We are seeing an increased appetite from our clients to talk to us about different ways of investing in the social and 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.
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.
The BSA was passed in April 2022. 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.
Social and affordable rents are regulated by the Rent Standard which (when set in 2020) allowed annual rent increases up to CPI + 1%. After a year of Government imposed rent caps in the face of high inflation which limitedthe increase of rent to 7%, the cap is back at CPI +1% until 1 April 2025.
The Rent Standard does not apply to shared ownership leases The increase allowed by the current model form leases is RPI + 0 .5% unless granted after 12 October 2023 when is is CPI + 1%.
Rules and procedures for all providers delivering housing through the grant funding programmes are set out in:
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. We expect this to be extended to private market rent housing stock by the next government.
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.
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.
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 is available from either:
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.
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. Details on how the RSH inspects are set out here. The results of the inspections are published by the RSH. It is this regulation that gives comfort to investors and funders to the sector.
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.
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.
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.
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.
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.
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.
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.
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 Act 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.
The quality of existing stock is one of the sector's main focuses. One of the reasons for disrepair is the age and design of older housing stock (often ex local authority housing or 'LSVT' properties). There is a renewed emphasis on solutions to problems of damp and mould, as well as decarbonisation.
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 new Consumer Standards).
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.
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).
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: All the major parties have included promises about the Right to Buy in their manifestos so it remains to be seen how these statutory rights change in the future.
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.
Defined in the Housing and Regeneration Act 2008 as:
The Act got Royal Assent last July. The sector faced substantial criticisms recently and the Act aimed to address those shortcomings. It changed 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 introduced Awaab's law which will set strict timescales for RPs to investigate hazards (including dangerous damp and mould) and fix problems or undertake repairs.
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.
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.
The period that a home is unoccupied. RPs with effective void management strategies are able to get properties ready to be re-let quickly (and generally have borough wide nominations agreements with the local authority to assist with this process). This can also help to prevent the properties falling into disrepair and can limit the loss of income thus maintaining a reliable income stream. The imbalance between supply and demand means voids are effectively minimised in this sector.
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.
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.
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 we think this may change under the new Decent Homes Standard.
