Affordable Housing

Demand for affordable housing will remain strong. The sector will continue to face challenges, but investment activity is expected to rebound strongly in 2024. This will be bolstered by For-Profit Registered Providers (RPs) unencumbered by legacy stock. In contrast, traditional RPs will need to invest in the safety and quality of their existing portfolios rather than expanding them.

Key Takeaways

1. The sector’s strong fundamentals, coupled with the improving macroeconomic backdrop, will mean activity in the affordable housing sector rebounds strongly in 2024. This will be driven in large part by For-Profit RPs that do not need to retrofit and upgrade existing stock.
2. However, the supply of new homes will continue to struggle as most traditional RPs focus on their existing portfolios. This will require a significant level of CapEx, which will result in a further reduction in development programmes across the country. In addition, a challenging funding backdrop will create further obstacles for new supply from traditional providers.
3. In the absence of any new government scheme to assist homebuyers in 2024, more private units will continue to switch to shared ownership. This will boost supply across this tenure. However, new regulation of this market segment means some RPs will need to re-evaluate their business models.
4. The challenges facing the sector will continue to drive mergers and acquisitions throughout 2024, with several already in the pipeline.

Investment activity will rebound strongly as we head into 2024, in line with falling inflation. This will be largely driven by For-Profit RPs that are unencumbered by the need to retrofit legacy stock and can continue to expand their portfolios. In addition, it appears increasingly unlikely that another rent cap will be introduced, which will provide certainty and underpin investor confidence. 

However, there are some headwinds facing the sector. Many providers will struggle to increase supply in 2024. This is particularly true for the traditional RPs that need to focus on improving the safety and quality of their existing stock. Current estimates suggest that repair and maintenance costs across the sector have increased by £1.5bn in just four years. These pressures will continue into 2024, with the Regulator of Social Housing estimating that capitalised repairs and maintenance costs will increase by a further 30% from 2022/23. This is coupled with the fact that construction costs have increased significantly. As a result, the G15 group of London Housing Associations confirmed that its members are reducing development programmes by up to a third. This will be mirrored across the country, translating into a lower delivery of new affordable homes in 2024 from traditional RPs. 

The funding backdrop will also continue to hamper traditional providers in 2024. Specifically, the higher cost of debt is adding pressure to RPs’ finances, meaning more are seeking loan covenant waivers from lenders. In addition, the sector’s credit rating is on a downward trajectory, meaning less access to investors. 

Figure 19: Registrations of affordable housing providers

Source: CBRE Research

New shared ownership regulation could also have an impact on existing business models by lowering rental growth prospects. The annual rent increases of new shared ownership homes will change from its current measure of Retail Price Inflation (RPI) plus 0.5%, to a new cap of Consumer Price Inflation (CPI) plus 1%. Based on historical data over the last decade, this would equate to an average annual rent increase 60 basis points lower than the current RPI measure. In addition, the floor for shared ownership rent increases moves from 0.5% to 0%. This means that rents cannot be increased if CPI is -1% or lower, albeit this scenario is very unlikely. The resulting lower rent growth across shared ownership may mean some RPs will need to re-evaluate the performance of their portfolios. 

Despite this, in the absence of any other government schemes, an increasing amount of private sale units will continue to be switched to shared ownership, which will boost the supply of these homes. 

However, these challenges will continue to drive mergers and acquisitions throughout next year as RPs seek to expand and enhance their ability to deliver new homes. Some organisations have already signalled their intentions, with Sanctuary and Johnnie Johnson Housing, for example, announcing that they are in early-stage discussions. A final decision on the merger between Stonewater and Mount Green is expected at the end of next year. 

Stock rationalisation to be a main theme in 2024 

The benefits offered from acquiring existing tenanted stock mean the stock rationalisation market has increased significantly in 2023. This will continue to be a major feature of the sector in 2024 as RPs seek cost-effective strategies to deliver on their performance and financial objectives. 

The new Tenant Satisfaction Measures (TSMs), that came into effect in April 2023, may also play a part in driving this rationalisation. These are provided to the Regulator of Social Housing to allow them to assess which landlords may need to improve their provision to tenants. The current timeline seeks to publish the first year of TSMs in the autumn of 2024 and, as such, may drive further stock rationalisation of low scoring assets.