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Income and impact: Opportunities in affordable housing

Quelle: LGIM.

Income and impact: Opportunities in affordable housing

Why we see a potential opportunity for private institutional capital to work in partnership with the public sector to address the UK’s affordable housing needs.

The UK’s housing challenges have been decades in the making and are all-encompassing across housing tenures. But this is particularly acute in the affordable housing sector.

The Labour government’s rhetoric on the need to significantly boost housing demonstrates a strong recognition of the task at hand – while potentially bringing compelling opportunities for investors in the affordable housing sector, in our view.

Labour vowed to “build, build, build” when it took power in July, setting an ambitious target to boost housing delivery to 375k new homes per year. The last time the UK hit that level of delivery was in the halcyon days of construction in the mid-60s to early 70s, a period where the public sector accounted for half of that delivery. We believe that is unlikely to reoccur.

Over the last 50 years, the UK has seen a dramatic transformation in state spending on housing. Successive governments have seen an unfavourable move from high housing investment to high housing expenditure through that period.  In 1975, 96% of state spending went to building social housing with 4% spent on housing benefits. By 2022, this had reversed with 88% spent on housing benefit against 12% on building[1].

The UK’s government has stressed that housing remains a top priority. The fiscal reality, however, may constrain its ability to directly fund the construction of new affordable homes to the required level. The upcoming spending review is expected to reiterate the importance of addressing the housing crisis but we believe is likely to fall short of providing sufficient funding.

This comes at a time where traditional housing associations face increasing financial pressures from remediation and maintenance works on existing assets as well as higher debt costs[2]. This creates, in our view, an ideal opportunity for private institutional capital to work in partnership with the public sector to step in and help fill the funding gap.

We believe that the wider recognition of this necessity is helping to encourage the government to enable the private sector. One key enabler has been the recent political clarity on a rent settlement at CPI+1% for the next five years[3].

This near-term certainty incentivises private capital by reducing the perceived risks associated with this asset class, in our view. With the Government consulting on establishing a 10-year longer-term rent settlement – and therefore potentially removing further uncertainty – this can provide greater confidence that the sector can deliver the income stream over time that is a key driver of investor interest.

Over the long term, we expect the sector to deliver returns comparable to those of other established residential sectors, such as build-to-rent and student accommodation, and notably higher than the long-term average returns for commercial real estate. This will be from a very different income style, with inflation linkages diversifying higher-beta, more operational income growth.

The nature of the sector also makes it a good fit for investors looking to make targeted tangible social impact. Targeted investments, increasingly typically used by local government pension schemes, demonstrate how capital can be deployed effectively to deliver measurable impact in a defined geographic area. Such initiatives not only address housing shortages but may also stimulate local economies and contribute to broader societal goals.

We believe the UK affordable housing sector is uniquely positioned to deliver both financial returns and net additional social impact. In our view, it represents an opportunity to generate inflation-linked income, robust long-term returns, and contribute meaningfully to alleviating the housing crisis. With more political certainty, a pressing social need, and the government’s commitment to addressing the housing challenge, we see a strong foundation for investors to build on.

Assumptions, opinions, and estimates are provided for illustrative purposes only. There is no guarantee that any forecasts made will come to pass.

[1] Ralph Mould, UK Housing Review 2024
[2] Regulator of Social Housing, 2024 Global Accounts of PRPs as at Jan 2025
[3] UK Gov MHCLG, Future Social Housing Rent Policy, Oct 2024

L&G Blog: Income and impact: Opportunities in affordable housing

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