A radical shake-up of the affordable housing sector could unlock up to £125billion from the existing stock, which could in turn go to fund the development of sorely needed new homes, according to EC Harris, the international built asset consultancy.
The analysis, which is based on EC Harris' research into the ownership and management of the 4.2million affordable homes in England, was developed in response to the Housing Minister's call for more radical thinking and innovative approaches to bridging the public funding gap; soon to be created by the inevitable outcome of the forthcoming comprehensive spending review.
EC Harris believes that unlocking just 10% of the potential £125billion it identified could directly fund the construction of over 120,000 new homes.
Rebecca Bennett Casserly, Head of Residential-Affordable at EC Harris said: "With a record number of people on waiting lists for affordable housing and demand set to increase significantly, the Government is looking at new ways to meet this need. Our research hopes to bring a different slant to this sector wide debate and deliberately seeks to leverage the opportunity created in the Housing and Regeneration Act 2008; opening the door of the sector to ‘for profit' registered providers.
"In determining what could be possible we believe that the adoption of a more commercial approach to the ownership and management of affordable housing, within an appropriate regulatory framework, would enable significant funds to be unlocked; funds which could be used to deliver more new homes to meet the housing needs of a wider range of income groups. We are aware that many of our clients in this sector are already seeking to address this challenge individually, but we believe an industry wide approach could have greater speed and impact."
EC Harris has identified four sources from which a total of £125billion could be unlocked:
1. Up to £80 billion capital could be released in equity from the appreciation in value of existing housing association and local authority stock. This is based on the gross book value of existing stock minus grant and private debt.
2. Up to £37 billion could be available through replacing the public sector grant on the balance sheets of housing associations (in the form of social housing grant) with private finance.
3. £6 billion of additional borrowing could be leveraged through providing greater flexibility to manage housing portfolios more commercially, for example by using half of the affordable housing stock that becomes vacant for intermediate rent.
4. £2 billion per annum can be saved through achieving 20% operational efficiencies in the management and maintenance of stock.
Affordable housing demand vs supply
There are a record 4.5 million people on housing waiting lists according to the 2009/10 HCA annual report. This is predicted to rise significantly as new household formation continues to outstrip the pace of construction of new homes.
New sources of funding and regulation requirements
The Housing and Regeneration Act 2008 opened the door to new providers with different corporate structures. It is therefore likely that new sources of funding will emerge.
Rebecca Bennett Casserly continued: "By introducing greater freedoms through legislation, legal and governance structures; the overall ownership profile of the sector could be overhauled. Private sector companies could assume a more prominent role whilst looking to existing registered providers for their expertise in management and maintenance. In time new and more efficient operating and service delivery models may then emerge. However, any such radical measures would still need strong financial regulation to protect historic and any future public sector investment in the country's stock of affordable homes."
EC Harris carried out the analysis of the affordable housing sector during August and September 2010. Data was analysed from sources including the HCA, the TSA, National Housing and Planning Advice Unit, Department for Communities and Government and the Housing Finance Group.
The basic premise for the research was that there is very significant capacity in the existing affordable housing stock in England which could be unlocked and recycled if the business models adopted by the existing cohort of providers, namely housing associations and local authorities, were changed to give them more freedoms and the incentives to act more commercially. Encouraging commercial operators into the sector, as the law now allows, could act as a catalyst to drive this change.
How far the sector is able to go in releasing this equity will depend upon how much additional income providers can generate by increasing rents based upon ability to pay (without impacting the housing benefit bill), targeted property sales to release capital growth, whilst maintaining sufficient numbers of affordable homes in the sector to meet reasonable demand and by reducing costs, both operating and the cost of procuring capital investment.