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Property, UK

Homing instincts: UK’s low-cost housing crisis

  • 21Mar 18
  • Andrew Allen Head of Global Real Estate Research, Aberdeen Standard Investments

The provision of low-cost housing in the UK is at a crisis point. Solving it will have to start with a grown-up conversation.

One thing that’s clear about the UK housing market is that it’s broken. Not enough homes are being built and, in particular, not enough of the right kind of homes.

The number of new dwellings across all tenures has been in decline since the mid-1970s, but low-cost housing has gone from accounting for nearly 25% of households in 1991 to just short of 15% now.

It doesn’t have to be like this. A solution can be found, and institutional investors can play a big part. As it stands, there are large pools of capital in the form of pension funds and insurance companies looking for long-term investments that can provide stable incomes to meet their liabilities.

We know from experience that rented residential property can provide this kind of stable income for institutional investors through experienced asset managers. For example, Germany has been doing this for decades.

We also know that there are operators like housing associations and local authorities that have experience managing low-cost housing.

Bringing the three together could provide a potential solution. Operators with the experience of managing properties but who lack the capital can be matched with investors who need to deploy capital but who lack the experience of managing the assets. These so-called “asset light” models are well established in other sectors such as student housing, hotels and supermarkets.

Reasonable safeguards need to be in place. That applies to those in the homes, which need to be good quality and, most importantly, affordable. It also applies to the investors who need assurances in order to deploy their capital responsibly. Having specialist intermediate partners in the form of housing associations or local authorities will be critical in order to achieve this.

The conversation also needs to include the government in order to facilitate and provide the public policy framework to make progress. The economics of developing lower-cost housing imply that some form of subsidy through government may be required. But the relevance of this issue to many politicians’ own constituents should help convince them of the merits.

This government support could take the form of utilising the significant public estates of land held by the likes of the Ministry of Defence and National Health Service (NHS). The windfall gains of the sale of this land and subsequent impact on the public purse would need to be considered, but the cost of the land versus the value of the solution may be a suitable compromise.

The residential units themselves would be blocks that are purpose built. They should be permanently for rent and not subject to disaggregation through schemes like “Right to Buy,” which sees social housing eventually moving to private ownership. There are real economies of scale to be achieved by managing entire blocks of flats (such as having one broadband, water or electricity supplier per block). These economies of scale cannot be achieved if the blocks are broken up by selling individual flats.

The next logical step to kick start the debate is to set up a review of how long-term equity is used. An independent housing policy committee (like the Monetary Policy Committee at the Bank of England) should be established, and it should aim to set the agenda above the influence of near-term party politics. That agenda could relatively rapidly create a stable framework through which much-needed, long-term decisions can be made.

None of this will be easy. This issue is complicated, and we can’t address all of the issues here. But there is a willingness from investors and a desperate need to find a solution. The sooner we get going, the better.

Important Information

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks may be enhanced in emerging markets countries.

Property investments may carry additional risk of loss due to the nature and volatility of the underlying investments and may not be available for investment by investors unless the investor meets certain regulatory requirements. In considering the prior performance information contained herein, potential investors should bear in mind that past performance is not necessarily indicative of future results, and there can be no assurance that such investments will achieve comparable results.

This article was originally published March 16, 2018 on Cityam.com.

Image credit: Joseph Clemson 2 / Alamy Stock Photo

ID: US-200318-59612-1





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