Affordable housing partnerships – leveraging equity investment to enable delivery
There is a clear need for new sources of capital in the affordable housing sector: demand for affordable housing is consistently high, but many traditional Registered Providers of Social Housing (RPs) are already highly leveraged on the debt finance market.
Over the last 10 years, for-profit RPs have grown to provide some of this much-needed equity investment. In 2013, for-profit RPs owned or ran almost no affordable units; in 2022, that figure was close to 20,000.
This article will consider why RPs are entering into partnerships with for-profits, how RPs can choose an investor partner, and the forms that a partnership can take.
Why traditional RPs are considering partnerships
With inflation high and construction costs escalating, some RPs are struggling to fulfil their existing development obligations, let alone take on new projects to deliver more affordable homes.
This pressure on RPs is unlikely to subside soon. Despite being higher than some in the sector expected, the government's decision to set next year's rent cap below the rate of inflation will only increase pressure on RPs' cash flow. Further, following tragic incidents including the case of Awaab Ishak, government pressure to improve sub-standard and unsafe housing stock is set to intensify, and minimum energy efficiency standards for affordable housing were included Social Housing (Regulation) Bill (though they remain under debate in Parliament).
The additional capital that flows from partnering with an investor or for-profit RP releases equity to help RPs deliver or expand their development and retrofitting programmes. The involvement of a partner also allows for risk-sharing and each party uses their expertise to deliver a better scheme for the RP, the investor and crucially, for residents.
Selecting a partner
Recognising a need for new capital is one thing; identifying the right partner is a much more difficult task. Before an RP is tied to an investor both financially and reputationally, the RP needs to know that it is joining forces with someone who shares their vision and can deliver what they and their residents need.
In January this year, the British Property Federation (BPF) launched a toolkit to help RPs find the right partner. The "Affordable Housing Partnerships" toolkit assesses three aspects of finding a project partner:
What does the partnership want to achieve?
a. Does the for-profit share the RP's ambitions, and do they agree on the geographic spread of the investment?
b. How long will the partnership last?
c. What return is the investor hoping to achieve, and can the RP secure those whilst also delivering for residents?
d. How much risk does each party want to take, and how will risk be apportioned?
a. If the for-profit is acquired by another investor, should the RP be able to reconsider the arrangement? Likewise, if the RP merges with another RP, their financial strength, geographic spread and ambitions may change; can the for-profit reconsider their involvement at this point?
b. Importantly, how and when does the partnership unwind? Neither party wants to be bound to the other if the arrangement is not producing the intended results.
The final question is focussed on the for-profit RP itself:
a. Does the for-profit have a good reputation? If this is a longer term partnership, this question is especially important as the names of the RP and for-profit will be linked for the medium- to long-term.
b. The for-profit's regulatory compliance record. The BPF has recently established a working group to create a voluntary code for for-profit RPs to highlight those who are achieving the highest levels of compliance.
c. Does the for-profit have a skill-set or experience which complements the RP's?
d. Does the for-profit have a strong track record in the sector?
What the partnership will look like
The BPF toolkit sets out options for how an RP and a for-profit can partner to deliver affordable housing.
Most structures involve the for-profit owning the stock: the RP could be granted a management agreement or medium-term lease of the stock. Sometimes these arrangement follow from the RP selling the stock to the for-profit.
Other options include the RP and investor setting up a joint venture (JV) vehicle to own and manage the stock, as seen in the recent tie-up between Hyde and AXA. This is a longer-term commitment and involves the JV itself being registered with the Regulator of Social Housing.
Which approach an RP chooses will depend on a number of factors:
- Risk appetite – if the RP is risk-averse, they may want to bring to an end their role in a scheme promptly, so may opt for an outright sale to a for-profit. Alternatively, a more risk-tolerant RP may be open to taking a medium-term lease of affordable units from an RP on an index-linked rent.
- Control – some RPs will not want the for-profit to be in control of the affordable housing asset, so would avoid models where the for-profit or JV owns the stock.
- Length of commitment – if the RP wants a simple equity release, a sale to a for-profit may be best. At the opposite end of the spectrum, establishing a stand-alone JV would involve both parties committing to each other for the long-term.
- Financials – RPs should consider the "cost" of an arrangement, evaluating the total commitment but also the timing of payments and the certainty of future costs. If, for example, an RP rents stock from the for-profit at an index-linked rent over 20 years, periods of high inflation (as we are experiencing currently) can increase the RP's rent costs unexpectedly for the remainder of the lease term.
Consider it early
The key to an effective partnership is to agree early and transparently what the parties are offering, considering both what the parties want from the arrangement and what they will bring to it. It is better to anticipate points of disagreement and plan for them, rather than be caught off-guard.