However, this is all chicken feed compared with demand. In the financial year to March 2016 about 17,500 new social homes were constructed compared with 4.5m people who have qualified for social housing, but are currently sitting on the waiting list. During the 1970s, social housing construction made up nearly half of all new houses built, but this has been cut back drastically since then, and the general level of social housing stock has been significantly reduced as a result of the right-to-buy legislation introduced in the 1980s.
The reason for such a big cutback in new construction is simple - money, or to be more precise, a lack of money. This is the result of the inexorable squeeze on public spending that has seen successive governments pushing housing associations away from public subsidy towards private finance.
The lack of funding has also encouraged some, but by no means all, associations to maximise rental income by putting more emphasis on providing so-called affordable rental properties, with rents set at 80 per cent of the market norm, rather than pure social housing where rents are typically half the market rate or less. This is inevitable in many ways because the increase in rental income makes it viable to build housing where the rents are sometimes just 30 per cent of the market rate, which on an income basis wouldn't justify the construction costs.
Another way of raising finance has led some housing associations to explore means of recycling capital to fund new construction by selling off existing housing stock. At the moment, there is only one real estate investment company that focuses on buying existing social housing stock, and which does not build its own homes and doesn't employ forward funding: Civitas Social Housing REIT (CSH. The Reit has only been around since November last year but has already spent £151m of the £350m raised at flotation on building a portfolio of social housing. The balance is expected to be put to work within 12 months.
In a typical transaction, properties are bought from housing associations, thus giving the latter fresh funding to build more homes. Civitas will take on any debt secured on each portfolio, but this still leaves the housing association with sufficient capital to form a deposit on lending for the next building project. In addition, housing associations will earn a management fee. For Civitas, this means that earnings are very clean of additional expenses, and the pledge on flotation was to deliver a 5 per cent yield based on the 100p flotation price.
Demand for social housing has been seriously underestimated over the years, and the need for more facilities even stretches into the NHS, where last January alone 2m bed days were lost as beds were occupied by people who weren't ill. Cost savings will also come from placing vulnerable people is specialist accommodation rather than having them packed into temporary accommodation that generally costs a lot more. There is also a need for specialist housing to accommodate people in need of special care for medical reasons.
Purchasing social housing from associations helps to pull property through the system, whereby the process generates funding for new building. And at some point, as the sector becomes less fragmented, it seems likely that institutional funds will start to take an interest, much in the same way that funds are now starting to percolate into the private rental sector.
For Civitas and any other company looking to invest in social housing, there are considerable attractions. Rental income is linked to inflation, or inflation plus 1 per cent, while the whole sector is regulated by the Homes and Communities Agency. Quality of earnings is also very high, and the social housing sector has never suffered a loss as the result of a registered provider's default.
