Article | Intelligent Investment

Reviewing Affordable Housing Sector Valuations to accelerate the delivery of new homes

May 31, 2023 7 Minute Read

By Jason Hardman

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The affordable housing sector comprises more than 4.4 million homes and demand continues to significantly outstrip supply. Despite one million households waiting for social housing, just 59,000 new affordable homes were completed in 2021/22.

Most of the current homes are held by private Registered Providers (RPs). The largest control more than 100,000 homes, which provides an asset base greater than most UK commercial property REITs. The emphasis is firmly on RPs to supply much needed new, affordable homes. However, the delivery of new housing is just one of the challenges they face. Others include tackling decarbonisation, upgrading homes to meet EPC requirements, and the higher cost of debt. Some of these challenges have already resulted in mergers and stock swaps between RPs or the formation of partnerships with third-party capital.

In the current environment, attracting new entrants and third-party capital to the sector is key to alleviate the supply crisis. Indeed, over the last five years, many billions worth of investment has been committed by investment managers such as Legal & General, CBRE IM, Axa, M & G, Gresham House, Man Group, and others. The institutions are typically experienced investors across multiple property sectors looking for direct exposure to a market with secure, stable index-linked income returns. Whether they are for-profit or not-for-profit organisations, they have a great depth of knowledge and experience in property and share an understanding of return metrics. They are also used to these metrics being benchmarked by transactions across the property investment spectrum and a valuation regime that enables properties to be “marked to market”.

One of the cornerstones of investment into the wider property market and the basis of asset performance is the concept of Market Value. This is defined in the RICS Valuation - Global Standards ('Red Book Global Standards’). While approaches to the determination of value might differ according to the property type, the basis of valuation “Market Value” applies to all property types. It is precisely this mechanism that provides the desired marking to market.

For more than 25 years, the affordable housing sector has had its own basis of valuation, Existing Use for Social Housing (EUV-SH). This is unique for the property sector and dates back to the formation and transfer of social housing stock to RPs. While the basis is founded upon the principles of Market Value, it assumes a hypothetical sale from one RP to another, on the strict assumptions that the stock will continue to be let at affordable rents in perpetuity; will be managed in accordance with the regulator’s requirements; and that any void properties will be re-let and not sold with vacant possession. Therefore, it is not a true mark to market.

Unsurprisingly, EUV-SH is not widely known outside of the affordable housing sector. And seasoned investors question whether it equals Market Value and how is it benchmarked against transactions.

Introducing the concept of “Market Value Subject to Tenancies” – MV-T or MV-ST or MV-SST (which is it?) does not usually help to explain the valuation regime for affordable housing.

The anachronistic nature of affordable housing valuation and its theoretical nature is confusing to new entrants. As the range of investors in the sector, plus the volume and transparency of transactions increases, the reliance on an academic model no longer remains appropriate. Unless it is reviewed to reflect the emerging banking and investor requirements and be more closely correlated to the concept understood by the wider property market, it will hinder the flow of capital into the sector.

With this in mind, CBRE responded to the recent RICS Consultation on the updates to the UK National Supplement to the Red Book Global Standards Our comments were:

We consider that the basis of valuation and guidance relating to the valuation of all affordable housing should be subject to a thorough review. The key rationale for this review is:

  • The affordable housing market has evolved in recent years to include a wider range of market participants to include private capital/investors rather than just traditional not-for-profit RPs. The sector requires a basis of valuation and clear guidance that reflects this, removes confusing acronyms and is easy to understand, to encourage the growth of affordable housing
  • The affordable housing market has also witnessed a change in the number and type of tenure types – the guidance should be flexible to be able to cope with such changes
  • The availability of market data is increasing, and transactional evidence is becoming more transparent. The basis of valuation must be able to mark properties to market. The use of EUV-SH in its current form seems to discourage rather than encourage valuers from benchmarking against market evidence. Reference to comparable data/transactional evidence must be included in updated guidance
  • The increased adoption of “Market Value Subject to Tenancies” as a basis for lending purposes in recent years, has led to confusion as to when this should be used, what the basis should be and what a reasonable approach for a valuer to take is. This needs clear non-prescriptive guidance within the VPGA
  • Property due diligence and reporting – given the volumes of properties that are typically valued in a single instruction, the level of individual properties’ due diligence that has been undertaken has been lower than for other property types. Clear and updated guidance needs to be drafted to ensure valuers are providing robust and accurate valuations and to provide clarity on the information that must be supplied (and relied upon) and reported, particularly relating to (but not exclusively); building safety, sustainability/energy consumption/ESG and related regulations, building condition and form of tenure

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