16 April 2019

Housing broken but not unfixable

By Bill Hughes Fri 22 February 2019

Despite Brexit stealing the limelight, housing remains a top government priority. In fact, there is rare cross-Whitehall agreement that the UK’s housing market is broken and innovation is urgently needed in the supply chain.

Focus is on the striking supply gap: the mismatch between estimated requirements against homes actually being delivered. In the autumn 2017 Budget, the chancellor stated his ambition to provide 300,000 new homes per year. Yet, analysis by the Ministry of Housing, Communities & Local Government reveals that in the 12 months to September 2018 there were only 166,000 new housing starts – and this figure actually represents an increase in activity from recent years.

So at a headline level, supply is not meeting demand, but the diagnosis is even worse when we dive into the detail.

Housing need can manifest itself in a number of ways: an increase in household formation; labour mobility; homelessness; or affordability constraints. Yet the product being delivered does not meet the needs of the households and individuals. As last year’s Letwin Review noted, sales rates are slowing as the market cannot absorb the homogenous, and often unaffordable, homes being delivered. Developers have inevitably responded by reducing build-out rates, which is, in turn, exacerbating the supply gap.

The counterpoint to homogeneity is diversity. This means bringing to market schemes with a point of difference, whether that is pricing, proposition or tenure. Aligning the offer with the varied demands of households should help counter the inertia in absorption and thus build-out rates – an important first step to fixing the housing market.

Move away from ownership

Sentiment towards owner-occupation has been on a downward trend for more than four years, underpinning the importance of repositioning the market away from its dominance on the for-sale model. Records suggest the UK has been a long-term nation of renters – in the 1900s, more than 90% of the population rented their homes and there is now a structural shift back towards this tenure.

But the homes being built have not always matched housing needs. The rental market has not been exempt from this, with the majority of rented accommodation in the UK today being converted from for-sale homes and often rented by amateur landlords.

Build-to-rent (BTR) is now making up for lost time, doing much of the heavy lifting in terms of the number of new starts while maturing into an investable asset class. Analysis by the British Property Federation and Savills reveals that almost 30,000 BTR homes have been built in the UK since 2013, with 110,000 in planning or construction. The increase in activity was 39% in 2018. In contrast, total starts in the wider housing market rose by just 1.3% over the same period.

Investors like BTR

Institutional capital has an important role to play in providing solutions to housing issues. This was recognised by government through 2017’s housing white paper, which supports large-scale investment into the sector, while acknowledging the requirement for purpose-built rental product in the UK.

Residential rental is one market where the requirements of different stakeholders are aligned. The demand for rental product has been established, while BTR is compelling for institutional investors. The rationale is underpinned by stable occupancy rates that produce consistent cashflows, rental growth that outstrips inflation and needs-based demand decoupled from economic volatility. This isn’t just rhetoric: the latest RICS Residential Market Survey highlights its inherent stability, with tenant enquiries holding firm against a volatile sales market.

The UK housing market may be broken, but it is not unfixable. Our aspiration is that the delivery of purpose-built and well-managed BTR homes will enhance the overall quality of housing in the UK, offering people a genuine choice between tenures. Institutional investment has been an important accelerator to help this market mature, but it is not time to take our foot off the pedal just yet.

Bill Hughes is head of Legal & General Investment Management – Real Assets.