British housing associations offer lenders quite a bit of what they love – a protected sector, strong security, government support and reliable cash flows. Pre-credit crunch all of those factors translated into 10-year money with margins of around 30-40 basis points (bps), Simon Hatchman, finance director for Acis Group, tells PDI.
But those days are gone and there was a retrenchment by bank lenders post-crisis before alternative long-term capital providers began to step into the void.
Now legislative changes mean the shift in favour of alternative lenders could be reversed.
In July, Acis Group, a housing association operating in more than 12 local authority districts across Lincolnshire, Derbyshire, Nottinghamshire and South Yorkshire, signed a £30 million credit line with M&G Investments, the UK investment firm owned by global insurer Prudential. It was the first time Acis had borrowed from a non-bank lender.
The 30-year private placement was part of a larger refinancing. It also signed a £50 million, 10-year loan with Danske Bank, split between a £10 million revolver and £40 million term loan. The £80 million package was to partially refinance a larger £100 million loan the firm signed with Royal Bank of Scotland (RBS) in 2013. Half of the RBS facility has now been repaid, says Hatchman.
The property management company also has a £51.5 million separate credit line with Dexia which is fully drawn and matures in 2030. Amortisation payments kick-in later this financial year. Acis Group manages 4,500 houses on behalf of local authorities and has developed and rents out another 700 units to social housing tenants in the East Midlands. The group also builds houses under shared ownership schemes, which comprise around 300 units, as well as for immediate sale.
The business is a mixture of purely commercial and public sector activities. In 2013, Acis bought a portfolio of student accommodation which is managed on a purely commercial basis backed by the RBS facility. It also has a maintenance and repair joint venture with private construction firm Wilmott Dixon.
Acis will use the debt to help construct 400 new houses for a mix of rental, shared ownership and sale.
However, the refinancing decision wasn’t driven by the planned construction, rather it was prompted by the opportunity to reduce the security package for the group’s asset coverage from 120 percent to 105 percent. Acis ran a competitive tender for the deal and M&G and Danske emerged as the most competitive in terms of asset coverage, Hatchman says.
M&G was competitive on price too. Hatchman declines to share the precise cost of the private placement, but says the cost of 30-year capital from institutional lenders is roughly in-line with rates charged by banks for 10-year debt. And for government-related housing associations, banks make 10-year loans with interest rates of 130-170bps.
The low margins are reflective of the low risk – the regulator has never allowed a housing association to fail. But margins remain higher than pre-global financial crisis margin rates of 30-50bps, Hatchman adds.
Post-crisis regulation has pushed banks out of long-term lending where they can avoid it. And building houses for below market rents needs to be matched by low-cost, long-term capital. The retreat of the banks allowed alternative providers like M&G or insurer Legal & General, to move into the space.
With a housing shortage in the UK, vacancies are rarely an issue for housing associations as providers of below market-rate accommodation – most have long waiting lists for tenancies. Delinquency is also less of a problem than for private landlords as rent is deducted directly from housing benefit payments and channelled to the association.
But the factors that attracted banks and non-banks alike are changing.
Housing associations are tightly regulated. Rents are set by the government and, until recently, increases were guaranteed and set at 1 percent above consumer price inflation. The UK government, as part of a wider drive to cut the welfare bill, has mandated that housing associations must cut their rents by 1 percent a year for the next four years.
Housing benefit cuts mean that landlords like Acis must collect more of their income directly from tenants, exposing them to a higher risk of default. Acis is factoring in a future default rate of 5 percent, up from the current level of 1.3 percent, says Hatchman.
And while not directly targeting housing associations, but of huge relevance to their tenants is the proposed reduction in the benefits cap from £26,000 to £23,000, as well as cuts to working tax credits.
Of more immediate concern is the extension of ‘right to buy’. The scheme gave council tenants the right to purchase their rental unit at a discount of up to 30 percent. The Conservative government elected in May plans to extend the same right to housing association tenants who have rented a property for at least three years.
“There’s pressure on rental income and increased focus on home ownership as the aspirational model for all people, so core social housing is starting to be seen as the tenure of last resort and that really is leading to much more volatility within our cash flows,” says Hatchman.
Housing associations will be compensated to cover the discount with the money coming from a new rule demanding that councils sell their most valuable properties when they become vacant. The final detail of the plan will become clearer this month when a new housing bill is published.
Many housing associations have criticised the proposal as it will hit their housing stock and pose challenges to balance sheet management. They also have concerns about how and when they will be compensated.
Hatchman says for Acis Group this and the other changes immediately call the group’s long-term building plan into question. Rather than constructing a large number of units for rent, the association is now considering dedicating more of its planned 400 units for immediate sale. The rejigged mix will boost the proportion of shared ownership to 40 percent with the remaining 60 percent roughly evenly split between rental units and houses up for sale.
This, in turn, has a knock-on effect on how Acis’s finance director thinks about debt and managing the balance sheet. “So because we’re expected to deliver much more housing for sale … that’s inevitably going to lead … towards a different approach to our debt portfolio. So you would expect debt to focus more on short-term lines of five to 10 years,” says Hatchman. He anticipates that revolving facilities, rather than term debt, is another way his firm could even out cash flow volatility.
With properties sold in a relatively short period of time and cash recycled back into the balance sheet, the 30-year debt backing rented units becomes less essential.
And it doesn’t hurt that banks are showing renewed appetite for the sector either. Danske, the firm’s most recent bank lender, is one of a number of recent entrants to the sector, says Hatchman. And banks that were in retreat are returning, he adds.
Though the reforms and regulatory changes could have an impact on market dynamics, alternative lenders remain keen on housing associations.
M&G Investment’s head of social housing, Mark Davie, says: “Our view at present is that we’re still happy to invest long-dated money in this sector. The Budget changes we regard as a nuisance but not a catastrophe. The question is what impact [will they have] in demand [for capital].”
Housing associations in the UK face ups and downs as the changes bed down. But with a housing shortage and resurgent banks seeking strong, safe assets, Hatchman likely remains in a strong negotiating position. ?
by the numbers
2014 turnover £30 million
2014 net surplus £6 million
Housing units: 5,500
- 4,500 local authority stock
- 700 rental units
- 300 shared ownership units
- £30 million 30-year private placement
- £10 million 10-year Danske revolver
- £40 million 10-year Danske term loan
- £50 million RBS term loan
- £51.5 million Dexia term loan maturing in 2030
- Student accommodation
- Maintenance and repair joint-venture with Wilmott Dixon
Asset coverage ratio reduced from 120 percent to 105 percent
Interest coverage ratio covenants 110 percent and 120 percent on various credit lines
Gearing: 62 percentcapped at 70 percent under covenants
- Sector average 1-2 percent
- Current Acis Group arrears rate of 1.3 percent
- Future projected arrears of around 5 percent