Oliver Letwin’s review into the speed at which homes are built, published this week, calls for greater diversity of design, size and tenure. Joey Gardiner reports on why private investors are keen to get involved and how it might actually be good news for tenants


Source: David J. Green / Alamy Stock Photo

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’t be further removed from the world experienced by those living in UK social housing. 

And yet Blackstone, also generally considered the world’s 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’s 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.

“There’s always been private finance in affordable housing. You could say what’s happening now is just a shift from debt to equity”

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 “partnership” businesses, which build cut-price homes for local authorities and housing associations. Why is high finance so interested in lowly affordable housing, where – by definition – profits are limited? And what does this all mean for the future of social housing itself?

Partnership housing: why does it work?

Partnership housing businesses work because of the high demand for sub-market-price homes, which allows schemes to be built out much more quickly and with much more certainty of demand than homes for sale. 

Countryside, for example, typically builds schemes consisting of one-third each homes for sale, for private rent and for affordable rent. Where private sale housebuilders typically build a maximum of 40-50 homes per year on any given site, this “partnerships” mix of uses allows much quicker build-out, with Countryside chief executive Ian Sutcliffe saying as many as 150 units a year can be constructed. 

This speed of development allows a developer to make a return from its investment far more quickly than it would otherwise, making up for a smaller profit margin of just 5%-15% compared with more than 20% from private sale. This is particularly attractive because housebuilders, as big borrowers, are valued as much by this metric – known in the City as “return on capital employed” – as by profit margin. 

Additionally, given concerns over the strength of the private housing market, the model gives a developer a guaranteed up-front sale for the bulk of any development. Partnerships consultant Michael Hill says: “It means around two-thirds of your risk is laid off. Yes, you have a lower margin, but your return on capital is rapid.” Cenkos analyst Kevin Cammack says: “The risk profile is far less than open market housing, and it’s the way you can still grow your business if the housing market rolls over.” 

However, it is not a simple option – partnership businesses require good development skills, the ability to interact with the public sector and tenants, an understanding of masterplanning and an ability to optimise construction to make build as efficient as possible. “It’s quite easy to do badly,” says Hill, “but you’d never win another job. It’s very difficult to do it well.”

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’s tenure with the introduction of so-called “affordable rent”, 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 £60bn of bank borrowing facilities. 

“Current conditions mean a greater range of product types in a development can give developers more certainty of it working. The timing is good”

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 £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: “There’s always been private finance in affordable housing. You could say what’s happening now is just a shift from debt to equity.”

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’s new affordable housebuilding business Sage Partnerships, says: “The fact that it’s a more diverse market opens up opportunity.” 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 “Blackstone’s social housing push”, below). 

”The moment you start thinking of the resident as a commodity you’re dead in the water”

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 – local authority, registered provider and private rent. 

This week’s Letwin review has underlined this approach – making clear the only way to realise the government’s goal of expanding supply to 300,000 units per year is through “diversity of offering” 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’s partnerships business until last year, says: “One 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.” 


Source: ABAC / PA images

US-based private equity firm Blackstone has launched an affordable housebuilding business in the UK, named Sage Partnerships. Founder Stephen Schwarzman has close links to US president Donald Trump

Blackstone’s push 

Blackstone bought a significant stake in social housing business Sage Housing this year, and aims to acquire 20,000 affordable homes within five years. Last week it announced the setting-up of Sage Partnerships, chaired by Sir Michael Lyons, to fund the construction of new homes that could become part of the portfolio. 

Lyons says the firm is looking to work with local authorities, public bodies, housing associations and landowners that want to build affordable homes but lack funding. “Local authorities are acutely aware of housing need in their areas,” he says, “and more than half have set up housing companies. But many haven’t actually begun building. We think we can help.” 

Sage Partnerships would work in joint venture commissioning the design and construction of large-scale housing schemes. Lyons says it does not yet have a target for the number of homes it will build. “Our backer hasn’t put a limit on what they’re willing to invest. There’s no limit on our ambition,” he says.


Cenkos’ Cammack says: “It’s becoming clear that the government is likely to increasingly turn to affordable housing to satisfy the required growth in volume. It’s why businesses are getting to that space, and why it’s more attractive to investors.”

Blackstone’s Lyons says the private sector is well placed to deliver on these aims. Blackstone, for example, “hasn’t put a limit” on the amount it is willing to invest, he says. “Local government needs help to get things moving. There’s no shortage of ambition over housing. But somehow delivery has managed to evade us.”

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 “partnership” businesses that have low risk and deliver a quick return on capital. Partnerships consultant Hill says: “When 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.”

Ian Sutcliffe, chief executive of Countryside, where the “partnership” business now accounts for two-thirds of housing completions and more than half of revenue, says: “We can grow that business much more quickly as we don’t have to worry about the private sale absorption rate.And we’re that much more resilient were the market to turn.”

Likewise, Blackstone’s Lyons says that while current market conditions aren’t the reason for Blackstone’s investment, it doesn’t hurt. “Current conditions mean a greater range of product types in a development can give developers more certainty of it working. The timing is good.”

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’s 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 “social rent” levels, says private money will ultimately be unlikely to help those who most need it. “I worry that the way this funding is sourced means it’s not going to lead to housing at rent levels that are genuinely affordable,” 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 “priced out”. 

“These 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,” Murtha says.

Likewise, Housing Finance International’s Heywood worries about how these firms will be held accountable to their tenants when problems arise. “The interests of tenants aren’t always going to align with maximising shareholder value. What safeguards are there to protect them?”

However, supporters of the recent drive say such concerns are unfounded. Countryside’s Sutcliffe says: “The reason our business goes from strength to strength is because we’re really good at shaping communities, and we’ve 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’re dead in the water.”

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’s Lyons says: “Has the public sector always been the greatest landlord? Has it always been responsive? The truth is it’s a mixed picture. There’s 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.”

And Lyons also rejects the idea of an “either or” dichotomy. “The 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 – we shouldn’t be turning down anyone willing to make that investment.”

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’s poorest and most vulnerable.