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Closing the gap

Unlocking investment to address the UK’s affordable housing challenge

An introduction to our landmark research

The UK has been in the midst of an intensifying housing crisis for some time and the shortfall of new homes for social and affordable rent is particularly acute. In Closing the gap: Unlocking investment to address the UK’s affordable housing challenge, we set out to further understand the challenges faced by Housing Associations by hearing directly from industry leaders, and explore possible solutions to increase affordable housing supply.

Before now, there has been plenty of research focusing on how to reach the 145,000 new affordable homes needed every year in the UK. But now, there is a more urgent crisis: how do we maintain the current level of output, let alone increase it?

The social housing sector is facing a ‘perfect storm’ of pressures including: inflation, higher interest rates, net zero commitments, regulatory and policy-related pressures as well as credit quality and other structural issues in the market. The sector is at a crossroads, faced with the choice of investing in improving existing homes or building new ones. The data is beginning to suggest that Housing Associations have mostly chosen to focus on improving the current housing stock. In 2021/22, the sector spent £2.3bn on capitalised repairs and maintenance, which rose to £2.7bn by the end of 2022/23.

The output of new builds from Housing Associations has peaked and now looks set for a downward trajectory.

When we consider the number of new affordable homes that are needed, our research highlights the significant shortfall the country is facing. Octopus has interviewed CEOs and CFOs of Housing Associations about their development ambitions and whether they expect to maintain development levels given the current pressures on them. Our interviews include most of the sector’s top 20 biggest developers and several medium-sized organisations. Taking an aggregate figure from these interviews, registered providers are planning to cut their development pipelines by 22% in the coming years.

To get a greater understanding of the sector’s priorities, Octopus, in partnership with Inside Housing, also conducted a survey to find out how financial pressure is impacting housebuilding among social landlords.

20% of respondents expect to reduce their development by between 21-50% over the next two years

47% of respondents said they were ‘not confident’ of maintaining development at 2021/22 levels

The top three barriers to development, according to respondents, were: construction costs, interest rates/cost of debt and refocusing on quality and safety of existing homes

The social housing sector has no choice but to move towards new and alternative ways of working

Despite the current challenges faced by the sector, there are potential solutions at hand — all of which rely on Housing Associations, the UK Government and the investment community working together and being prepared to tackle the situation with new and innovative ways of thinking and doing. The sector and its investors need to engage in a process to find more sustainable funding solutions that can bridge an era of lower grant funding levels and more expensive debt.

Our research, survey, and conversations with industry leaders suggest that many Housing Associations will begin looking at partnership working as a solution.

34% of respondents reported an average funding shortfall of 11% – 25% on their social housing development schemes

49% of respondents were more likely to work with for-profit registered providers/equity partners compared to 12 months ago

Equity partners’ primary role, according to respondents, is to take on development risk (36%) and to forward fund schemes (28%)

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