Are you looking to invest in affordable housing as a new asset class?
We are seeing an increased appetite from our clients to talk to us about different ways of investing in the affordable housing sector, particularly the new breed of 'for profit' providers of affordable housing. What's the current attraction? In short, long-term stable income alongside a strong focus on ESG credentials and a chronic housing supply shortage. Many of these clients are brand new to this sector and have only a sketchy idea of some of the terminology that is used in it.
Addleshaw Goddard has a market leading affordable housing finance practice advising on the largest, most innovative and impactful affordable housing finance transactions in the UK. We have advised on funding for the majority of the five million affordable homes in the sector and are the pre-eminent firm acting for all major funders (both lenders and investors) on affordable housing finance matters across England and Wales.
Our 'Living Sector' provide first class advice across the full housing spectrum; from student accommodation, affordable housing, build to rent and co-living through to later living.
Our teams provide expert advice to new entrants to the affordable housing sector (which includes social housing, affordable housing and low cost home ownership), whether by way of investment in traditional 'not for profit' housing associations or the growing number of 'for profit' providers of affordable housing, and we can help you understand and navigate the sector.
This jargon-busting A to Z of affordable housing in England is aimed at those considering their first investment in this area. For those already well versed but looking for specialist advice, or those who want to continue their journey further this might not be for you but we would still love to hear from you.
Likewise for those operating in the different regulatory regimes in Wales and Scotland get in touch for jurisdiction specific advice.
- Affordable rent
Rent set at a level higher than social rent that can only be charged for accommodation which is provided by a Registered Provider (RP) under agreement with either Homes England or the GLA (or the Secretary of State if provided by a local authority) which allows the property to be let at an "affordable rent" and is a popular investment class.
Remember: Affordable rent (inclusive of service charge) must not exceed 80% of gross market rent for the local area.
- Building Safety Act 2022 (BSA)
The BSA was passed in April 2022 and is being brought into force over a period of 18 months. It provides a comprehensive regulatory regime (under the Building Safety Regulator) for structural and fire safety risks associated with buildings, with a key focus on providing accountability for building owners and giving a voice to residents.
Remember: Many RPs hold assets or are in the process of developing assets that will be caught by the BSA regime. It is vital for them and investors in the sector to be up to speed on how it works and how it will impact them. A current hot topic is whether schemes with a pre-existing planning permission but which are not subject to the new building regulation regime and do not already have a secondary means of escape will (although potentially lawful) be or become unfundable.
- Caps on rent increases
Social and affordable rents are regulated by the Rent Standard which (when set in 2020) allowed annual rent increases up to CPI + 1%. In the face of high inflation, the Government imposed rent increase caps for one year from 1 April 2023 limiting, the increase of rent to 7%. Although the Rent Standard does not apply to shared ownership leases, most RPs (including For Profit RPs) voluntarily capped the rents charged on the unowned share to the same 7% (the increase otherwise allowed by the current model form leases is RPI + 0 .5%).
- Capital Funding Guide
Rules and procedures for all providers delivering housing through the grant funding programmes are set out in:
- Decent Homes Standard
A "decent" home is one that meets the current statutory standard for housing (no Category 1 hazards under the Housing Health and Safety Rating System; is in a reasonable state of repair with reasonably modern facilities and services and a reasonable degree of thermal comfort). RPs are expected to ensure all their homes meet this standard.
Remember: The Government's Decent Homes Guidance was published in 2006 and we are promised an update shortly and we expect this to be extended to private market rent housing stock under the Renters (Reform) Bill.
- EUV-SH (existing use value - social housing)
Valuation methodology specifically created for this sector based on the rental income achievable. It determines the value of properties based on their existing use value and on the assumption it is to remain as social housing – generally where there is a binding restriction on its use as social housing.
Remember: This usually gives a lower valuation than MV-ST.
- For Profit Registered Provider
An RP permitted to make profits which it may distribute as dividends – but its board must be sure that it is still able to discharge its landlord obligations and comply with the Regulatory Standards. Usually established as companies limited by shares and, more rarely, limited liability partnerships.
- Golden Brick
The date following which the developer of a property can grant a major interest in land to allow for VAT to be zero rated and VAT on the construction to be recovered. A major interest in land is a sale of a freehold or long lease or the grant of a lease of 21 years or more. The golden brick itself is the first course of construction above ground floor level. RPs will look to acquire a property being built for them after the golden brick date as they cannot recover VAT so acquiring at or after golden brick (or turn-key) avoids irrecoverable VAT costs.
- Grant funding
Grant funding is available from either:
- Homes England under the Affordable Homes Programme 2021 – 2026.
- The Greater London Authority (GLA) under the Homes for Londoners: Affordable Homes Programme 2021 - 2026.
- Housing Administration
A special administration regime specifically devised for the affordable housing sector which permits the Secretary of State (or the Regulator with the consent of the SoS) to apply to Court to appoint a housing administrator on the insolvency of a RP and under which the housing administrator has two objectives; achieve the best results for the creditors and keep the housing in the regulated sector (although the administrator should pursue both the first takes priority). Whilst this process remains untried and the sector is termed a 'no loss' sector in terms of funders, our team has been involved in every RP rescue to date and can provide expert advice on this area.
- In-depth assessment (IDA)
This is a tool the Regulator of Social Housing (RSH) uses to ensure that larger RPs (those with over 1000 affordable dwellings) are meeting the regulatory standards. The IDAs are published by the RSH. It is this regulation that gives comfort to investors and funders to the sector.
- Joint ventures
Joint ventures between RPs and third parties (often institutional investors but also major land owners including local authorities) are being used more widely in the sector to unlock housing delivery. They are also being used for partnerships between not for profits and for profit RPs to develop more homes.
- Keyworker housing
Keyworkers are public sector employees who provide a vital frontline service in areas of health, education and community safety. Keyworkers is one of the groups RPs are required to prioritise in offering housing.
- London Living Rent
A scheme available in London (similar to Rent to Buy) to help middle-income households save for a deposit by charging a below-market rent for a minimum of three years. Eligibility criteria is published by the Mayor of London.
- Mortgagee Exclusion Clause (MEC)
A clause usually found in section 106 agreements, nominations agreements, transfer deeds, leases or other documents which contain binding restrictions to use properties as affordable housing. The MEC permits a mortgagee to dispose on the open market, free from affordable housing restrictions (often following a three-month process during which it must seek to dispose to another RP as affordable housing). An acceptable MEC can change the valuation basis of a property from EUV-SH to MV-ST. The NHF and the GLA model forms (which our team co-drafted) are published here.
- MV-ST (market value subject to tenancies)
Valuation methodology which determines the value of the properties based on a disposal of the portfolio with the existing tenants remaining in occupation under the existing tenancies. It generally gives a higher value than EUV-SH as it assumes properties could then be sold on the open market out of the social housing sector when the existing tenant vacates, or that rents could be increased to market rents. There must be no binding restrictions on use as affordable housing and various other criteria satisfied for this valuation to be achieved.
- Nominations agreement
These are agreements between the local authority and an RP that give a local authority the ability to nominate persons from its housing waiting list to the affordable housing the RP holds which helps to reduce voids. Unless drafted correctly these can restrict values to EUV-SH.
- Not for profit registered provider
The traditional housing association. The majority are community benefit societies and are listed in the Mutuals Public Register by the Financial Conduct Authority, the remainder are mostly companies limited by guarantee. There are no shareholders and 'surpluses' are reinvested for the further provision or maintenance of affordable housing
Remember: Most not for profit RPs are also charities but are 'exempt' charities due to their regulation by RSH.
The Housing Ombudsman is an executive, non-departmental public body, sponsored by the Department for Levelling Up, Housing and Communities. It was set up to look at complaints against housing organisations and resolves disputes between landlords (including RPs) and their tenants.
- Planning in the affordable sector
Affordable housing is usually (currently) controlled using planning agreements under section 106 of the Town and Country Planning Act 1990. Developers may be required to make a payment to a local authority in lieu of building a certain number of affordable housing units in their development but more usually requires the developer to provide affordable housing units in their development. It will usually require these to be sold to an RP and for that RP to enter into a Nominations Agreement. It may also require the dwellings to remain 'affordable' in perpetuity (though often with a Mortgagee Exclusion Clause under which the dwellings cease to be restricted to affordable housing if a mortgagee enforces its security).
Remember: The Levelling Up and Regeneration Bill is set to replace s106 agreements with an Infrastructure Levy and there is concern in the sector that this will reduce the provision of affordable housing.
- Registered Provider (RP)
Registered Providers of Social Housing are registered with and regulated by RSH who sets economic and consumer standards, codes of practice and regulatory guidance that apply to RPs ( known as the Regulatory Framework ) They operate only in England (other jurisdictions have separate regulatory regimes). RSH keeps a register of RPs (required by statute) which is updated monthly. RPs can be public (Local Authority) or private (Not For Profit or For Profit).
Remember: The Standards can be changed and updated from time to time (e.g. the recent introduction of Tenant Satisfaction Measures).
- Rent setting
Rent levels and rent increases within the social housing sector are strictly controlled in line with Government policy. The most recent Government Policy Statement on rents for social housing was published in December 2022. RSH has been directed by the Secretary of State to have regard to that policy statement when setting rents and has published a Rent Standard which applies to all RPs.
- Renters (Reform) Bill
The much talked about Renters (Reform) Bill as currently drafted will impact the affordable housing sector as much as the private rental sector including the abolition of Assured Shorthold Tenancies and fixed term tenancies and the changes to grounds for possession. There is a mandatory ground to allow social landlords to terminate tenancies to tenants who no longer meet the criteria for key worker accommodation. Read more >
- Rent to Buy
A scheme which allows tenants to save for a deposit by charging a discounted rent (Intermediate Rent of about 20% below market rent) for a minimum of 5 years. Eligibility criteria are set out in the Capital Funding Guide. Rent to Buy is available only in England outside London (in London, see London Living Rent).
- Right to Buy/Right to acquire/Right to Shared Ownership
A statutory right for a tenant to buy their rented property from their RP landlord. For Right to Buy and Right to Acquire the purchase price will be discounted depending on how long the applicant has been a tenant. The Right to Buy applies only to secure tenants of local authorities (including those who transferred to private RPs) and gives a greater discount to the tenant than the Right to Acquire which (like the right to Shared ownership) applies to tenants of private RPs where the property was built using grant. There is no discount for the Right to Shared Ownership but all these rights must be factored into any decision to invest in the sector.
Remember: A voluntary (in the face of a potential compulsory imposition) scheme for housing association tenants to have the more generous right to buy their properties has been piloted recently but was not thought to be viable and was not welcomed by the sector.
- Shared ownership
Shared Ownership is a "low-cost home ownership" product within the definition of "social housing" aimed at helping eligible people in housing need who are unable to afford to buy on the open market.
The property is part-rent/part-buy on a leasehold model whereby the shared owner raises funds to buy their share in the normal manner (i.e., savings and a mortgage) and pays rent to the RP for the share of the property still RP-owned. Rent is initially set by the RP under guidelines which must be followed and rent increases are controlled by the model forms of lease published by Homes England. Shared owners can 'staircase' by purchasing additional shares and if they choose (subject to some exception) can eventually own outright.
Remember: Model form shared ownership leases contain some unusual terms which we can provide specific advice on for those investing in the sector.
- Social housing
Defined in the Housing and Regeneration Act 2008 as:
- low-cost rental accommodation – social and affordable rented
- low-cost home ownership – currently shared ownership (but previous affordable housing programmes had shared equity schemes (Help to Buy)).
- Social Housing (Regulation) Act 2023
The Act got Royal Assent in July. The sector has faced substantial criticisms recently and the Act aims to address those shortcomings. It changes the regulatory landscape of social housing in England, introducing reforms to put tenants firmly at the centre and ensuring that landlords provide safe, good quality homes and are held accountable for failures. It also introduces Awaab's law which will set strict timescales for RPs to investigate hazards (including dangerous damp and mould) and fix problems or undertake repairs.
Remember: We are expecting further consultations on the changes from the Regulator and from government over the coming months.
- Social rent
Rent level for general needs tenants at a lower level than Affordable rent. Set initially no higher than "formula rent". Uses a formula based on national average rent, relative county earnings, bedroom weight and relative property figures and is usually significantly lower-than-market rent.
- Tenancy agreement
RPs can offer different types of tenancies, but have to comply with the Tenancy Standard. This means that general needs tenants should have periodic assured tenancies or fixed terms normally of at least 5 years.
Remember: But some of this may change if the Renters (Reform) Bill goes through in its current form.
Provided by councils when their housing stock was transferred to private RPs in place of certifying title. Warranties are given to the RP but also a separate collateral warranty is given to the funder at the time of the transfer (LSVT). They may contain a cap on liability (either express or implied) and a time limit within which claims may be made but are nonetheless usually considered to be beneficial to funders and investors.
Remember: The valuation basis if relying on warranties should be EUV-SH and new infill developments on LSVT land will not benefit from the warranties.
- (e)Xtra care accommodation
Accommodation for mainly the over-55s but with higher levels of support and care to help residents live independently for longer.
The annual financial return achieved on a rental property. This has application in the affordable housing world just as much as in the private rental sector and although yields may be relatively low, the sector is seen as a stable investment for patient capital.
- (Net) Zero
The sector is not immune to the industry-wide quest to achieve Net Zero. For existing stock, this will mean large-scale programmes of retrofitting and decarbonisation and, for new builds, a focus on sustainability throughout the lifecycle of the property. Many not for profit RPs are struggling with the cost and scale of the demand and this provides an opportunity for them to work alongside for profit RPs to access equity investment.
Remember: There are currently exemptions to the EPC (Energy Performance Certificates) and MEES (Minimum Energy Efficiency Standards) regimes for RPs' affordable housing stock – but this is expected to change when the Social Housing (Regulation) Bill comes into force.