Could LGPS investors help unlock the Northern Powerhouse?

Contrary to popular belief, the largest reduction in social housing in the country has actually been in the northern regions, driven by a significant reduction in local authority owned stock. Between 2000 – 2023, the overall stock of social housing in Northern regions fell by 14%. This compares with a 2% increase in the rest of England[1].

The North West and Yorkshire and the Humber have some of the highest unmet affordable housing demand, with 199,000 and 149,600 households on the waiting list respectively. In the North East there are 76,000 households on the list; notably, the region saw a 51% increase in 2023, significantly outpacing the national average of 6%[2].

The scale of the problem is clear. Northern regions are estimated to need 18,000 new affordable homes annually, but only 11,000 p.a. are built on average[3]. This shortfall is compounded by historically low overall housing construction in these regions. Average annual completions in the North are still below pre-global financial crisis levels.

Looking ahead, the outlook for new affordable housing construction appears challenging without new sources of investment. Q1 2024 saw a 15% drop in housing starts compared to the same period in 2023[4]. Traditional housing associations (HAs), typically the main source of new supply, have high levels of debt and now face higher debt costs given the new interest rate environment.

Additionally, they are also seeing increasing levels of maintenance costs to bring existing housings up to standard as environmental standards become more stringent and materials prices inflate. These HAs intend to reduce new construction by 15% and divert capital to debt financing and maintenance[5].

As we flagged recently in our LGPS Intelligence article, we believe this presents an opportunity for long-term investors looking to generate inflation-linked cashflows while delivering social impact. For-profit registered providers, backed by institutions and pension funds with long-term investment horizons, are well positioned to support the consistent construction levels needed to meet the scale of the challenge in Northern regions.

However, we believe the opportunity could be particularly suited to Local Government Pension Scheme (LGPS) funds looking to contribute significantly to local economic development, where mechanisms can be put in place to ensure that their capital is targeted at specific regions to meet their place-based investment remits.

The concept of ‘levelling up’ may have faded from the government's parlance, but the underlying principles remain relevant. Cities like Manchester and Birmingham have seen robust economic growth over the past decades, but as London’s experience shows, economic growth without corresponding housing development leads to imbalances. Investing in affordable housing now is not just about addressing immediate needs; it is also about providing the foundations that can help support long-term economic growth.

Institutional investors can drive change by funding much needed new, high-quality affordable homes in these cities and surrounding towns. In our view, this approach addresses social needs while seeking to securing stable returns for pension holders and supporting regional economic growth.

Over the long term, in addition to aiming to deliver a clear social impact, we believe the affordable housing sector can target total returns of 6 – 6.5% p.a. (excluding any yield shift). This is comparable to other UK living sectors and meaningfully higher than our long-term ‘all property’ expectations of 5.0%.

Assumptions, opinions and estimates are provided for illustrative purposes only. There is no guarantee that any forecasts made will come to pass.

[1] MHCLG as at Mar 2024

[2] MHCLG as at Jun 2024

[3] MHCLG as at Mar 2024

[4] ONS Housebuilding UK as at Apr 2024

[5] Regulator of Social Housing, Sector Risk Profile as at Nov 2023