very heart of the agenda for our new Government.
For those of us in the social housing sector this provides optimism that there will be a commitment, within the new Government, to take a number of steps to unlock institutional investment into housing.
Where are we now?
Early stages, but underway.
Pension investment into housing has been increasing exponentially (admittedly, from a low starting point) over recent years driven by the strong alignment of financial and social outputs. As the sector has reached saturation point for debt, and demands for capital continue to pile up, alternative funding structures that allow for equity investment have emerged, with pension funds moving into equity investment structures and for-profit registered provider models.
This has included both investment in social housing focused funds (such as the L&G, M&G and SIM managed funds) and direct equity investment/ ownership in FPRPs (such as Pension Insurance Corporation equity investment into the London Square Group).
Whilst most scale to date has been on newly developed shared ownership, the market continues to evolve and there is now considerable scale across all tenures and in both new and existing stock. There has not yet been any real traction with harnessing this investment into funding of retrofit through releasing equity in existing portfolios of stock. This continues to be explored by a number of parties across the sector and is expected to be essential as a mechanism to fund the social housing retrofit costs (across both private registered providers and local authorities).
What have Labour said they will do?
The Manifesto committed Labour to:
- act to increase investment from pension funds in UK markets,
- adopt reforms to ensure that workplace pension schemes take advantage of consolidation and scale, to deliver better returns for UK savers and greater productive investment for UK PLC
- undertake a review of the pensions landscape to consider what further steps are needed to improve pension outcomes and increase investment in UK markets.
All of which provides a consistent message on Labour wanting and needing to take steps to support pension and institutional investment into affordable housing.
So what about the detail, what could be done to deliver on this principle?
Positively, on the supply side there are already material changes happening to support the emerging market of pension investment. Reforms to the Solvency UK regime are due to come in this summer that will provide the new Government with a running start. Changes to the Solvency UK regime, supported by Labour when in opposition, are designed to unlock up to £100 bn in capital by, amongst other measures, amending the rules around categories of assets that under the Prudential Regulation Authority pension funds are able to invest their capital in. This could be very significant and open up a much larger pool of capital for investment into affordable housing, notably shared ownership. Earlier in the year Labour released a policy paper titled ‘Financing Growth: Labour’s Plan for Financial Services’ (overseen by a working group from the finance/ pension sector) which supported these reforms and stated a desire to ensure full benefits are realised through “addressing the critical blockers to investment”.
Which moves us to demand side changes, where there is likely to be more action for the new Government. The underlying demand for capital is very high, and the broader housing sector reforms to planning, land supply and help to buy should (as well as an improving economic climate) aid a greater supply of housing.
Zooming into what could be done within the social housing sector, there are a number of levers (not all of which will cost additional money) that we expect the Government to be looking at:
- Grant: Subsidy remains fundamental to the market with development and acquisition of new housing dependent upon grant. The scale and focus of the new AHP will do much to shape where the institutional market looks to invest. At a much smaller scale Homes England’s equity investor role as a catalyst for wider LGPS investment could be improved, with current Treasury held restrictions around investing alongside LGPS reformed.
- Rent settlement: The principle underpinning the suitability of pension investment into housing is that stable, index linked returns match well to long dated index linked pension liabilities. The short termism of recent rent settlements together with the cap and reduction on rents has been a challenge to this narrative. A long-term indexed linked rent settlement would be a welcomed platform of stability.
- Level playing field: The LGPS investment into social housing model is closely linked with the use of FPRPs. Whilst the recent Social Housing (Regulation) Act 2023 did much to align the regulatory regime for both for-profits and non-profits, there continue to be a number of anomalies on the application of housing law/ approach to regulation that could be improved, for example FPRPs being able to acquire secure tenancies (typically ex-Council housing properties) – something that could be crucial if the much needed investment into existing Council housing stock is to be achieved. We have been involved with Government departments in recent months that have been eager to understand what blockers there are and how they could be tidied up so the new Government should have a good start on this.
- Regulation and leadership: Carrying on the theme of stability and confidence, the new Government could facilitate the market through setting out a clear principle and long-term policy of supporting institutional investment into social housing. A consistent overarching message linked to the specific reforms would provide confidence not only to investors but also to the various different actors within the sector - including local authorities, registered providers and regulators. Collaboration, as ever, will be key to delivery and this will be facilitated by clear leadership at the national level.
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