The disconnect between developers and affordable housing RPs needs addressing, fast

It is no secret that the real estate sector is facing some challenging market conditions right now, and developers are having to contend with headwinds on multiple fronts. One test developers are increasingly facing is the difficulty in selling Section 106 (S106) restricted affordable housing stock.

This may surprise some, given the chronic undersupply of – and increasing demand for – affordable homes. Indeed, Shelter, the National Housing Federation and Crisis are all reporting an annual affordable housing shortfall of more than 50,000 homes. So why, given the clear lack of supply, are developers experiencing difficulties in selling their affordable housing stock?

The answer is, as you would imagine, multifaceted. In the past, the process has been prescriptive and sometimes poorly coordinated, lacking sufficient dialogue with purchasers or proper consideration of the end user. Late-stage engagement with the affordable housing market is also a contributing factor, as is the reliance on traditional affordable housing purchasers who are not actively seeking to acquire more stock. Unfortunately, this has led to fatigue, disconnect and disengagement from investors, and thinning interest from traditional Registered Providers (RPs).

From an investor’s perspective, there are several reasons for this reduction in appetite. First, in some instances there is a need for additional investment once stock is acquired to ensure it meets current safety requirements in terms of fire regulations, ventilation and sustainability – consequently reducing available funds for new developments. There has also been a shift away from RPs acquiring ‘ready-made’ S106 stock, towards buying land and tailoring schemes to their own requirements and preferences from the outset. Although this route is sometimes susceptible to planning delays, it does allow RPs to access and utilise grant funding from applicable funding programmes, something they cannot do when acquiring S106 stock.

These factors combined mean developers can no longer rely on late-stage engagement with a small handful of RPs to dispose of their S016 affordable housing stock. By counting on selling to their traditional shortlist, developers are missing vital opportunities to engage with new purchasers. A more robust marketing strategy targeting a broader pool of investors – both private capital and other housing associations – will help developers cast their net wider and drive improved results.

A considered approach

A more thoughtful process needs to be run – one that enables feedback from the market to ensure requirements are being properly met and guarantees S106 stock is providing what the market wants and needs. By optimising their processes and tailoring their approach, developers can ensure their S106 stock is creating maximum value add and attracting the broadest possible range of potential purchasers.

Tailored advice at an early stage will aid this and ensure that the end product is not only attractive to investors, but also to tenants and residents. Developers should also engage with potential purchasers from the S106 stage, not much later, as has conventionally been the approach. Engaging early will help prevent values from being eroded and the scheme ending up undeliverable, which would then require variations to planning, further putting off potential investors.                                                                                                           

An expanding sector

While the number of non-profit RPs currently operating in the sector still greatly outweighs the number of for-profit players, the sector is expanding and the ratio continues to shift year on year in favour of for-profit RPs. A week rarely goes by without one member of Knight Frank’s Affordable Housing team speaking to a new for-profit investor keen to enter the market.

The ever-growing list of buyers on our books means more competition in the market, which of course is a good thing for developers. Many of the newest for-profit RPs will not be household names and are likely relatively unknown to many of our clients – another reason why developers shouldn’t rely on late-stage engagement with their traditional handful of known RPs.

There are so many opportunities for developers beyond the traditional investors and deal structures considered in the past. So, while market conditions may feel a little tough right now, developers who embrace a new way of selling their S106 stock will find that the market is, in fact, alive with possibilities, and that more players than ever are keen to enter this exciting and growing space.