The shortage of low-cost housing is a global issue that is attracting ever more attention. A resolution of the problem would be hugely rewarding for the resident of towns and cities, as well as for social cohesion and economic productivity. It could also potentially help meet the return requirements of long-term investors.
From North America, to Europe, to Asia, there are few, if any, major cities that have a surplus of suitable low-cost accommodation; not only in terms of the number of homes being built, but also the type of homes.
In the UK the problem is particularly acute: while the number of new homes has been in decline since the mid-1970s, low-cost housing now accounts for less than 15 per cent of new dwellings, compared with nearly 25 per cent in 1991. A problem of this size clearly requires investment on a considerable scale, probably from sources we would not typically associate with the housing sector.
In Germany, tenants in low-cost residential housing typically stay for between eight to 10 years. Given there are large pools of money from UK pension funds and insurance companies searching for investments that can provide stable incomes to meet their long-term liabilities, investment in low-cost residential housing could prove an attractive home for some of this capital.
Any solution must also involve rental property operators, such as housing associations and local authorities, which have experience in managing low-cost housing on a day-to-day basis. Matching these operators, many of which are seeking to bolster or diversify their sources of capital, with investors who need to deploy capital but lack the experience of managing such assets, is crucial. These so-called ‘asset light’ models are well established in hotels, supermarkets and student housing.
However, government also has a role to play. Housing policies biased towards a private-ownership model have philosophical merits but can inflate prices and further exaggerate the issues for those in need of low-cost housing.
The economics of constructing and managing lower-cost housing imply that some form of government subsidy may be required. Currently, the UK housing benefit budget is £28bn, but as the shortage of affordable housing grows in importance with voters, policymakers could well be convinced of the merits of more action.
The residential units would be purpose-built blocks, permanently for rent and not subject to disaggregation through schemes that permit private ownership. This would lead to real economies of scale. Nor would it be in the interests of long-term investors to break up the residential blocks, as such housing can more easily be managed for its long-term income. This would ensure a large pool of prospective investors.
Financing such investments could involve a variety of approaches – one might be a form of private markets model. As an example, capital from pension funds and insurance companies could be used to finance diversified purchases of residential blocks from housing associations, which continue to manage the tenants, with the rental income (on an inflation-plus basis) returned to the long-term investor over a 10 to 15-year period.
Of course, the shortage of low-cost housing is a complex issue and there is no ‘one size fits all’ solution. However, real estate managers, long-term capital owners, housing associations, and local and central government could profitably combine their resources to engage in a potential solution. In our opinion, it is time for all parties to engage in this debate and work towards mutually beneficial solutions.
Andrew Allen is global head of real estate investment research at Aberdeen Standard Investments
