In many places across the UK the increase in house prices has earned more equity for owners than the average local salary. With such stellar growth it is no wonder housing assets continue to be of interest to large scale investors.
Investment in housing has extended beyond the traditional arena of homes offered for retail to individual buyers. Investment in the private rented sector has never been higher, at £6.3bn in 2017, supported by government reforms to the national planning policy framework and guarantees and loans to incentivise new building for rental in particular.
Investors’ attention has turned to affordable housing as well. In January Blackstone raised eyebrows by announcing it would be partnering with UK social housing association Sage to buy affordable homes from private developers, targeting a net yield of five per cent. Impact investors have also shown an interest – Bridges Fund Management’s announcement that it is creating a portfolio of affordable homes in the north-east of England under the moniker of The Ethical Housing Company speaks clearly to this trend.
But while investment in the sector is welcome, the rapid increase in house prices has led to increasing political interest which investors must be mindful of. All political parties now agree the UK is experiencing a “housing crisis”, consisting of undersupply and prices beyond the means of many. This interest has and will continue to drive policy discussions, raising the risk of future regulatory change that investors in the sector will need to navigate.
The Labour Party has taken a particular interest in housing, publishing a “new deal on housing” alongside its 2017 manifesto, and a more recent green paper on affordable housing. Though the party is still struggling to make headway in the polls, the party’s interest makes it prudent to consider the chance of a Labour government and the potential impact of its policies when considering new investments. Radical proposals such as considering a land value tax to generate revenue from price increases and incentivise movement in the market, or the resumption of mass scale council house building could dramatically change the market. So just what is Labour’s policy on housing and how could it impact investors?
Labour wants to see the volume of private housebuilding increase and the 2017 manifesto commits the party to helping investors place their capital by bringing “more land forward for development at a lower price”. Under a Labour government, the Homes and Communities Agency (now called Homes England) would be beefed up to become the government’s main housing delivery arm. In addition to commissioning homes directly, the Agency would aggregate and market opportunities for investment in private housebuilding. This may prove a boon to investors looking for a reliable return, with a level of state investment in projects’ ongoing success. The high targets Labour has set for house building mean all sectors must increase output to reach them, which helps explain this private sector-friendly approach (Housing Secretary John Healey is also one of the few remaining Blair-era ministers in the Shadow Cabinet).
Current government schemes which incentivise new building while providing a level of certainty to developers, such as the Help to Buy scheme (which offers government loans of 20 per cent of the value of a house outside London or 40 per cent in London towards its purchase) would be guaranteed for an extra six years, to 2027, but with an upper limit on household income of £100,000 for those accessing the scheme. However, in return, a future Labour government would negotiate an agreement with developers to increase both the speed of housebuilding and the proportion of homes built which must be affordable. Current Conservative government proposals would require at least ten per cent of housing to be for affordable home ownership, though councils often impose higher rates locally through Section 106 requirements so a higher national rate may not have as marked an effect as it appears. But increasing the requirement for affordable homes may still erode margins across the sector.
As well as increasing the proportion of affordable housing required in developments at a national level, Labour would change the definition of affordable, as the party believes the current definition of up to 80 per cent of market rents has undermined the notion of affordability. The new definitions were announced in Labour’s green paper for the housing sector and would see three brackets of homes:
- “Social rented homes” will be around half the rent level of the market equivalent. These would be the core of Labour’s affordable housing programme.
- “Living rent homes” will have rents of no more than a third of the average local household income.
- “Firstbuy homes” will be discounted so the mortgage payments are no more than a third of the average local household income. Shared-ownership and Rent to Buy homes will be other low-cost options included in this category.
These definitions will be “hard-wired” into housebuilding targets, investment priorities, and planning rules through “policy, financing, planning and legal changes” to ensure they become the new standard. While they loosely follow the current categories of social rented, affordable rented and intermediate housing, the definitions tighten the language by specifying the relationship to market rents. Developers would likely have to subsidise affordable housing to a greater extent than under the current system. Labour would also abandon current Conservative plans to add “affordable housing for rent” and “starter homes” as new definitions of affordable. Should developers not abide by their affordability requirements, councils would be given powers to fine them to capture their greater than expected profits. This would reverse the current power dynamic where developers are able to question the amount of affordable housing required by councils through section 106 requirements if the project does not meet “viability” tests. Again, this could potentially see margins fall for some investors.
Finally, of interest to developments for rent, Labour would improve consumer rights for tenants of private rented housing. Increases in minimum housing standards would require owners to meet new levels of upkeep, improving metrics such as energy efficiency. The current government has been making similar noises in this area by increasing the fines for failing standards and beefing up councils’ enforcement powers. Where Labour would go further is in making three year tenancies the ‘new normal’, with controls on rent rises during the tenancy. There is currently little advantage to offering longer tenancies, though the government is considering incentivising them through the tax system. A move to three year controlled tenancies may reduce the return on investments, as rents couldn’t be raised as freely during the tenancy as is currently possible, though this could be offset by higher rises every three years. Longer terms would not necessarily come with more security for owners as tenants would retain the power to leave with two months’ notice.
The public sector
Outside the private sector, Labour would look to lower the cost of finance for those in the ‘third sector’ such as housing associations and others. This would include new public guarantees against borrowing for affordable housing and encouragement for long-term investors such as pension funds to increase their activity in the area. This may prove another opportunity for investors looking for reliable returns.
Labour also argues some housing associations have moved too far away from their original social purpose and are acting like private developers. While Labour has pledged to “champion housing associations” it would act against those that currently call themselves ‘for profit’ associations. All associations would be required to use their surpluses in the service of existing communities or to develop new affordable homes. This may directly affect some of the partnerships investors like Blackrock have recently announced with associations, and limit the forms of investment in the sector to offering simple finance.
In the state sector, Labour has said the party would lift the council housing borrowing caps to their prudential limits to kick-start “the biggest council housebuilding programme in over 30 years”, and review the way this borrowing is recorded in the national accounts to ensure it doesn’t count against government debt levels. Currently councils can borrow to build commercial property but not residential, which the Local Government Association, amongst others, argues is holding them back from being able to meet the needs of local populations. The Conservatives have taken some tentative steps towards relaxing this limit in local trials, but have not backed the policy outright as yet. Council building is one of the main ways in which Labour says it would meet the party’s target to build one million genuinely affordable homes over ten years, more than 100,000 of which must be being built per year by the end of the party’s first five-year term in Government.
While such council housing will be aimed at a different portion of the market to many private investments, the cumulative effect of increasing supply may be long term reductions in house prices which could affect current assets and reduce the return of future investments. However, a gradual reduction in house prices in relation to incomes may result in deterring further political interference and ensuring more radical proposals like a land value tax do not disrupt the market in the longer term.
To explore all the implications of a future Labour government under Jeremy Corbyn, WA is publishing a series of articles examining the internal dynamics of the party and the detailed policy thinking in key sectors for investors over the coming weeks. If you know someone that would like to receive these and other pieces from the WA Investor Services team they can sign up via WAInvestorServices@wacomms.co.uk.