Deregulation, supposedly the Big Bang of the social housing world in the UK, may be perceived by some as opening the door to new opportunities for housing associations in the free market. Instead of lending to a regulated entity with a strong public service ethos, financiers could now be lending to “corporate-lite” entities with market-oriented approaches varying from their pre-regulation persona.
With non-governmental lending to registered providers of social housing standing at some £65 billion ($81 billion; €76 billion), it might be time to take another look at lending criteria for RPs. It’s also worth asking: what type of investment are lenders to RPs looking for?
Non-bank lenders and debt funds should be aware of the benefits of the social housing market, having invested heavily in the public bond market and smaller private placements. Social housing has been producing moderate, stable yields for its long-term debt. Additionally, for pension funds in particular, the positive ethical dimension in such an investment is a bonus.
Social housing assets are ripe for these lenders, with consistent cashflows, government-backed housing benefits, strong covenants and the watchful eye of the Housing and Communities Agency regulator, as well as fixed security over assets in a rising market. Among the larger housing associations, bond/note issuances have been, in many cases, preferable to bank funding, at very competitive interest rates.
The corporate nature of RPs had been emerging for some time before the deregulation debate began. Commercial sides of businesses are being ring-fenced, while running alongside the core social housing function.
Over time, a group of larger RPs, known as the G15, has become established. Some of these entities now build little traditional social housing, involved instead mostly in providing affordable housing, shared ownership, outright sales, and market lets to the private rented sector. These entities have a different agenda from smaller RPs. They’re seeking to maximise the benefit of their construction and management expertise in the private sector, where margins are high, while using the profits for investment in their bespoke RP products as they remain not-for-profit RPs.
Moody’s 2017 outlook sets out the percentage of borrowing across the sector for commercial activities. Bond funding – with investors typically comprising insurers and pension funds – to be used exclusively for social housing purposes has fallen from 50 percent of the sector in 2012 to 30 percent in 2017. The balance is being spent to fund commercial market activities.
Funding for development programmes and working capital has historically been accessed by securing long-term (30-year) loan facilities from the main retail banks. Increasingly, however, RPs have turned to the public bond market and private placement initiatives as well as considering specific development funding.
Typically, loans are being made to the RP ‘mothership’, or parent. These are then increasingly on-lending, subject to regulations, to their ring-fenced commercial subsidiaries. This is usually a cheaper option than direct development finance.
With the changing nature of the sector, however, it is likely that secured development finance and unsecured corporate-style working capital facilities will be more widely sought.
Unlike structured finance, RPs do not grant all-asset debentures to their lenders. As they have access to large portfolios of properties that can be utilised for security, they tend to grant security over specific pools of properties that are not shared by lenders. As a result, there is generally no need for senior/mezzanine debt structures.
Whereas the rating agencies once gave RPs predominantly AA ratings, there has been a steady decline, with the level of risk perceived to have increased. With the safety net of regulation, however, which investors are reasonably satisfied with, they are still mostly rated in the A category.
Overall funding in the sector has also remained high. In the 2016 Global Accounts published by the HCA in 2016, it was revealed that £7.5 billion had been invested in new and existing stock, up 39 percent from the year before. Debt also increased by £2.2 billion over the year.
Certain RPs in the G15 – for example, London & Quadrant, Metropolitan Housing Trust and Places for People – are looking to expand the non-social housing aspects of their business. Essentially, they’re looking to borrow without security on covenant strength. They appreciate the cost of borrowing will be higher, but ultimately overall costs will be lower – they’re not paying for the cost of valuations and charging, and are benefitting from speedier transactions. Importantly, they’re looking for greater flexibility to operate their wider business.
There are also tax benefits from funding development as opposed to securing new-build units. This, on the face of it, fits the description of a corporate loan, and some RPs, such as L&Q, are seeking to expand in size to rival commercial property companies. L&Q, for example, purchased a £505 million land bank from commercial property owners Gallagher Estates earlier this year, consisting of 42,000 additional units. This takes L&Q’s total unit numbers to just over 90,000 units, giving the RP an overall value above £2.6 billion.
The search for cheaper funding goes on and the G15 have been out in force recently looking for overseas investors – Places for People, for example, issued a bond through the Japanese Stock Exchange. In the UK, Places for People, Home Group and Clarion are on the £2 billion regeneration panel for Haringey in company with bona fide house developers. Many RPs are linking up with developers to cover all bases.
Perhaps, with this change in attitude by RPs to their role in providing housing, the time has come for more corporate-style lending arrangements.
Louise Leaver and Ruby Giblin are partners in the social housing finance team at Winckworth Sherwood. Visit www.wslaw.co.uk