How to use public grant to bring in private capital
Public-private partnerships will be vital to fully utilise government funding to deliver the social and affordable homes needed in the country, writes James Agar of Pension Insurance Corporation
Public-private partnerships will be vital to fully utilise government funding to deliver the social and affordable homes needed in the country, writes James Agar of Pension Insurance Corporation (sponsored) #UKhousingIn association with:
James Agar is head of real estate origination at Pension Insurance Corporation (PIC), a specialist insurer of UK defined benefit pension schemes with an approximately £50bn portfolio.
He has over 20 years of financial services, capital markets and investment management experience.
The £39bn allocated for new social and affordable housing over the next 10 years (2026-2036) during the Spending Review in the summer was a historic settlement that gave institutional investors more clarity about future funding and was widely welcomed by the housing sector.
Both public and private funding will be required to deliver the social housing we need. In addition to the £39bn of public funding, JLL, a global commercial real estate and investment company, estimates that £100bn of private capital is needed to deliver 500,000 new affordable homes over 10 years.
Securing this level of private investment will require sufficient public grant to be extended to plug the ‘viability gap’ for individual projects to unlock housing delivery. A range of factors influence this, including inflation, wage and construction costs, new building safety regulations and the current interest rate environment.
As a result, it is often financially unfeasible for investors to commit capital – even those that are willing to take a very long-term, risk-adjusted view – without public subsidy.
Variable grant levels
Institutional investors, such as Pension Insurance Corporation (PIC), want to invest more in social housing. However, many in the sector believe that current grant levels are too low to make schemes viable.
Grant levels vary based on rent levels, tenures, general costs and design specifications. Habiko is PIC’s joint venture partnership with placemaker Muse and government agency Homes England to deliver low-carbon, low-energy housing at scale. It utilises enhanced upfront public investment to deliver lower running costs and emissions over a property’s lifetime.
In future, policymakers may want to consider reflecting some of the energy bill savings that low-carbon properties deliver through the rents tenants pay. This could allow more tenants to enjoy lower energy bills by boosting investment in low-carbon homes.
To ensure that the record public funding settlement results in the housing boost the country needs, the housing sector must work with Homes England to get the grant levels for individual projects right to unlock more development.
The level of public subsidy required will differ by project and funding may need to be pieced together from a variety of sources alongside Homes England, such as local authorities and other public bodies to meet the necessary level.
To boost development, viability appraisals should be transparent and reflect the current market reality with updated build costs, finance rates and revenue assumptions, as well as an appropriate value for money assessment.
Homes England will provide appropriate oversight to ensure that public funds are deployed in an effective way, as it has done for many years. In June, Homes England appointed Simon Century, formerly of financial services provider Legal & General, as its new chief investment officer. His investment experience means he will be aware of these challenges.
In addition, the establishment of a new National Housing Bank is very welcome, and the government estimates it could “leverage in £53bn of additional private investment”.
With a range of financial tools at its disposal and greater freedoms to invest, the bank could be vital in extending government guarantees for projects that will help put shovels in the ground. This enhanced credit quality delivered by the National Housing Bank guarantees programme is likely to drive down the cost of borrowing and enhance institutional investor appetite to deploy long-term, patient capital into all tenures of housing.
Together, we can deliver the social and affordable homes this country needs at the speed and scale required to meet challenging government delivery targets. Creating effective public-private partnerships that are built on targeted and well-designed public grants is needed to help turbocharge housing delivery.
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