What do the Affordable Homes Programme 21-26 strategic partnership grant allocations tell us?

At the start of September, Homes England announced that it had awarded £5.2bn of grant to 31 strategic partnerships to complete nearly 90,000 affordable homes by 2028. This works out at an average grant rate of approximately £57,600 per home. Somewhat unsurprisingly, the average grant rate of all successful bids fell closely in line with the total amount of grant that Homes England announced would be available under its 2021-2026 Affordable Homes Programme – this was £7.39bn to deliver 130,000 homes, equating to approximately £56,800 grant per home.

We can work out from government press releases that the total programme comprises nearly 50% on home ownership tenures (in line with Homes England’s original guidance), around 14% on social rent, and with the 36% balance on mostly affordable rent. The £57,600 programme average grant per unit therefore comprises a mix of quite different underlying tenure grant rates. Average grant rates of somewhere around £45,000-55,000 for ownership tenures and £65,000-75,000 for combined rented tenures would make sense (with social rent alone being considerably higher).

The step up in the grant per unit is substantial versus previous “Wave 1” strategic partnerships, which were awarded on average £44,000 per home. The £14,000 increase in grant rate could be explained by at least three cost factors in appraisals:

1. Modern Methods of Construction (MMC) cost premium - the Homes England programme requires 25% MMC delivery, although this should in theory be offset by savings elsewhere in the appraisal.
2. Decarbonisation premium - delivering homes to higher EPC ratings to future proof new stock.
3. Land/build costs inflation over recent years.

In committing to build nearly 90,000 affordable homes by 2028 at a fixed average grant rate of £57,600, the delivery risk being taken on by registered providers is substantial. Registered providers will need to keep a very close eye on appraisal risk factors which could undermine programme viability over coming years, not least build cost inflation and interest rates, both of which have recently increased, which will translate into a higher grant rate required in appraisals. Accurate modelling and robust stress testing of the programme in a financial planning context will be critical.

Homes England strategic partnership grant allocations

Grant can be thought of as the balancing item in a scheme appraisal – the amount of subsidy required for an affordable housing development to “stack up”, usually meaning it meets a minimum net present value (NPV) or internal rate of return (IRR) hurdle rate. Both not-for-profit housing associations and for-profit registered providers perform a similar appraisal analysis and target similar ungeared levels of investment return of c5-6%.

Given this, it is interesting to note the very wide distribution of grant per units awarded to the 31 strategic partnerships, including for the first time four for-profit strategic partners (Sage, Vistry, Legal and General, and McCarthy Stone) themselves also exhibiting a wide distribution of grant rates:

The specific tenure mixes of each bid are unknown and this factor may explain some of the outliers, with the extreme cases being c£25,000 away from the mean in each direction. Metropolitan Thames Valley and Sage were each awarded £42,000 per unit each which could be explained by having a very high weighting (possibly 100%) of shared ownership in their bid. At the other end of the scale, Hyde were awarded £83,000 per unit which seems only explainable by having very high social rent weighting in the bid.

However, it would seem reasonable to conclude that many of the bids are likely to be fairly comparable, given Homes England guidance that around 50% should be on ownership tenures, and likely low weighting of social rent in most cases. Grouping the grant per unit awards into £5,000 increments reveals that nearly 60% of strategic partnerships bid between £50,000-65,000 per unit.  Interestingly, regional differences in costs and rents translate into relatively modest differences in the average grant per unit between regions, with a spread of only £10,000 grant per unit between housing associations in the north of England and housing associations in the south east, as seen in the table below.

Greater London Authority (GLA) strategic partnership grant allocations

The GLA’s strategic partnership grant allocations released at around the same time were even more revealing (see table below). The average grant per unit awarded across 53 strategic partnerships, which included 24 housing associations and two for-profit registered providers, with the rest local authorities, was approximately £118,000. This can be largely explained by the 57% programme allocation to social rent delivery in London (which requires the most grant), with the balance on home ownership tenures (shared ownership and rent to buy).

Most housing association bids were clustered around £100,000-125,000 blended grant per unit, with a balanced weighting between social rent and ownership tenures in their bids. ReSI was awarded £45,000 per unit for a 100% affordable home ownership bid, and nearly half of the local authorities were successful at grant rates of £150,000-200,000 per unit for mostly 100% social rent bids. It seems quite likely that most housing associations were also bidding in the region of £150,000-200,000 grant per unit for social rent.

The grant rates that Homes England and GLA have awarded to strategic partners therefore reveal some interesting and useful information for registered providers who are looking to benchmark their appraisal methodology against regional and national housing associations and the competing for-profits.