Originally published January 2021.
With the government under pressure to tackle the UK homes shortage, social housing offers yield opportunities to high-net-worth investors.
As a developer in the North of England dealing in high-volume but relatively inexpensive units, at the start of 2020 we anticipated continuing demand from the same high-net-worth clients and property funds, loosely based on several factors – low unit costs, the Northern Powerhouse, and rental yields that were higher than the overheated South of England. Scroll forward several months and we have unearthed areas of demand that reflect a different landscape of shifting politics and social conditions. That stamp duty holidays and post-lockdown pent-up demand have underpinned prices is well known, but increasingly our attention has turned towards local authority demand for social housing and the subsequent opportunities for funders seeking yield in a seemingly permanent ultra-low interest rate environment.
Social care was a secondary focus of the last election but has rarely been more in the headlines than with the impact of covid-19. The Red Wall conversion of the 2019 election placed huge emphasis on the North – and the Conservatives, having embraced the ‘get Brexit done’ message, now need to retain those votes by providing a longer-lasting reason for what were in many cases multi-generational changes of allegiance. Covid-19 seems, for the moment, to be affecting the North more than the South, and if the Tory government wants to be deemed trustworthy it must demonstrate a corresponding shift in regional support. The Office for National Statistics reported a fall in construction output of 10.6% in the three months to July – the very period when factors driving demand for social housing (abusive relationships, redundancy, rent defaults, deteriorating mental health statistics) were pushed upwards by lockdown.
Local authority demand, being essentially taxpayer funded, somewhat mitigates the uncertainties of underlying asset prices. Fundamental to this is the changing doctrine of state support in a country where there appears to be no fully functioning political opposition. Criticism of the government’s handling of covid is deemed unpatriotic and self-serving, and recently the most effective means of forcing the Conservatives’ hand (in any given area) has been via social media. Campaigns led by celebrities pushing for government U-turns will increasingly be headed off by pre-emptive action by the Tories, and the longstanding crisis of social housing may well fall under this banner.
Local authority demand, being essentially taxpayer funded, somewhat mitigates the uncertainties of underlying asset prices
The irony of a Conservative government adopting spending plans that, under Labour, would have been deemed ultra-left, unsustainable and patrician has been much remarked upon. Joe Biden’s victory in the US may well force a left lean from the Conservatives, as the US/UK trade deal negotiations and the implications for Ireland are on the table. The dearth of housing nationally, specifically at the local authority level, is so severe that it would be difficult for even the most persuasive of politicians to imply otherwise, let alone suggest that a magic solution may be around the corner.
The population must be housed somewhere, and the problem is even more acute when factoring in homelessness and the mental/physical health conditions that are perhaps pandemic in their own right. Local authorities have a duty of care to supply homes and will often work closely with housing associations to share some of the burden. Put simply, the local authority points those in need of housing towards the housing association, which provides a list of suitable accommodation. The local authority pays the rent, of course, as well as various other fees where additional services or support are provided.
Pension funds, property developers and HNW investors can support this effort by offering their supply of properties to housing associations, in return for guaranteed rent (backed by the local authority), long leases (often five to 20 years or more), no maintenance costs, no management fees and with their property returned to them in immaculate condition when the lease expires – although a renewal is arguably more likely.
Like many others, our investors believe they have missed the boat on a toppy tech sector and see little value in more traditional equities. Some have gone to cash on their property holdings but are increasingly encouraged by incremental state support (5% mortgage schemes, generation rent/buy schemes etc.) and are poised to re-enter the social housing market. If they see sustained and robust government policy on social housing, they will continue to seek returns there that are increasingly absent elsewhere.
