Not only is the sector plagued by a chronic undersupply of fit-for-purpose homes, the number of vulnerable people that rely on supported housing is forecast to increase dramatically over the coming years.
Although this poses a compelling opportunity for investors, this subset of the property sector is particularly nuanced. There are multiple stakeholders involved in the delivery of supported housing, including central government, housing associations, care providers and landlords.
For investors interested in providing a solution to this worsening problem, a total addressable market of about £25bn is up for grabs. In addition, the UK Regulator of Social Housing has identified several issues with the current system, which provides an opportunity to be part of the solution.
Surging demand
In supported housing, accommodation is provided alongside support, supervision or care to aid vulnerable groups to live as independently as possible in the community avoiding the need for expensive, inappropriate accommodation such as hospital beds, care homes or bed and breakfasts. The supported housing sector can be divided into three broad person-specific categories; specialised supported housing (SSH), extra care, and the homeless.
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SSH seeks to provide support to vulnerable adults with learning difficulties, Down's syndrome or autism, in addition to mental health issues. Extra care housing is targeted at older adults who require an element of care to live independently but do not yet need to live in a care home or nursing home. Lastly, homeless accommodation is required for people with an unexpected and immediate housing need, including victims of domestic abuse and asylum seekers.
Alarmingly, several of these vulnerable groups are forecast to grow considerably, putting further strain on the already stretched supported housing system in the UK. The rising cost of living is set to meaningfully exacerbate the homelessness crisis playing out in Britain, while the National Audit Office has predicted a 29% increase in adults aged 18 to 64 requiring care by 2038 - with a 49% rise in demand from adults with learning disabilities - and 57% more over 65s requiring care compared to 2018. Given these projections, the Personal Social Services Research Unit predicts a 30% growth in the demand for specialist supported housing in England by 2030.
To meet this surge in demand, it is estimated about £25bn worth of investment will be required across the SSH, extra care, and homeless categories, in order to create 22,000, 103,247, and 52,610 additional housing units, respectively.
Rethink required
While private capital will be pivotal in plugging this gap, the Regulator of Social Housing has highlighted numerous deficiencies with the existing approach that must first be addressed. One of the key concerns it has raised with the existing supporting housing model is the misalignment between lease lengths and the lengths of care contract terms.
According to the regulator, this exposes registered providers to a potentially significant void or rental shortfall risk. For this reason, the regulator has found a series of housing associations locked into these leases to be non-compliant in the areas of governance and financial viability.
Additionally, there is currently a lack of transparency around how the majority of developers set rent figures for housing associations. Recent stakeholder scrutiny has highlighted how this can result in housebuilders generating staggering profits at the expense of housing associations. In some cases, the premium to private market rents surpasses 100%. While it is of course important for developers to earn a profit in order to incentivise the greater supply of high-quality homes, they should not be able to excessively profit from taxpayer-funded housing associations.
Sustainable solution
In order to enhance the current supported housing model, the sector must replicate the approach utilised by other real estate asset classes. Tailored term leases have become the norm across privately owned real estate. Rather than locking occupants into long-term leases, the quality of the assets naturally ensures the longevity of tenancies.
What's required is a new model that aligns lease lengths and care contracts, working with regulatory compliant housing associations that are well capitalised and have appropriate governance and risk management practices in place. Rents should be set in a transparent and justified manner.
Investors in any new model would gain exposure to an asset class that is underpinned by the traditionally resilient UK housing market, while benefiting from multi-year leases to attractive covenants, fundamentally underpinned by the UK government. Additionally, the enhanced yield and weighted average unexpired lease term (WAULT) compared to the private rented sector makes supported housing even more compelling.
By expanding the supply of affordable supported housing in a fair way, investors can have a measurable social impact, gain exposure to assets with inflation linked income and deliver value for the UK taxpayer.
David Blakeborough is managing director at Atrato Group