Knowing housing is a human right, not a commodity, social and affordable housing should be the most important sub-sector to construction. Yet, over the years the public sector has largely had to deal with meeting the demand on their own, as developer and investor concerns over scheme viability impact heavily on the private sectors appetite to step in. However, with record levels of homelessness and increasing reports of damaged stock against a wider backdrop of economic pressure, planning problems and missed building targets, we understand the private sector will increasingly need to partner with local authorities and registered providers to find commercial solutions; this will support the strain placed onto the public sector to accelerate housebuilding to the levels desperately needed across the UK.
Whilst general engagement between housing associations and private financers has previously been low, in recent years both parties are starting to recognise the mutual benefits that can occur by working together to secure growth of the sector. With growing numbers of cross-sector social housing schemes, we discuss the benefits to private and public partnerships and how to maximise the viability of their schemes.
An unexpected partnership
Let’s start at the beginning, why are the private and public sectors interested in partnering on social housing?
With public spending undergoing cuts, housing associations have started to become more receptive to working with private financers to see developments through. Working with the private sector broadens budgetary scope also allowing for advancements that are unavailable on public budget, and which produce attractive developments to buyers and tenants. However, with private lending becoming more stringent, paired with a recent market volatility, traditional lending routes are now viewed as risky with flexible financing models moving to the forefront. This has made way for different methods of structuring financing, that are making money more accessible and quicker to receive, but without maximising risk and releasing finance all at once. This has seen many private financers view social housing as a more attractive option, alongside the potential for long-term inflation-linked income and a route into residential investing.
With lower risk for private funders and higher equity for housing associations, we are seeing for-profit registered providers (FPRPs) almost double their stock each year since 2015, according to research from Savills. However, FPRPs are interesting in social housing schemes for more than just money; they also boost their ESG ratings. The very nature of social housing is one of the reasons why it is so attractive to the private sector. Providing housing for low-income individuals and households falls into the ‘S’ in ESG, creating a positive effect for the community; this is something private companies require as part of their corporate social responsibility.
Understanding how these partnerships come to light, what are some key considerations that can maximise scheme viability for all parties?
Taking you on the customer journey
One of the biggest things in the success of any housing or placemaking development is making sure that developers and authorities are engaging with local communities and delivering schemes that truly benefit the end consumer. Placemaking schemes shouldn’t just be a way to deliver against an investment criterion or a housing target, but are about providing real value to real people. This is where the customer journey can help you beyond just initial economics.
Taking stakeholders on the customer journey with you is a great way to analyse whether a development is providing what the community really wants and understanding whether your contract is geared towards measurably delivering that. In our capacity as Employer’s Agent, we have worked with some of the UKs biggest registered providers (RPs) to ensure that viewing all development decisions from the end-users perspective is a standardised element of their strategy and procurement across all their projects; this repeatedly results in truly successful schemes for all of each community’s stakeholders.
Let’s talk about costs
Regardless of your position on the public to private sector spectrum, costs are an important factor to consider. However, we are asking clients to look past the initial capital expenditure (CapEx) and look at the customer journey.
When working to tight margins, it can be tempting to purchase the products that result in the lowest initial CapEx, but it is vital to take quality into consideration. We undertake a cost benefit analysis before making any decisions on which products, materials, or technology to use, and take our clients on the customer journey; it isn’t just about build costs, but the lifecycle of the building. For example, a product with lower CapEx may last half the time as a product requiring a higher initial spend, hence costing you more in the long-term. We remove this false economy that sees you spending more to replace poor quality products in a short period after build. This approach develops successful, futureproof schemes that benefit all parties, from funders to developers to the many happy tenants in years to come.
Assessing sustainability
It would be remiss of us to discuss a new development scheme without touching on sustainability. It is essential for housing associations to produce stock that is compliant in line with Government legislation and targets; this ensures schemes are futureproof, so you aren’t left with a stranded asset or one that is not fit for purpose in 20 years’ time. However, with a stringent bottom line, housing associations are required to think innovatively to produce buildings that are environmentally conscious, and which provide buy back. Rainwater harvesting and car clubs have been popular options, whilst installing solar PVs likely result in too high a CapEx to be viable.
We understand that the best-in-class sustainability initiatives often come with a green premium, but this doesn’t mean it isn’t possible to create an ESG-driven social housing scheme. As Employer’s Agent, we look at how to connect businesses on all sides of the public and private sector to get the best sustainability credentials we can. We recently advised our developer client to install a large district heating system, however we put them in contact with two local schools who now feed into the network. Whilst paying the initial CapEx, the registered providers (RPs) get the buy back as the schools now use their network for their heating and cooling – also a great example of how the customer journey, and cost benefit analysis, provides long-term benefits.
Producing synergies
Another key consideration to maximise scheme viability takes you back to basics, but it is vital to have your contractual model and procurement process in order. Some important questions we ask our clients when starting an affordable housing scheme are:
- Are your employer requirements clear and match what you want to do with your organisation?
- Do you have the right team and model to work together?
- What is your strategy and how does this fit into your wider plan?
Once in order, we can look at the budget and understand what the best scheme we can develop is with this cost per square metre; this then gives the starting point to match up appropriate developers and funders.
Throughout procurement, we bring together external parties and build relationships that are mutually beneficial – like that of the RP and two schools in our previous sustainability example – whether that be for sustainability, finance, or the build itself. We are working with a leading modular builder who can save developers on cost and programme, allowing savings to be reinvested back into ESG strategies. This modular product is beating traditional builds in terms of acoustics, fire protection and ESG credentials, making it an exciting opportunity for developers in both the public and private sector. Introducing businesses in this manner produces synergies and maximises the chance of scheme success.
Do you want to maximise your scheme’s viability?
Local Authorities and housing associations own land on which they aspire to produce regeneration schemes that will last, be sustainable, produce quality housing and brings jobs to the community. And private funders have ESG investment criteria allowing them to transform developments into sustainable, futureproof, placemaking schemes. It’s a mutually beneficial relationship, that will truly drive growth in the social and affordable housing sector to help reach government housing targets.
Working for all parties, if you would like to know more about how we can help you to maximise your social housing scheme’s viability, please get in touch with our Head of public sector, Sam Richardson, and our social housing expert, Barry Stevens.
