Agenda item

Dr Stanimira Milcheva (Associate Professor in Real Estate and Infrastructure Finance, University College London)


1.    The Chair welcomed Dr Stanimira Milcheva to the committee and asked her to introduce herself and to provide an outline of the main responsibilities of her post along with her main research interests.


2.    Dr Stanimira Milcheva, Associate Professor in Real Estate and Infrastructure Finance, University College London – As an Associate Professor in Real Estate and Infrastructure Finance at the University College London (UCL), Dr Milcheva’s most recent research encompassed various aspects of affordable housing, primarily from an institutional point of view. Her research also involved investigative work on how institutional investors approached affordable housing and real estate and their role on prices and the real estate market overall. Dr Milcheva combined a finance angle with an urban economics perspective to investigate the role of spatial linkages, linkages of assets across space and time, for prices and market dynamics. She had an established track record in this area and was well known for her contributions in the intersection of spatial econometrics and asset pricing.


3.    Dr Milcheva had published her work in a number of high-esteemed journals in finance, urban economics, real estate and economics, such as the Journal of Corporate Finance, Journal of Banking and Finance, Journal of Macroeconomics, Regional Science and Urban Economics, Journal of Real Estate Finance and Economics and the Journal of Housing Economics. She had presented her research and been invited as a panel member at numerous prestigious conferences and symposiums in the field of real estate. Dr Milcheva had been awarded various prizes for her research output, including Best Paper at the Asian Real Estate Society by the Royal Institution of Chartered Surveyors, best research output for 'Thinking out the Box' by the Homer Hoyt Institute, best research output by Cushman and Wakefield, and best research output by the University of Reading Research Endowment Trust Fund.


4.    Q – What is affordable housing?


5.    Dr Milcheva said that affordable housing varied depending on different income groups, as what was deemed affordable for one, may not have been affordable for another. Affordable housing also varied in terms of quality requirements as low quality housing was more affordable than good quality housing which meant that many people had to compromise on the standard of their living conditions. Affordable housing also varied by location, meaning that people were moving outside of less affordable areas (London) and commuting further to work. Dr Milcheva’s research identified that different segments of the affordable housing market needed a tailored approach dependent on the area in which the affordable housing infrastructure was built. However, a significant factor that was highlighted in Dr Michela’s research was that affordable housing was built in the wrong areas.


6.    UCL ran two seminars on the study of affordable housing which were attended by a number of stakeholders from local authorities, housing associations, institutional investors and pension funds. A majority of those present said that affordable housing was linked to market rent, however, the other proportion felt that affordable housing should reflect local income levels. Within the current housing model there were two different tenures, one was social which was related to income and the other was affordable, which related to market price.


7.    With regard to the number of affordable housing completions by Tenure in England, Dr Milcheva explained that the data presented had been extracted from the Ministry of Housing, Communities & Local Government (MHCLG) and that the evidence suggested a strong decline in social rent; this was predominantly due to a 50% reduction in capital funding for the development of new social housing announced in 2010. As social rent started to decline, the government’s scheme of affordable housing started to rise.


8.    In relation to the statistics on the number of Affordable Housing projects started by Kent Local Authorities since 2015, the data showed that very few Local Authorities had funded new affordable housing units.


9.    In terms of housing affordability in Kent compared to Croydon, the statistics identified that affordability in existing dwellings compared to new build stock had risen. In 2002 affordability of housing started at 4.5x the average income (Swale being the most affordable area) with Sevenoaks starting at 7x the average income (the least affordable area in Kent). Croydon in comparison to Kent’s affordability margin was relatively similar starting at 5.5x the average income. From 2002 to 2018 the affordability margin had increased considerably with those living in Swale needing to earn 7.7x more than their income and those in Sevenoaks needing to earn nearly 13x more than the average income to break into the housing market. In 2018, households within Croydon needed to generate 10x their average income to afford market prices which made Croydon a more affordable place to live compared to Sevenoaks. This was also reflected in the new build statistics with Tunbridge Wells reaching an unaffordability rate of x16 the average income whereas Croydon sat at 11x the average income. Dr Milcheva concluded that from the data, it was evident that some of the local authorities in Kent were more unaffordable than Croydon and the earlier evidence of ‘housing starts’ by local authorities would suggest that there was a clear need to build more social and affordable housing. Dr Milcheva noted that the evidence suggested that through the increased construction of affordable housing, this would reduce average house prices and therefore would make new builds a more affordable market for first time buyers to break into.


10. Q – The current Government definition for affordable housing is not fit for purpose as it is currently based on market rent rather than income, what is your stance on this and what would you recommend to government?


11. Dr Milcheva expressed her view on the need for more social rent and for this to be issued based on income or personal circumstance when allocating suitable housing. Over the years social rent dwellings were replaced with the governments initiative on affordable housing which was based on market price opposed to income. She noted that different tenures targeted different housing needs and household segments based on household earnings. The government and local authorities needed to focus on long-term provision of affordable housing by providing housing for rent, which was  a tenure that would stay on the books for housing associations and local authorities, and encourage the provision of tenures linked to income in addition to existing products linked to market rents or prices.


12. Q – In East Kent, affordability is relatively cheaper, however using the category of affordable related rent in West Kent could amount to substantial discount to the rented value of the property, so much so that it becomes unaffordable for the provider to build, what are your views on this?


13. Dr Milcheva said that the grant rate for social tenure was a percentage of the price to build and was much lower than the tenures which were market orientated. From the developer’s point of view, they considered social rent to be less beneficial. The alternative, preferred option would be for developers to build several different tenures and enter into joint ventures. Cross-subsidy builds were the preferred models adopted by housing associations.


14. How do demographics play a part in affordable housing?


15. Dr Milcheva said that when making the decision of where to build social and affordable housing, adopting a very localised approach – i.e. looking at local authority or even more granular – was essential. It was important to do a feasibility analysis, analysing existing demographics and socio-economic data in the local area. It was also important to take into account factors that would influence market value or the attractiveness of an area such as amenities (i.e. train station, school etc.) and these would all need to be taken into account when determining the best housing tenure mix.


16. Is there a lot of variance within the housing market in Germany in terms of what is available and affordable?


17. Dr Milcheva informed Members that within the UK, on average, it was cheaper to have a mortgage than it was to rent. There were  a number of reasons for this. One of them was due to the regulatory framework as tenants within the UK did not have the same protection rights as those within other European countries or even the United States. Furthermore, the quality of private housing stock was low compared to public rental or ownership housing. All these factors would make buying the most attractive option for people within the UK, however, more and more people have been forced into rental tenures due to price inflation of property and therefore have no other option other than rental accommodation. In Germany there was a very different institutional framework with strong renter protection (and rent control) which made rentable accommodation more appealing and more affordable for tenants in comparison to buying a property, in spite of academic research evidencing that it was not a feasible alternative. The quality of rentable accommodation was also better in Germany and due to the protection for tenants, there was often greater certainty in being able to stay in one place, whereas in the UK, those renting properties do not have the same protection rights and could face no-fault evictions. Germany also had a higher level of job mobility as a higher percentage of people moved across the country to accommodate their working conditions and so renting was considered to be a better option for this setting. In terms of buying, the fact that most mortgages in the UK had variable mortgage rates and transaction costs which were much lower than those in Germany, made the market more liquid, i.e. buying and selling happened more often. In Germany, the option to buy may have been less attractive for households anticipating a move, as mortgages mostly offered fixed rates with high prepayment penalties.



18. Q – What can Kent County Council do to alleviate housing unaffordability?


19. Dr Milcheva expressed the view that Local Authorities had good expertise “on the ground” which would allow them to identify where to build affordable housing. Unaffordability varied largely even in small areas, so there was a need to analyse at every granular level where the need for housing was. She also felt that land needed to be released for affordable housing. There needed to be less constraints on housing supply such as planning permission, so this would include increasing the density of affordable housing along with introducing tenures that would alleviate unaffordability in the long run (rental accommodation). And finally, through securing finance for new developments and taking a more proactive approach in engaging with real estate institutional investors and registered providers in order to deliver housing at scale.


20. Q – How can Kent County Council finance affordable housing developments and achieve scale?


21. Dr Milcheva said that this could be achieved through the use of the Public Works Loan Board (PWLB) and/or institutional investors such as pension funds or insurance companies who could provide cheap and long-term borrowing in the form of loans. Another way to finance affordable housing was through joint ventures with registered providers (examples of this can be seen with Brighton and Hyde) and institutional investors. There was also the option of using the Kent County Council pension fund to invest in affordable housing indirectly by investing in a private Registered Provider with a mandate to invest in affordable housing. From a research entitled “Preferences of Institutional Investors in Commercial


22. Real Estate” together with D. Cvijanovic and A. van de Minne, it was shown that different types and sizes of institutional investors behaved differently on the real estate markets and had different preferences. In a follow up piece of research, the authors showed that holding periods and prices varied based on the size of investor. Therefore, when Kent County Council and its Local Authorities make the decision to engage with institutional investors (different from the traditional housebuilders that have dominated the market in the UK), they should be mindful that they do not all behave in the same way and were not all looking for the same thing. Kent County Council should be mindful to differentiate among the investors and their incentives. 


23. Q – From an academic point of view, what is the effect of the borrowing cap being removed?


24. Dr Milcheva informed Members that the cap was only lifted in 2019 and that there was not enough data to look at the trend. Furthermore, housing developers were not willing to invest at a time when house prices were falling.


25. In terms of the funding options available, equity funds would operate differently from a pension or insurance company. In general, an equity fund would be looking to flip an asset quickly, whereas a pension fund would be looking to invest over a longer period. The latter would be looking for stable cash flow and hence would be willing to accept a lower rate of return.


26. Q – The USA are looking to expand into the British market, but how will that benefit the British market in America?


27. Dr Milcheva advised that Britain may be more cautious and would pull back capital if anything was to happen in America. Since the financial crisis, banks were more heavily regulated as a majority of European countries were dependent on loans from banks to build their economy. However, due to this, there was a decline in borrowing provided by banks for construction purposes and instead, loans were being provided by new lenders, i.e. institutional investors sourcing money from the capital markets, mostly adopting a fund structure.


28. Q – Are companies such as Facebook and Google going into banking?


29. Dr Milcheva said that it was quite common practice in China to see large corporations providing loans as they are not under the same regulatory restraints as banks and could invest their money in different ways. It was important that Kent County Council approached large institutional investors with a long-term view on housing investment to ensure more flexibility and less constraints in order to provide high quality affordable housing.


30. Q – Do the dynamics change when local authorities own a lot of land?


31. Dr Milcheva informed Members that most house builders adopted a speculative approach to development, i.e. built properties to sell, whereas some institutional investors sought to rent properties and would often work alongside housing associations to develop a process and have in-house expertise in construction and development.


32. Q – In Kent Thanet has the lowest house prices and the greatest demand for housing. If Kent were to enter into funding with a major investor they would want to build in an area where the house prices were higher to make it a feasible investment, compared to Thanet where the cost of building would outweigh their return on investment as house prices were lower. What are your views on this?


33. Dr Milcheva explained that this is what social tenure rent was there for – it was not always feasible but it was needed. Affordable rent instead, which was  linked to market prices and rents, targeted people like herself who could not enter the priority housing list for social housing as she did not fall within the category of people who would qualify for priority residency, but could apply to other housing schemes – i.e. shared ownership. Those people who were identified as being most in need would require a different approach – i.e. social rent. Dr Milcheva said that there needed to be a mixture of tenures provided. For example, in Dartford, statistics showed that social rent would be the tenure that was most in demand. However, building the sufficient amount of social units to house all people on the waiting list may not have been a viable option to the private sector (housebuilder or investor) as a 100%% social rent tenure alone was not feasible. In this case, there would be the need for the local authorities to intervene in the process and co-ordinate the supply of social housing. The way it had been done was by using the cross-subsidy model where private sale would be used to fund social rent. However, if the need for social rent in one local authority was much larger, but the need for affordable tenures was less in the same local authority, then that local authority would need to work alongside other local authorities or Kent County Council to address the problem. Overall, left to market forces, it was likely that where social housing was most needed, it may not be built.

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