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Does a brighter future for housebuilding lie ahead?

Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.

With a new Labour government now in place, there are hopes that tackling the decades-long crisis in housebuilding will be firmly back on the agenda.

In the King’s Speech on Wednesday, the prime minister Keir Starmer confirmed a key pledge to build 1.5million homes over the next parliamentary period. This will be supported by updating the National Policy Planning Framework, prioritising the development of used land and speeding up the process of approval to develop urban brownfield sites.

While these are ambitious plans, they have been welcomed as a positive development for housebuilding activity in the UK, which could potentially go a considerable way to alleviating some of the cost pressures and the increasingly tight supply.

The background

The volume of available social housing has fallen steadily over the past few decades, due to the failure of successive governments to meet new home building targets. This, combined with soaring house prices, has left more than a million people on the waiting list for social housing.

Despite government targets of 300,000 new homes being built every year, in fact since 1991, there has been an average net loss of 19,000 homes from social housing stock as a result of selloffs and demolition overtaking the number of new homes being built.

Of the target of 300,000 new homes a year nearly half – 145,000 – need to be affordable homes in order to meet demand. Yet the lack of supply saw a record 109,000 households in England living in temporary accommodation last year. The graph below highlights this social housing stock deficit.

Net Social Housing Supply

Net Social Housing Supply

Source: The Department for Levelling Up, Housing & Communities, June 2024

At the same time, house building has shifted to the private sector. Since 1990, developers have been required by law to allocate 25% of new builds to affordable housing. But over this time construction has fallen sharply.

Developers typically have to provide a range of affordable homes as a condition of getting planning permission. These are then sold to housing associations. If housing associations aren't buying, this puts developers in a difficult position. Selling the affordable homes is important for cash flow and many developers won't even begin developing a site until they have a housing association on board. This is because the risk of not selling a notable proportion of the new homes is considered too great, especially at a time when higher interest rates have affected sales.

However, if developers are not developing properties then the affordable homes do not get built either and the housing shortfall becomes still worse. to make matters worse, over the past 30 years or so real house prices have climbed dramatically across much of the UK, exacerbating affordability issues. This has led housing associations to warn that building new homes is becoming financially impossible, worsening the downturn in the property supply.

The challenges of decarbonisation

The cost of decarbonisation has also added further financial pressures to the sector, with landlords required to upgrade their properties to an EPC standard of at least ‘C’ by 2030. The challenges of sourcing the materials and labour have intensified and it is estimated that the total cost of decarbonising the sector is around £36 billion.

Meanwhile, government grants have been declining drastically. Funding also tends to be on a short-term basis which doesn’t help housing associations plan for a longer-term decarbonisation strategy. The current Social Housing Decarbonisation fund has provisioned for £1.4 billion of funds towards energy saving measures, with an additional £1.1 billion in matched funding from social landlords bringing the total investment up to £2.5 billion. This, however, only covers a small portion of the total estimated cost of £36 billion and capital markets will likely play a role in bridging this funding gap. According to the Regulator of Social Housing (RSH), associations are planning to agree £47 billion of new debt over the next few years, including refinancing, increasing the sector’s debt facilities to £12 9billion by 2026/27.

Consequences

The biggest consequence of the challenges described above, has been the reduction in the development pipeline. HAs have cut their forecasts for building over the next five years by 64,000 homes. This has already started taking place as the housing starts in the fourth quarter of 2023 were half the 10-year average. Southern Housing, for example, has stopped all new development for 2024 and 2025, while a few social landlords have now expressed their concern over the financial viability of building for the next couple of years, widening the gap between affordable housing needs and supply.

Our holdings

We are exposed to the largest HAs, which have the capacity, due to their scale, to build more homes and alleviate the problem of homelessness and declining affordability. Across our holdings, the total number of homes managed is around 660,000 homes. To put that into context, there are four million social homes in the UK, therefore the names we support hold more than 15% of the social homes stock.

Even though HAs have scaled back their development pipeline over the next couple of years, their plans for the next decade remain ambitious and their contribution to the housing market supply is important. Our holdings aim to deliver more than 60,000 homes in the next decade, most of which will be towards affordable tenures.

Our holdings spend more than 30% of their revenues on maintenance, which is also expected to increase further, while on average 75% of their stock already meets the EPC criteria, compared to an industry average of 60%. They are also on track for meeting the 100% target by 2030. Data collection for carbon emissions purposes, although still in the preliminary phase, seems to have taken a priority in their agenda and we should expect to see further developments in the area.

We have also seen positive developments in terms of reporting in the sector. Uniform reporting, which has recently been adopted by HAs, will lead to better decision making and efficient resource allocation. Also, increased regulation and oversight by the Social Housing Regulator and the Housing Ombudsman will help landlords improve their services to tenants and ultimately their lives.

Even though financial metrics have deteriorated in the past couple of years due to all the factors described above, these seem to be currently stabilising. In general, we like the HA business model, as it is underpinned by levels of government support and a steady and secure rental income stream. This makes them more insulated than others from economic storms.

We believe that supporting the sector is crucial, as the benefits it provides to society are of great importance, especially at a point in time where the cost-of-living crisis and affordability are having a toll on people’s lives.

Understand common financial words and terms See our glossary
KEY RISKS

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.

The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

The Funds managed by the Sustainable Future Team: 

Are expected to conform to our social and environmental criteria. May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund. Hold Bonds. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay. May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. May, under certain circumstances, invest in derivatives, but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead. The use of derivative contracts may help us to control Fund volatility in both up and down markets by hedging against the general market. The use of derivative instruments that may result in higher cash levels. Cash may be deposited with several credit counterparties (e.g. international banks) or in short-dated bonds. A credit risk arises should one or more of these counterparties be unable to return the deposited cash.  Outside of normal conditions, may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. May be exposed to Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails. Do not guarantee a level of income.

The risks detailed above are reflective of the full range of Funds managed by the Sustainable Future Team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.

DISCLAIMER

This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.

This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.

Nancy Kondelidou
Nancy Kondelidou Nancy joined Liontrust in September 2021 on the Sustainable Investment Fixed Income team. Prior to this, she worked for a year in a fixed income data related role. Nancy holds the IMC certificate and CFA Level II.

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