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Jack Burnham, Octopus Investments
Jack Burnham, Octopus Investments

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Investing in affordable housing: an opportunity to level up the UK

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Jack Burnham, Head of Affordable Housing, Octopus Investments, writes that the UK government’s levelling-up agenda aims to tackle regional inequalities, in fact, housing is referenced more than 150 times in their whitepaper, standing tall as a critical piece of the puzzle. 

The reasons why are clear. The UK faces a stark reality: it has regional disparities and currently ranks among the most unequal developed countries. Poorer households spend a significantly higher proportion of their income on housing than wealthier households, and this gap has grown wider in recent years. Figures from the Institute for Fiscal Studies show that in 1968, the poorest quarter of the population spent 9 per cent of their income on housing; in 2021, it was 21 per cent.

The government has a crucial role to play but it cannot tackle this challenge alone. Private investment is needed across the UK to raise living standards and wellbeing nationwide.

The government has called explicitly on Local Government Pension Scheme (LGPS) funds to invest 5 per cent of their assets in projects supporting the UK. 

While institutional capital can deliver a meaningful impact across the UK, investors should approach the challenge carefully, fulfilling their fiduciary duty obligations, as well as commitments to social and environmental change.

The answer in meeting those objectives may lie in supporting affordable housing sector.

Why affordable housing as part of an ESG strategy

Housing is more than a roof over one’s head; it is the foundation of thriving communities and vibrant economies. 

High-quality housing has a clear and direct link to living standards, and the affordable housing sector presents an opportunity for an outsized ESG impact.

First comes from economic impact. Affordable housing can attract and retain talent by allowing skilled workers and young professionals to move to areas with job opportunities. This fosters economic growth and innovation. When residents spend less on housing, they have more disposable income to support local businesses, further boosting the economy. Further, providing housing security helps improve their job prospects and educational attainment.

Second, stable and secure housing is essential for physical and mental health, improving overall well-being and reducing social issues. Affordable housing helps anchor communities, fostering social cohesion and preventing displacement. It also leads to better educational outcomes for children, breaking the cycle of disadvantage.

Next, affordable housing in less prosperous areas can attract investment and businesses, reducing the dominance of major cities. Investments in affordable housing can revitalise disadvantaged areas, improving infrastructure and public services. Giving people agency through affordable homeownership or secure rentals fosters community participation and development.

Finally affordable housing has a positive environmental impact. By being more energy-efficient, affordable housing can also have a positive environmental impact in reducing the carbon footprint. Sustainable design and construction practices, such as incorporating energy-efficient appliances, solar panels, and recycled building materials, become more accessible with affordable housing. This translates to lower energy bills for residents and a significant reduction in greenhouse gas emissions overall. Energy-efficient features in affordable housing directly address fuel poverty, a significant issue where residents struggle to afford adequate heating.

These impacts can be measured and reported, allowing investors to fulfil their obligations and commitment to investing in UK living standards.

Affordable housing as a driver of attractive returns

The potential of developing and improving the quality of affordable homes to improve living standards in the UK is matched by the potential for an attractive return profile for investors. 

The affordable housing sector is built on targeting potential stable returns. It aims to deliver dependable cash flows and low volatility, regardless of the economic climate.

In fact, public sector funding can bolster rental incomes, ensuring a steady stream of revenue. As an added advantage, inflation-linked rents provide a hedge against economic fluctuations, promising growth alongside stability.

But this is not to say the affordable housing sector is without challenges. It is a sensitive area for private investment, and allocation to, and management of, affordable housing should consider all stakeholders via a sustainable funding model. A model that ensures collaborative and long-term models between housing associations, local authorities and investors.

Building a portfolio of affordable homes that fund managers and institutional investors can be truly proud of, that are energy-efficient homes and affordable from the outset and throughout their life should be the goal.

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