The social and affordable housing sector in the UK includes rental property up the street from Buckingham Palace and rows of terraces owned by charitable associations dating from the Victorian era.

But today these growing operations are using sophisticated global finance as more investors with ESG mandates look towards a well-regulated sector with strong social purpose, governance and climate commitments built in.

“From a banking perspective it’s quite an esoteric sector,” says NAB’s London-based Director, Social Housing Finance, Michael Carr. “It’s not really property – you’ve got to know it’s a long-term debt position and income play. You’ve got to have the right mindset to be able to take people through that whole process.

“It’s a wonderful challenge to roll up your sleeves and get into.”

With Australia tipped to need as many as a million new social and affordable homes by 2036¹, it is a challenge for both public and private investment that requires fresh thinking on funding structures and operating environment.

NAB’s experiences in the UK so far have helped to inform the bank’s affordable and specialist housing activities in Australia, which in 2021 reached a cumulative total of A$1.8 billion towards the A$2 billion commitment to provide financing for the sector by 2023².

Carr says the issue for providers of social and affordable housing, as well as specialist disability accommodation, is the need for some form of subsidy to make a return in what is in effect long-term rented property leased at sub-market rates.

In the UK this subsidy takes the form of surpluses generated by regulated not-for-profit housing bodies, government grants and what Carr calls “planning gain” where developers get permission for a project by including a certain number of social and affordable homes within it.

Housing evolution

The distinction between social and affordable is essentially the amount of rental discount and eligibility.

In the UK social housing is for general needs at the lower end of the spectrum and is set at a discount to market of up to 50 per cent³, with large regional differences.

Affordable housing is designated for key workers on capped incomes for example, like nurses or first responders, and can be priced at as much as 80 per cent of market⁴. There are also regulated shared ownership vehicles allowing tenants to part buy, part rent as a low-cost step onto the property ladder⁵.

The UK sector itself has largely evolved from post-World War II rebuilding projects, traditionally administered by local authorities and known as council housing.

Following the Thatcher years, much of the council stock moved into highly regulated, not-for-profit housing associations at a certain value, funded on a long-term basis. These were low-cost, indexed rental products with strong protections built in – from secure tenancies to maintenance and keeping stock within the sector.

After the global financial crisis in 2008, changes to how UK banks accessed long-term lending meant the sector needed money from other sources. These included international banks like NAB, with expertise in debt capital markets to draw on, as well as providing term lending and liquidity support for both regulatory and rating purposes.

“Housing associations are accessing money in a much more sophisticated way, using capital markets,” Carr says. “The investors for those debt streams are pension funds who are after long-term money to match their liabilities.”

Today private registered providers in the UK have generated and reinvested surpluses to grow to own and manage 2.8 million homes⁶ that will house about 6 million people (based on an average of just over two people per household). Some larger housing associations now hold more than 100,000 properties in their portfolios⁷. Housing associations are also acting as developers and there are for profit providers also moving into the space.

Stable and sustainable

Carr says the history of effective regulation has managed to create a stable sector which ensures ESG elements are in-built and actively monitored, including climate commitments in recent times.

“Sustainability is something the sector has really embraced,” he says. “Nearly every debt capital market issue that’s been done in the last year has been in a sustainability format. We at NAB [London] have acted on four transactions [for UK housing association clients] in the last year and been sustainability co-ordinator on two.

“All housing associations have to have their portfolio carbon neutral by 2050 – it’s part of the regulation and they’re already having to provide plans on how they are going to achieve it.”

Carr says discussions on funding for retrofitting existing stock is ongoing with the UK government, with questions on transition finance or changes to regulatory rules to allow older stock to be sold out of the sector.

The UK, like Australia, is running with a structural deficit in housing supply and needs more than 300,000 social and affordable homes to be built each year just to keep up⁸.

Carr says the current low interest environment and ESG drivers have seen funds from Blackstone⁹ to Legal & General¹⁰ and M&G¹¹ setting up as registered providers for profit within the affordable space where they can “make the numbers work”.

Funding innovation

He says the historic success of the sector in the UK can give confidence in the viability of funding a long-term rental product for investors and lenders under a shared value model. Strong ESG credentials are attractive to the superannuation industry in Australia, as well as for tenants or prospective first home buyers facing into a surging housing market, Carr says.

Carr says success will mean creating and scaling a low-cost rental market with enough safety nets to allow viable long-term funding, noting recent growth of the lifestyle-led build-to-rent sector needs to operate as its own separate asset class.

“You need to have the regulation and structure which allows funders to be confident either investing in a long-term basis or lending on a long-term basis,” he says.

“If you want to protect key workers and the like, then you’ve got to have long-term rented property, which your community housing providers provide. You can see them growing with money.”

While the institutional demand for ESG investment is a strong driver, Carr adds the effect could be “further enhanced” through some form of government guaranteed debt. The UK and European markets have shown the sector generates “very stable” rental incomes, driven by the lower prices and surety of tenure, with flow-on productivity benefits for communities, he says.

Carr, a highly experienced asset finance specialist who started as a chartered surveyor before moving into banking, says there is a definite “feelgood factor” to working in social and affordable housing, coupled with the satisfying challenge of developing sophisticated funding models for customers.

“You know that the funding you provide will ultimately help them build houses or make their existing houses better,” he says.

“The sector works on a long-term basis – it doesn’t make decisions for the next three years – it makes decisions for the next 30 years and that’s really good and that’s very enjoyable to work with. The funding we provide definitely helps existing communities and to build new communities.”

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¹ Filling the Gap: Costing a National Affordable Housing Program | City Futures Research Centre (unsw.edu.au)
² 2021 Annual Review (nab.com.au)
³ Meeting housing demand (parliament.uk)
⁴ Ibid
⁵ Ibid and 2021 Global accounts of private registered providers – GOV.UK (www.gov.uk)
⁶ Registered provider social housing stock and rents in England 2020 to 2021 – GOV.UK (www.gov.uk)
⁷ 2021 Global accounts of private registered providers – GOV.UK (www.gov.uk)
⁸ Meeting housing demand (parliament.uk)
⁹ Social Housing – News – For-profit RP agrees £135m of deals in June alone as part of 14,000-home pipeline
¹⁰ Social Housing – News – L&G: new for-profits reflect ‘natural evolution’ of sector
¹¹ Social Housing – News – M&G registers for-profit shared ownership R