UK Prime Minister Keir Starmer’s government has repeatedly promised to deliver 1.5 million new homes to tackle the country’s housing crisis. The onus of development will be on the private sector, which the government is encouraging through planning reform, grants, training for the construction workforce and more.
Following the Spring Statement, the Office for Budget Responsibility (OBR) forecasted that the government would not reach that figure by 2029, as Deputy Prime Minister Angela Rayner has promised, even with the planning reforms. The head of the UK’s largest housebuilding company reflected this sentiment, saying that an industry-wide skills shortage means there are not enough workers to reach this goal.
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However, after the former administration’s lacklustre, decade-long campaign to address the housing issue in the UK, this change in attitude is still welcomed by many in the industry.
“In some ways, you have got to set unrealistic targets to kind of get anywhere near them,” Marcus Dixon, the UK head of living and residential research at global estate agency JLL, told Investment Monitor. “I think the will to build more is pretty strong across the industry.”
While foreign investment in the UK’s housing sector may be limited compared with other markets, there are signs that institutional investors are showing more interest. According to a report by the Common Wealth think tank, most built-to-rent developers are owned by foreign private equity firms.
As the UK’s housing push moves forward, what role will foreign capital have in addressing one of the most pressing issues facing the country today?
Housing supply problems
The experts Investment Monitor spoke to highlighted that, while many factors have contributed to the housing crisis, it boils down to a supply shortage.
“All of it fundamentally comes down to the fact that there has been this under supply of homes that has meant that people are generally chasing a smaller pool of properties, which has driven up values,” Dixon says.
The implications of this undersupply should not be understated. As Deputy PM Angela Rayner has pointed out, there are 150,000 children in temporary accommodation, almost 1.3 million households waiting for social housing, declining real estate purchasing power, rent increases of nearly 9%, and homelessness rates are at an all-time high.
The government hopes planning reforms will catalyse investment interest. Proposals include allowing projects on low-quality green belt land (protected areas to prevent urban sprawl); prioritising projects on the grey belt (defined by the government as “poor quality and ugly areas” on parts of the green belt); limiting the power of objectors to prevent developments; and giving councils mandatory housing targets.
Dixon highlights that planning reforms are welcome in the real estate industry as regulations have made the planning process far too slow. At the same time, there are serious questions over whether the construction sector can deliver government objectives.
“I think that the main challenge that they have is around the capacity within the sector. It is a sector that pretty much builds 200,000-ish homes a year, and we are talking about upping that to 300,000 or 370,000 a year, without very much being done to change the profile of whose building them,” Dixon says.
A battle for incentives
According to the findings of a government inquiry, the proportion of housing available for affordable or social rent in England fell from 20% in 2000 to 16% in 2023. Schemes like Right to Buy have incentivised social housing tenants to purchase their homes since the programme was introduced by Margaret Thatcher in the 1980s. Around two million homes have been sold under the scheme, depleting social housing stock that has never been replaced, exacerbating the crisis.
Dixon outlines that market conditions make it hard to address this problem.
“The most difficult properties to build are lower-value properties. There needs to be an element of gap funding, whether that be through grants or whether that be through some other body coming in. I think the challenge has been that there isn’t necessarily sufficient grant funding to deliver that stock, which is the stock that is most needed,” he outlines.
According to Savills, there was demand for around 21,700 homes in the lower mainstream submarket last year, but only 3,000 were built. On the other hand, in the upper mainstream market, where only 10,900 were needed, around 6,000 were built.
The cost of building the same house in terms of “brick and mortal and all” is not that different outside Blackpool or Surrey, “but the property in Surrey might be worth five times the amount of that property in Blackpool when it is sold”, Dixon says.
Rayner told the BBC she wants to see “the biggest wave of council housing in a generation and that is what I want to be measured on”.
The Deputy PM has recently announced further measures to increase the country’s social housing stock. Rogue landlords, those who disregard tenant rights, will now face restrictions on benefits they can claim if their properties are substandard. Rayner also announced an extra £350m ($463.2m) for affordable housing, earmarked to build 2,800 new homes and support the local authority housing fund to improve accommodation standards.
That is on top of the £500m ($661.9m) that had already been announced for affordable housing, meant to build 5,000 buildings. The entire Affordable Homes Programme is worth £11.5bn and aims to provide 130,000 new homes by 2026. The programme was launched in 2021 under the Conservative Government.
The rise of institutional investors
The strong demand for housing has lured more real estate investors, domestic, foreign and institutional, into the housing market, as real estate maintains its reputation as a stable and appreciating asset amid global economic turmoil. Despite domestic hardships accentuated by a harsh cost of living crisis, the UK’s global reputation as a stable and modern economy still attracts foreign investors.
“If we focus on what the government has done, or not, to stimulate much-needed investment then we can say that the UK has generally been considered a stable and attractive environment for foreign investors, thanks to its sound legal system, established frameworks and relatively liquid market,” Leona Ahmed, partner at law firm Taylor Wessing, tells Investment Monitor.
Kajima Partnerships, a property developer and subsidiary of the Japanese Kajima Group, has been pursuing major real estate projects in the UK. In 2023, it announced the building of Springfield Village in south-west London, expected to have 800 homes, cafes and more.
“Foreign and institutional investors are returning to the UK market, with renewed confidence and a focus on long-term impact. In particular, we have seen Japanese and Australian investors reaffirm their interest, drawn to the UK’s stable outlook and its appetite for regeneration,” Kajima Partnerships’ head of development and investment, Andrew Ludiman, tells Investment Monitor.
While this perception of the UK has held, Ahmed thinks new regulations such as the Building Safety Levy could be “perceived as a change in sentiment around how the UK attracts capital to build out some of the real estate infrastructure that we know we need”.
Given the scale of funding required, and that the government expects this to come from private capital, both foreign and domestic, Dixon also highlights the importance of facilitating processing schemes.
“Overseas capital can just as easily be invested in other countries, anywhere else across the world,” he says. “If it becomes too difficult or too complicated to build within the UK, this money will look elsewhere.”
That said, institutional investor interest is only growing.
The growth of the build-to-rent sector, which used to be considerably smaller a decade ago, reflects the impacts foreign investment has had on the UK housing market.
“We have seen this shift across to a model that, obviously, was already quite well established in places like Germany and North America, of kind of larger institutional investment into rented residential stock,” Dixon says.
While it is still a relatively small part of housing stock in the UK compared with markets like the US and Germany, “the focus is shifted across the government, favouring that sort of institutional model of investment into large-scale residential rather than those individual landlords owning properties”.
The speed with which the government wants to build homes may also push them towards these institutional investors.
Relying too much on them, however, comes with its own set of risks. For one, there are already worries that while Labour’s plan might boost stock, it will not lower prices to the extent that most people will tangibly benefit any time soon. If the government reached its 1.5 million target, prices would theoretically fall by 10%. However, any price changes would happen slowly, and even a 10% drop would not be transformational for first-time buyers.
In its report, the Common Wealth think tank also warns that the rise of institutional investors could exacerbate the housing crisis by putting further pressure on rents and limiting people’s ability to purchase their homes.
