New models for new build affordable housing?

As New Homes Week highlights the advantages of new build homes, the Scottish Government's target of delivering 110,000 new affordable homes by 2032 is under review. By the end of September 2023, only 14% of that target figure had been achieved, with the number of starts on new build affordable homes falling by 24% compared to the previous year.

With the recent 14% budget cut (£75m) in grant funding and a 72% (£121m) cut in loan funding, both of which are currently required to enable local authorities and housing associations to build new affordable homes, it seems unlikely that the shortfall in supply will be made up in the short term.

The budget cuts are in stark contrast to the £3bn expansion of the Affordable Homes Guarantee Scheme (a government backed loan fund) in England which was announced on 13 February 2024.

Here in Scotland, models which can enable new investment from alternative sources to the traditional grant funding regime could help unlock the delivery of additional affordable homes.

Particularly, investors (especially those committed to enhancing the social credentials of their investment portfolio including Scottish Local Government Pension Schemes) are understood to be keen to move into the affordable housing space here in Scotland as they have done in England to help meet the demand by forward funding affordable housing developments (or large-scale mixed tenure developments).

Although in Scotland, unlike in England, it is not possible for social housing to be delivered by any entity which is not a Registered Social Landlord ("RSL"), and there is no such thing as a "For-Profit RP", being a for-profit RSL (RSLs in Scotland must hold charitable status).

Notwithstanding these challenges, there is an opportunity for investors to support affordable housing delivery by partnering with RSLs in terms of a lease. Essentially – the investor will fund and own the homes and lease these on a long term basis to the RSL, replacing the normal upfront capital payment raised from grant funding and debt, with a long term, inflation linked annual rent. In simple terms, the rent paid by RSL will cover the investor's development cost and pay a return.

Undoubtedly, the devil is in the detail – for brand new, energy efficient affordable homes built to modern building standards and delivered at scale, the investor's required return is likely to be substantial and the financial model will need to be considered carefully by both investor landlord and RSL tenant. Particularly – the RSL must be satisfied that the differential between anticipated income (net of anticipated void losses and other management and maintenance costs) and rent payable to the investor landlord is sustainable in the long term. Other considerations too will need to be borne in mind, particularly when it comes to what happens at the end of the lease term (far into the future as it may be) – a hard requirement to recover vacant possession of social housing is likely to be challenging for any RSL.

Is there a place for a relatively (compared with current benchmark levels) low level grant payment to RSLs to support them in making an upfront payment or premium to the investor to effectively bring down the cost of the annual rent? If the lease terms were broadly equivalent to ownership, with the use of the homes tied to affordable housing use by way of a section 75 planning obligation for a fixed period of time (25 – 30 years, say) then the differences between grant supported acquisition on an ownership basis and acquisition on a leasehold basis start to reduce.

If this is a model you are keen to explore, please get in touch with us.