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Controversial US-listed private equity business Blackstone is probably the most successful alternative investment firm in the world, with $400bn of assets and a track record of having paid $15bn in dividends over the last 10 years. Its founder, Stephen Schwarzman, a close adviser to US president Donald Trump, earns hundreds of millions of dollars a year and is reported to have a personal fortune of over $13bn. All in all, this firm couldn鈥檛 be further removed from the world experienced by those living in UK social housing. 

And yet Blackstone, also generally considered the world鈥檚 largest real estate firm with $100bn of property assets, last week went public on its desire to set up a UK business to invest in building affordable housing. Some in the social housing sector have thrown up their hands in horror, concerned that Blackstone鈥檚 profit motive could end up leaving tenants out in the cold. But the truth is that this private equity behemoth is not the only big investor to conclude that affordable housing could be big business.

鈥淭here鈥檚 always been private finance in affordable housing. You could say what鈥檚 happening now is just a shift from debt to equity鈥�

Andrew Heywood, Housing Finance International

In recent years a number of affordable housing landlords, in the form of real estate investment trusts, have successfully listed on the London Stock Exchange, while insurance giant Legal & General is also setting up its own social housing business. 

At the same time UK housebuilders are being rewarded by their shareholders for an increasing focus on building up lower-margin 鈥減artnership鈥� businesses, which build cut-price homes for local authorities and housing associations. Why is high finance so interested in lowly affordable housing, where 鈥� by definition 鈥� profits are limited? And what does this all mean for the future of social housing itself?

All change

Private finance has had a big role in affordable housing since the early 1980s, when housing associations, which have always used money borrowed privately to supplement government grant, took centre stage in the provision of new affordable homes. This model was turbo-charged during chancellor George Osborne鈥檚 tenure with the introduction of so-called 鈥渁ffordable rent鈥�, which allowed associations to charge up to 80% of market rent. This made their stock much more valuable, allowing them to borrow much more. As of June this year, the sector has just under 拢60bn of bank borrowing facilities. 

鈥淐urrent conditions mean a greater range of product types in a development can give developers more certainty of it working. The timing is good鈥�

Michael Hill, partnerships consultant

But the introduction of affordable rent also allowed them to raise money on the capital markets at scale for the first time, and the sector now has 拢32bn of financing from this quarter. The fundamentals of affordable housing have, in a sense, always been investable. These homes provide a particularly stable and secure long-term investment because of the almost unlimited demand for subsidised housing, the relative stability of tenancies, and the fact that much of the rent roll is effectively underwritten by the government through housing benefit.

But recent developments have taken this trend a stage further, with investors looking to take stakes in affordable housing businesses or sell into that market. Andrew Heywood, housing academic and editor of Housing Finance International, says: 鈥淭here鈥檚 always been private finance in affordable housing. You could say what鈥檚 happening now is just a shift from debt to equity.鈥�

Why is this happening now? One factor is the growing diversity of providers since affordable rent was brought in, meaning tenants are used to considering other options than simply their local authority or housing association. Sir Michael Lyons, chair of Blackstone鈥檚 new affordable housebuilding business Sage Partnerships, says: 鈥淭he fact that it鈥檚 a more diverse market opens up opportunity.鈥� Blackstone, which took a significant stake in landlord Sage Housing at the start of the year, is now committing through its recently formed business, Sage Partnerships, to financing the construction of new homes as well (see 鈥淏lackstone鈥檚 social housing push鈥�, below). 

鈥漈he moment you start thinking of the resident as a commodity you鈥檙e dead in the water鈥�

Countryside chief executive Ian Sutcliffe

Also driving investor demand is government policy, which since the 2017 housing white paper has prioritised tackling the housing crisis by building homes of all tenures, not just for private sale. Cenkos analyst Kevin Cammack estimates that, in response, anything between 50,000 and 70,000 of extra annual supply of homes will come from various forms of rented housing 鈥� local authority, registered provider and private rent. 

This week鈥檚 Letwin review has underlined this approach 鈥� making clear the only way to realise the government鈥檚 goal of expanding supply to 300,000 units per year is through 鈥渄iversity of offering鈥� by building homes to suit people of all types and all income levels. Under his proposed new planning rules, sites for more than 1,500 homes would have to provide a variety of housing types, allowing developers to build faster without hitting profits. Partnership housing consultant Michael Hill, who ran Countryside鈥檚 partnerships business until last year, says: 鈥淥ne of the keys to accelerating housing delivery across the country has been to reduce the proportion of outright sale, because with market sale you have a limited rate at which homes can be delivered.鈥� 

Attractive

Cenkos鈥� Cammack says: 鈥淚t鈥檚 becoming clear that the government is likely to increasingly turn to affordable housing to satisfy the required growth in volume. It鈥檚 why businesses are getting to that space, and why it鈥檚 more attractive to investors.鈥�

Blackstone鈥檚 Lyons says the private sector is well placed to deliver on these aims. Blackstone, for example, 鈥渉asn鈥檛 put a limit鈥� on the amount it is willing to invest, he says. 鈥淟ocal government needs help to get things moving. There鈥檚 no shortage of ambition over housing. But somehow delivery has managed to evade us.鈥�

Government policy and market reality are, of course, often two different things. One big reason why investors are seemingly backing this drive for affordable housing is, of course, the uncertain state of the housing sale market. With sale prices and volumes stagnating, amid uncertainty over Brexit, the economy and interest rates, affordable housing offers a lower-risk way of achieving returns. This goes for housebuilders too, like Countryside, Galliford Try, Kier and Keepmoat, which are expanding 鈥減artnership鈥� businesses that have low risk and deliver a quick return on capital. Partnerships consultant Hill says: 鈥淲hen there is great nervousness about housing for sale, then to develop a site with 35% affordable housing, 35% market rent and the rest market sale is a very nice model.鈥�

Ian Sutcliffe, chief executive of Countryside, where the 鈥減artnership鈥� business now accounts for two-thirds of housing completions and more than half of revenue, says: 鈥淲e can grow that business much more quickly as we don鈥檛 have to worry about the private sale absorption rate.And we鈥檙e that much more resilient were the market to turn.鈥�

Likewise, Blackstone鈥檚 Lyons says that while current market conditions aren鈥檛 the reason for Blackstone鈥檚 investment, it doesn鈥檛 hurt. 鈥淐urrent conditions mean a greater range of product types in a development can give developers more certainty of it working. The timing is good.鈥�

Fears for tenants

But not everyone feels that this influx of private capital will be a good thing. The rise in private sector interest comes amid concerns that estate regeneration schemes have become a byword for gentrification, cramming neighbourhoods with expensive flats and prioritising private sector profit over the interests of tenants. Haringey council was earlier this year forced to abort its planned 6,400-home joint venture with Lendlease after a grassroots campaign opposed the Australian developer鈥檚 involvement, citing low levels of affordable housing on schemes such as the Heygate Estate redevelopment. 

Tom Murtha, a former housing association chief executive who founded campaign group Shout in 2014 to lobby in favour of housing at traditional 鈥渟ocial rent鈥� levels, says private money will ultimately be unlikely to help those who most need it. 鈥淚 worry that the way this funding is sourced means it鈥檚 not going to lead to housing at rent levels that are genuinely affordable,鈥� he says. 

If the private money goes into homes that are also in receipt of government funding, he fears it may crowd out other, more worthy projects at lower rent levels, or, where competing for public land, organisations with plans to build cheaper homes are 鈥減riced out鈥�. 

鈥淭hese firms will be working for the benefit of their shareholders and investors, and the danger is that tenants either become commodities or priced out with higher rents,鈥� Murtha says.

Likewise, Housing Finance International鈥檚 Heywood worries about how these firms will be held accountable to their tenants when problems arise. 鈥淭he interests of tenants aren鈥檛 always going to align with maximising shareholder value. What safeguards are there to protect them?鈥�

However, supporters of the recent drive say such concerns are unfounded. Countryside鈥檚 Sutcliffe says: 鈥淭he reason our business goes from strength to strength is because we鈥檙e really good at shaping communities, and we鈥檝e got a great track record with local authorities. The more we do that, the more work we win. The moment you start thinking of the resident as a commodity, you鈥檙e dead in the water.鈥�

Indeed, some point out that despite the avowed social purpose of housing associations and supposed accountability of local authorities, neither sectors have unblemished track records as landlords. Blackstone鈥檚 Lyons says: 鈥淗as the public sector always been the greatest landlord? Has it always been responsive? The truth is it鈥檚 a mixed picture. There鈥檚 a need for a greater professionalisation of management of housing stock. A well-funded commercial organisation I would say has much more of a vested interest in maintaining a great reputation. The commercial discipline replaces the charitable purpose.鈥�

And Lyons also rejects the idea of an 鈥渆ither or鈥� dichotomy. 鈥淭he key issue is this country has not built enough homes for 30 years. The only way you solve it is by massive additional investment in housing 鈥� we shouldn鈥檛 be turning down anyone willing to make that investment.鈥�

While many in the social housing sector may not find it easy to hear, increasingly it looks like private finance and expertise will be taking a prime role in housing some of the UK鈥檚 poorest and most vulnerable.