Over the past decade, a revolution has been taking place in the affordable housing sector.

Whereas the large-scale development of social and affordable homes has been dominated by not-for-profit housing associations (HAs) for the past 40 years, for-profit providers are playing an ever-greater role.

In 2015, there were just 25 of this type of landlord, owning fewer than 400 homes. By the start of this year there were 80, owning 46,000 homes. Traditional HAs still own the majority of the social housing sector’s 4.5 million homes, while councils have around a third.

But with high debt levels and a need to spend more on improving existing homes, many HAs have slashed their development plans. This has included a high-profile retreat from acquiring Section 106 properties from housebuilders.

Step forward the for-profits and a wall of institutional capital. BlackRock, Blackstone, Grainger, Gresham House, Legal & General (L&G), Lloyds Bank, M&G and Octopus Capital are among the for-profit providers now with skin in the game. Even British Land has dipped its toe in the water and has its own for-profit, Seymour Street Homes.

By the end of the decade, for-profits could have 150,000 homes, Savills predicts.

But entering this market does have its pitfalls. In March, it emerged that four subsidiaries of BlackRock-backed Heylo Housing Group had been placed into administration. This could lead to 3,500 of Heylo’s homes going to the private sector, if another social landlord is not prepared to buy them.

Rob Beiley, chair of Real Estate:UK’s affordable housing committee and a partner at law firm Trowers & Hamlins, believes Heylo is a one-off.

“Its problems are pretty much unique to the structure that Heylo devised,” he says. “There is no real read-across to the models that other investors are using.”

While the Heylo issue swirls, it could be seen as a sideshow to the UK’s housing crisis, which shows little sign of abating. Around 1.3 million households in England are on social housing waiting lists.

Partnership approach

New ideas have emerged from those already in the for-profit space that could partly fix the problem.

In April, L&G published the white paper ‘Delivering affordable housing growth – a partnership approach for England’, which included the idea of creating ‘partnership’ registered providers (RPs). This involves traditional HAs selling homes to private investors, but remaining as managing agents of the properties. The freed-up cash would help HAs build more homes, or so the argument goes.

Traditional HAs currently own nearly three million affordable homes. But in the white paper, L&G argues the value in these homes is “latent”. While an unlikely scenario, L&G believes that if HAs sold 60% of their existing stock to investors, nearly 40,000 affordable homes a year could be delivered using a recycled subsidy and £13bn in private capital.

Pete Gladwell, L&G’s group managing director for public investments, tells Property Week the white paper on the idea has “already sparked discussion” in the sector. He says the firm has had “great engagement from HAs, local authorities, local government pension schemes and wider partners to explore these ideas in more depth”.

Beiley believes L&G’s idea could be a “genuine turning point for the sector”.

However, some are not convinced HAs will want to offload large swathes of homes to investors. “It’s very unlikely that large numbers of providers are going to decide to sell lots of their homes,” says Will Perry, director of strategy at government agency the Regulator
of Social Housing.

Even if they did decide to sell homes, HAs would not immediately invest the returns into new development, Perry suggests. Instead, they would look to pay down debt, he says.

The other issue for some for-profits is the tenure waters they swim in. A major focus for some big providers is on shared ownership. Yet this tenure has generated negative headlines over service charges and concerns that buyers are not fully aware of what they are signing up to. Two years ago, the cross-party Levelling Up, Housing and Communities Committee published a report into shared ownership. The committee’s chair, Labour MP Clive Betts, went on to warn that the model would become an “unbearable reality” for “too many people”.

Beiley says: “I don’t think anyone is hiding from the fact that shared ownership has got a reputational issue in London.” But he adds: “What’s interesting is that when you speak to clients who are developing shared ownership houses outside London, they are not having any issues selling properties.”

Strong opposition

Aside from this, there remains the ideological argument against institutional investors making a profit from owning social housing assets. The National Housing Federation (NHF), which represents traditional not-for-profit HAs, has spoken out strongly against these providers. NHF chief executive Kate Henderson told MPs last year she believed that for-profits were not the “answer” to the social housing crisis.

Social housing, she argued, is a “public good” and should not be a “driver to increase returns to a shareholder”.

But the problem the NHF has is that some of its members have been striking partnerships with institutional investors. Among the most prominent has been large London-based landlord Hyde. In March, it formed a joint venture with L&G, to operate homes and retrofit properties, too.

Hyde also has a partnership with M&G to fund a pipeline of shared ownership homes, plus its own for-profit business, Halesworth, which it launched with French insurance giant AXA in 2022. AXA sold its stake back to Hyde last year, but Hyde is planning more for-profit ventures.

Hyde chief executive Andy Hulme, who is a former Lloyds Banking Group executive, appears keen on the idea of allowing more private capital into the sector. “There’s a gulf between the funding available and the funding needed to deliver the affordable homes the country needs,” he said at the time of the launch with L&G in March.

“Grants alone will not close it. The only way we can close this gap is by bringing pension and other responsible capital into the mix – and that is exactly what this innovative partnership delivers.”

Beiley believes institutional capital should be seen as complementing rather than competing with the traditional HA sector. “It’s not a question of for-profits eating more of the cake; it’s the cake getting bigger,” he says.

Grant subsidies

But there is also the challenge of grant subsidy. As L&G notes in its white paper: “Total new-build activity by institutionally funded RPs is also constrained by the volume of available subsidy.”

The for-profit sector’s biggest player, Sage, which is backed by Blackstone and Regis, has called for more of a level playing field in how the government distributes grants. Investors in the sector already come under the watch of the Regulator of Social Housing. But the regulator is in the early stages of reviewing its standards for the first time in 10 years, which could lead to further measures.

On these changes, Perry says: “Being an RP is a status with conditions attached, and you should behave in certain ways. We don’t want to see social housing value being arbitraged or investors taking excessive returns.”

So, what would be his advice to investors looking at the space?

“Investors need to think about what they are actually intending to achieve and what providing social housing involves,” he says. “You need to understand the obligations that go with that.”

And on the returns, he says: “Be aware that making a return in social housing is difficult. Your margins and your returns are going to be low. Think about how the economics of this stack up and how you are going to make it sustainable over the long term.”

As a result, Perry is more circumspect about the growth potential of for-profits. “It’s taken 15 years to get to [around] 50,000 homes, and the rate of growth has slowed in the last couple of years.”

He concludes: “Subsidy is what makes social housing projects viable, and the amount of that – through grant and Section 106 funding etc – is limited. Increasing the amount of capital available does not increase the amount of subsidy available, so does not increase the number of economically viable projects.”

While much of the focus of late has been on possible tie-ups between for-profits and traditional housing associations, L&G has also been building up its stock through deals with major housebuilders.

In one of its latest deals, L&G acquired 311 homes in April from housebuilder Barratt at its Colindale Gardens development in north London.

The homes have been acquired by L&G’s Affordable Housing Fund and will be managed by L&G Affordable Homes, one of seven for-profits owned by the pensions and investment firm.

Ali Farrell, senior fund manager at L&G, said at the time of the purchase: “This scheme is the largest grant-enabled, social-rented affordable housing scheme delivered in London in the past 12 months and will make a meaningful difference to local families in temporary accommodation and on social housing waiting lists.”

L&G’s wider affordable homes business now owns around 6,250 homes.