Unfreezing of Local Housing Allowance signals positive news for investors

Written By: Gemma Bourne Managing Director Big Society Capital

Allowing Local Housing Allowance to rise with market rents will be crucial to attracting new investment in housing for people at risk of homelessness says Big Society Capital’s Gemma Bourne

There is a chronic shortage of housing in the UK, leading to rising levels of homelessness.

The government estimates annual investment of approximately £16.9 billion will be needed for the next 10 years to meet the predicted demand for social and affordable housing. Given that additional public funding will be limited in coming years; private investment should be an essential part of the solution.

Whilst the market is still relatively nascent, there is a wave of impact orientated capital ready to invest into social and affordable homes. And the market is growing, from virtually zero in 2011 to £5.1 billion in 2022. These investors are attracted to the long-dated sustainable income, low correlation to other real estate sectors and the ability to have real tangible impact.

In his Autumn Statement, the Chancellor announced that Local Housing Allowance (LHA) rates would be unfrozen. This is important for investors, because it provides certainty that income returns are moving with the wider macro-economic environment.

LHA based impact investment models are typically used to support people excluded from mainstream housing markets such as those at risk of homelessness and those on low incomes. It enables them to rent from the private market when Local Authority or Housing Association housing is not available.

However, freezing the rate since April 2020 has meant that it has not been able to keep pace with market rents – particularly against a backdrop of inflationary pressures. This has led to fewer and lower quality properties being available and pushed more people into homelessness and temporary accommodation. It is for this reason that the unfreezing has for many years been championed by social housing campaigners including Crisis and Joseph Rowntree Foundation.

The impact for tenants
With rents continuing to rise and outstripping levels of support, tenants have been finding less and poorer quality options available. LHA aimed to enable people to access the cheapest 30% of private properties; however, in June 2023 only 5% of private rentals were affordable to those on housing benefits. These properties also tended to be less well-insulated so come with higher heating and hot water costs at a time of a cost-of-living crisis.

This is putting more people at risk of homelessness. Research from Alma Economics found nearly 60,000 Londoners living in the private rented sector were likely to have become homeless over the next six years if the government had maintained its freeze on LHA.

The impact for investors
Investors into this market include institutional investors attracted by its potential steady returns and diversification benefits. It is also accessible to London Stock Exchange investors through listed funds such as the Schroder BSC Social Impact Trust.

All investors, including impact investors, want to see a good financial return. Part of the returns from social housing investments come in the form of rental income and LHA supports that.

However, the freezing and unfreezing of LHA rates (rates were frozen between April 2016 and March 2020, and then unfrozen and frozen again in April 2020), creates uncertainty for investors without a corresponding increase in return especially in today’s climate.

Unfreezing this rate is therefore the first step to attracting more capital to the market.

The impact for Government
The unfreezing will also free up money for the government by taking pressure off expensive services for the homeless. According to figures published by the Department for Levelling Up, Housing and Communities, councils spent £1.74 billion on temporary accommodation between April 2022-March 2023, up 9% from the previous year – and up 62% from the past five years.

What are we doing to help
At Big Society Capital, we have committed alongside our co-investors £1.4 billion to social and affordable housing.

Within that, 75% of the high-impact investments in our current portfolio are providing homes in the areas of the country where homelessness is most pronounced.

Our mission is to grow the amount of money invested in tackling social issues in the UK, through investing in funds seeking to achieve social impact. And we seek out fund managers that partner with charities and housing associations that have a deep understanding of the complex reasons why people face homelessness.

These include south-east housing association Notting Hill Genesis, which has provided care, support and shelter for people at risk of homelessness since the 1960s and is currently working with impact fund manager Resonance to manage 600 homes for people in the greatest need.

Other partners include Refuge, NACRO, St Mungo’s, Preston Road Women’s Centre and Let Us.

Looking ahead
Big Society Capital will next month publish a report into the costs and benefits of impact investment in homelessness funds. It will outline how much the government can save by working in partnership with private capital.

Unfreezing the rate will play an important role in helping the social housing market to scale and start delivering the homes the country needs – and we will be urging Government ministers to ensure certainty remains.