Boosting housing supply – is Income-strip a potential solution?
The supply of new homes (of all tenures) in the UK has, for sometime, materially failed to keep up with or even partially meet demand. This failure has contributed to a significant distortion of both market and affordable housing. This problem is no longer confined to just the south-east, London or a select number of other cities. The proportion of household income required to buy or rent decent market housing is challenging for an increasing number in the UK.
Covid-19 has the potential to add to historic housing supply distortion through a potential combination of higher unemployment, possible wage reductions together with battered public and market finances which have already been deployed to keep the economy on life support.
The question is what tools might be available to boost the numbers of both new market and affordable homes once the health crisis has subsided. Private sector house builders, traditional housing associations and local authorities will no doubt be eager to restart activity. The pension/investment funds are also likely to be interested in investing in both affordable and market rental housing.
Trowers has advised on a number of income-strip arrangements where the public sector has secured investment for town centre and economic assets for a local area. There has been a diverse range of asset classes; from office, research, leisure and of relevance build to rent market homes. Could these be adapted for affordable housing?
Income-strip lease arrangements typically involve a fund financing the construction of a new property asset which is leased to the public sector (or other bodies with strong credit ratings). The lessee pays a rent which is indexed linked (usually with minimum and maximum increase or a cap and collar applied). The lessee also might be expected to have a right to acquire the asset's freehold for a nominal sum at the end of the lease. The public sector could contribute towards the upfront capital cost of the new asset which might reduce the rent it pays and/or reduce the term of the lease.
Could rental housing be delivered through an income-strip lease arrangement as a post Covid-19 option? Potentially it could, especially if the state's capacity to borrow for housing investment is reduced as a consequence of the UK government committing billions to support the economy during the Covid-19 crisis. It would also require a more flexible approach when subsidy is provided for at least some affordable homes.
Income-strip leases are attractive to funds as they provide them with safe low returns which are broadly indexed linked (a safe pension investment). This attraction does create a risk for the lessee as RPI/CPI and rent inflation can and does diverge; with this exacerbated for affordable tenures.
If an affordable housing provider/local authority entered into an income-strip arrangement with a fund, they could contribute to some of the upfront capital costs of the new homes with the intention of paying a lower annual rent to the pension/life fund. In practice, the housing provider may have a need to seek public subsidy if there was a material divergence between the affordable rents they collected against the indexed annual rent they had to pay the fund. Providers and local authorities might also be expected to have scope to manage some divergence from their existing resources.
Income-strip arrangements would, at best, only play a relatively small part in affordable housing delivery. However, it potentially could be an important part, especially if future UK governments are, following Covid-19, constrained in what they can borrow and spend.
The tenant's right to buy/acquire their affordable home is only likely to be acceptable to the funds if some form of guarantee is given that this would not affect the housing providers or local authority's ability to repay the fund.
Housing provider/local authority subsidiaries would have fewer challenges for market or other non-affordable rental tenures. Structures have been successfully adopted which address enfranchisement and other previous fund concerns about residential income-strip housing.
Unfortunately, the Covid-19 health emergency is likely to disrupt society for sometime. We cannot assume that 'business as usual' will automatically resume without changes. This means we all might need to think about possible solutions and innovations to continue the delivery of decent homes.