Housing Investment Taskforce report

Maximise investment opportunities in affordable housing

34. In its consideration of affordable housing, the Taskforce has included both social and mid-market rental properties. The term ‘affordable’ is used as shorthand where the same issues apply to both, and its meaning is in line with the homes currently supported through Scottish Government subsidy.

35. The Taskforce acknowledges the priority of social housing and that there are inherently greater challenges to its delivery than mid-market options given the lower income levels of those eligible for social rental properties. However, the additional flexibility in mid-market rent provision also plays an important role, particularly in certain locations and for some keyworker provision.

International evidence and context

36.The Taskforce benefitted from a review of international evidence on affordable and social housing finance innovation by Professor Ken Gibb of CaCHE, the UK Collaborative Centre for Housing Evidence.This review highlighted five overriding themes that can be summarised as:

i. there is no ‘silver bullet’ but a set range of components that can be tweaked;

ii. policy transfer from other jurisdictions is tricky but ideas can be customisable;

iii. path dependency matters in housing systems;

iv. dominance of existing stock over the flow of new supply and the ever-changing dynamics of affordable housing delivery; and

v. making progress is about navigating political priorities and making the public spending case.

Private finance for affordable housing

37. The review, and the other academic work cited within it, resonated with the Taskforce and has informed their conclusions. Capital funding for new affordable homes comes from debt, equity or subsidy. All models of delivery stem from that and the search for ‘innovative’ solutions can be a distraction from the basic elements that make up the delivery conundrum: looking after tenants through fair rents and maintenance; the limitations and conditions of subsidy; and providing an acceptable market rate of return for developers, building contractors and financiers.

38. The affordable housing sector continues to attract private finance as it is asset-backed, has long-term predictable income and strong credit credentials. However, the cost of this finance given wider economic factors has been the recent challenge. There is investor demand for affordable housing from both traditional banks and institutional investors (the latter requiring scale). Simplicity is the preference for all; complex arrangements need to deliver additionality and be worth the additional transaction costs.

39. With a favourable lending rate for housing through the Public Works Loan Board for local authorities, and the preference for a degree of fixed-rate debt amongst RSLs; index-linked debt or long lease/income strip arrangements from institutional investors need to provide some additional benefit in order to be attractive. The benefit could be different profiling of fixed-rate debt and ability to stretch the public subsidy further. In some circumstances a government guarantee could improve pricing from an institutional investor. Governments (local and national) need to carefully consider if this offers best use of resources.

40. Investors have highlighted that there is a gap that the Scottish Govervnment could help fill in bringing together RSL demand with investor appetite to help explore the full range of financing options, particularly within the complexity of investment needed for both new supply and retrofit.

41. Scottish Government should discuss with affordable housing providers whether investment in independent professional advice to support RSLs and local authorities who want to widen their assessment of different financing options would be appropriate and useful.

42. Although there are opportunities for more mobile capital investment in affordable housing, there is a risk that this simply displaces other forms of private finance and does not deliver additional homes, and therefore more significant changes in approach to provision are discussed further below.

Leveraging of public funds through the affordable housing supply programme

43.Over the term of the Taskforce, the Scottish Government’s affordable housing supply programme budget position changed substantially, with the reinstatement to previous levels of public investment welcomed. This period of budget reduction and some of the associated impacts highlighted to the Taskforce:

a. differences in approach across local authorities and RSLs on attitude to risk/forward funding;

b. transparency of projects being funded, timescales for delivery and their relative priority could be improved;

c. less capacity for the affordable housing sector to fund homes through private developer planning obligations which are considered ‘good to have’ rather than ‘must do’, with other methods of fulfilling these obligations (e.g. low-cost home ownership) not pursued;

d. focus on budget reduction had reverberations beyond the practical impact to delivery confidence, including finance and RSL development capacity; and

e. challenges to the sector of inability to plan for longer term, there being no quick ‘switch’ to respond to changing budgets.

44. While recognising the challenges to public finances, the Scottish Government should make a long-term commitment to a minimum level of funding for new affordable housing supply. If implemented at the next budget cycle this would provide a firm and positive basis for the start of the new Scottish Parliamentary term.

45. To support this commitment the affordable housing sector, wider third sector, business, government and parliamentarians could work together on a robust and evidence-based business case for public affordable housing investment; demonstrating and quantifying the important impacts on social, economic and environmental outcomes. Undertaking this work would also support a clearer evidence base for partnerships, where social value is a consideration and allow decision-making to be driven by acuteness of need and where the greatest gains in outcomes could be achieved.

46.Providing this new long-term commitment would recognise housing as critical infrastructure. Alongside this commitment, the Scottish Government should reconsider whether their approach to allocation of affordable housing supply funds on an individual local authority basis is maximising investment and value for money, particularly for providers working across multiple local authority areas or where funds available have not been fully utilised.

47.At a minimum, data-driven performance and outcomes from investment – both public and private – should be published. With longer-term budget certainty comes greater opportunity to think about things differently including entering into strategic commitments with providers that can leverage private finance more effectively.

Capacity and flexibility in the affordable housing sector

48. Subsidy, in a variety of forms, is a fundamental requirement of providing affordable housing given that the only income-stream generated is subsidised rent. Grant is considered the optimal arrangement for social housing as any alternative income stream would require RSLs and/or local authorities to undertake higher-risk commercial activity. Headroom and capacity are issues highlighted by both local authorities and RSLs as particularly acute given commitments to existing tenants and the size and scale of the retrofit challenge.

49. The positive impact from the Scottish Government’s charitable bond programme for the RSL sector is noted by the Taskforce, with the unsecured nature of the funding being of particular benefit.

50. Local authorities face a wide range of funding pressures, including substantial growth in Housing Revenue Account (HRA) debt and servicing costs. The certainty of their overall funding settlement is also relevant.

51. Developments over the term of the Taskforce on the UK-wide National Wealth Fund providing guarantees to the bond market, commercial lenders and an affordable housing aggregator were welcomed. These provide an additional tool for RSLs in financing retrofit, thereby creating some additional capacity for new supply. The Taskforce has noted that even with these new structures, borrowing for retrofit will use some of their gearing and interest cover capacity without a new source of rental income.

52. With the cornerstone of operations being serving existing tenants and communities, the ability of the whole RSL sector to deliver additional new supply is unknown. There is a need for a fundamental assessment of the capacity of the sector to deliver new supply, including financial capacity and land currently held. This assessment should aim to provide a long-term path to delivery at a national level and support improved leverage of the current strengths and assets of RSLs. In turn, this can help provide confidence to investors of the credible pipeline of affordable housing commitments in Scotland and indicate where additional system capacity may be required.

RSLs

53. Mid-market rent is now firmly part of the provision of housing in Scotland with subsidiaries created by RSLs to deliver and issue private residential tenancies. In addition to confirmation of exemption from rent control, if regulation allowed RSLs to provide this as part of their core business, this would in turn enable simplification of arrangements (particularly on mixed-tenure sites) and the benefit of the balance sheet strength of the RSL.

Local authorities

54. The UK’s approach to public finances is not optimal for supporting affordable housing investment (with rental income being able to support debt unlike other infrastructure sectors). Although recent changes to UK fiscal rules have improved matters, they do not yet go as far as many commentators in the UK have long argued for. The Scottish Government should work with the UK Government to seek a change in approach so that housing investment by local authorities does not count towards state borrowing, in line with international best practice.

55. In addition, the Scottish Government should raise with the UK Government the prospect of write-off of historic HRA debt. This would create immediate new capacity including reduced need for subsidy in the short-term. Costs of borrowing per property have risen, meaning local authority capacity to support existing stock and tenants as well as future development is increasingly constrained.

56. In 2023/24, debt servicing costs were £343m, or almost 25% of income, across 26 local authorities while overall HRA debt rose by £600m (net). This single-year 12% increase, if sustained, would lead to rising costs and rents, constraining ability to borrow to develop homes.

57. Local authorities estimate that write-off could release funds to develop from around 585 new social homes per year without grant subsidy and up to 3,673 per year with usual subsidy arrangements in place.

58. Changes should also be made to the authorising environment for transfer of funds within local authorities from the General Fund to the HRA. Local authorities should have flexibility to make contributions from the General Fund to the HRA, and rather than through the current model, which requires consent by Ministers, this should be taken forward in legislation. Given the timescales for primary legislation, statutory guidance could be considered in the interim to allow those local authorities who can, to make use of this flexibility more immediately without recourse to Ministers on an individual basis. While pressures on finances will mean that not all local authorities will want or be able to take up this option, the position could be clearer for those who do.

New entrants

59. While the vast majority of affordable housing is delivered by local authorities and RSLs, public funds are also used to support delivery by organisations not regulated as housing providers by the Scottish Housing Regulator. These organisations have supplemented the core supply and alongside the potential of social investment in third sector organisations have the potential (and willingness) to do more.

60. The Scottish Government could take a more expansive approach to delivery, ensuring that they create an environment for a range of organisations to work with local authorities to deliver on priorities. Overall, it needs to be clearer what safeguards should be in place to provide protections for tenants, including whether an expanded role for the Scottish Housing Regulator should be considered.

61. New entrants have the benefit of being unencumbered by existing stock and can focus on new supply for new tenants. There is a ready-made source of new capacity within the institutional investment sector with the combined funder/operator approach.

62. Allowing operations of this type in Scotland would be the single biggest intervention that would attract more mobile private capital to affordable housing.

63. The Taskforce recognises that the ‘for-profit’ approach has not been preferred in Scotland and a significant change would need to be accompanied with appropriate safeguards for all parties. This approach could utilise public sector pension funds, including local government, who invest in these structures in England. In this scenario, the ‘for-profit’ is servicing the pension liabilities of the public sector while also investing in supply for new tenants.

Local Government Pension Funds

64. Local Government Pension Funds can support housing development, but the overriding consideration is selection of the best opportunity in line with each Pension Fund’s formal strategy. This can include providing funds on commercial terms to housing associations with appropriate credit ratings to invest in social housing.

65. Most commonly, a Fund Manager will be sought rather than direct investment, and sufficient return is needed to enable investment. Therefore, the other potential areas identified by the Taskforce on fund-based approaches, aggregators, guarantees for institutional investors and new entrants are of relevance if this investment is a priority. In line with other forms of finance, the need for subsidy remains.

Temporary accommodation

66. The provision of investment in assets for use as temporary accommodation, while not within the remit of the Taskforce, merits further investigation. In particular, the potential for designing a cashflow that can support an asset is logical and could support better outcomes for individuals and families. The Taskforce notes that the arrangements of where responsibility lies at UK and Scottish levels may be complex to navigate but is worthwhile for further consideration as to feasibility in Scotland.

Instigating change for future generations

67. The Taskforce has focused on actions in the medium/long term. However, there is the opportunity to seed change that is multi-generational in its legacy. Work could start on this now.

68. From international examples, the revolving funds approach, particularly the Landsbyggefonden approach in Denmark, was considered attractive for being able, over time, to shield the affordable housing sector from turbulence. Inherent in the success of these approaches is their scalability, longevity and stability; creating a ‘sealed circuit’ of housing investment not unlike the approach of sovereign wealth funds.