Jump to content
House Price Crash Forum
Sign in to follow this  
Fancypants

Just When You Thought It Was Safe To Go Into Social Housing

Recommended Posts

Social housing: Opening doors

Housing associations are now a multibillion pound sector willing to open their doors to new investors

Karen Day, Financial Director, 26 Apr 2007

The face of the social housing sector today is barely recognisable to that of just a few years ago. From humble, often philanthropic beginnings, housing associations have grown to form a multibillion pound sector that has become increasingly adept at getting around the constraints of public funding to raise much needed finance, make a profit and fulfil a social need.

The 1,500 registered social landlords in England manage two million homes, 7% of the country’s housing stock. As a sector, it’s valued at £63bn and the latest global accounts (2004/05) show it to be in rude health. Turnover is up over £500m to £8.3bn and associations are sitting on a pre-tax surplus of £444m. Yet, up until the late 1980s the sector was 100% government subsidised. Today its borrowing stands at £35bn and rises by around £3bn a year to fund growth and housing development.

As quasi-public private bodies, associations have been limited in the ways they can borrow. Managing social assets means equity finance is a door firmly closed. Over the years, the social landlords have realised the strength of their assets and have become more sophisticated in finding ways of raising private cash. “Landlords have become much better at negotiating with banks and getting the margins down,” says Derek Joseph, director at Tribal Treasury Services. “They are getting much more financially active and have worked to reduce costs through bond issues and by setting up borrowing clubs.”

Merger mania

That said, the real turning point for registered social landlords has come through the recent mergers. Over the past three years associations have been in a period of intense consolidation leading to the creation of mega housing groups. Genesis, Home Group and Affinity Sutton now manage around 45,000 homes each across the country. Now, a third of the sector is responsible for 95% of its activity. These groups are looking for bigger deals and this has helped to create a real buzz from investors.

It was a merger 18 months ago that created what will be the sector’s largest financing deal to date, breaking the billion pound ceiling. Circle Anglia’s £1.3bn deal, which is due to be completed within three months, also breaks the mould by using a combination of bank loans and capital markets. Circle Anglia is keen to develop affordable homes. It plans to build 2,000 a year by 2009, selling some for shared ownership to sustain its growth. But, crucially, it wants 40% of these to be developed without any government funding, hence its large-scale refinancing.

The deal is made up of £900m of bank debt from lenders including Lloyds TSB, Barclays, HBOS, Nationwide and Royal Bank of Scotland. The remaining £400m will be raised in the capital markets through bonds and floating rate notes. The refinancing deal is expected to save £500,000 a year as its margins are much more advantageous.

“We chose this structure because we wanted access to different types of funding and investors,” says Nathan Dunton, Circle’s group treasury manager. “The floating rate notes are shorter term and allow us to fit in with a five-year development programme. We’re always being pressed to do more with less and this allows us to utilise our capacity efficiently.”

Howard Webb, director at Sector Group, says the size of some of the newly merged housing groups and the capacity they have to borrow has led to interest from new investors. There are also concerns that with many looking for deals above £200m, the small group of bank lenders will quickly reach their name limits. So associations are casting their eyes to the capital markets.

“There is a feeling that housing associations will have to tap the bond market,” Webb says. “But they may have to be prepared to pay higher margins to do it: the current pricing looks higher than the banking market.”

Bond issues are not uncommon, though, as with Circle Anglia, Places for People, Metropolitan and London and Quadrant Group have all previously dabbled. Webb says there are discussions to push the borrowing boundaries further, particularly with unsecured issues. There are talks around using the medium-term note market, with only the few well-rated associations being given access. There is also the possibility of using the corporate paper market for short-term funds for up to one year. The question is, says Webb, whether investors would be willing to part with their cash on an unsecured basis. But he maintains that the banking sector may also extend the amount it loans to housing associations to meet demand.

Reit move

The larger groups are also part of the country’s first social housing real estate investment trust. Reits were given the go ahead in the 2006 Budget and several commercial property groups have since converted to Reit status. The social housing Reit is a consortium of 16 associations and the Joseph Rowntree Foundation. It’s attractive to the sector because it’s a tax efficient investment vehicle for property and fits well because a quarter of its assets must be held in income yielding properties. According to Derek Joseph, who has been advising the consortium, it plans to sell mostly shared-ownership properties to the Reit as any revenue raised from grant-funded homes would have to be recycled straight away. The associations will sell the properties at a level of their projected rental income plus the unsold potential staircasing income from shared ownership. The associations will get a lump sum straight away, but as they retain ownership, they will also realise the uplift in capital value over time.

The Reit will be listed on the London Stock Exchange, with institutional and private investors financing it. However, despite the preparations being in place for a July launch, it’s not all plain sailing. There is some confusion over the tax status of shared ownership properties. Currently, associations pay tax on shared ownership sales and the Treasury is sticking to its guns, which would effectively negate the Reit. Joseph says there are ongoing discussions to try and solve the issues, but with the Treasury keen to safeguard its tax income there may have to be a solution found using grant-funded properties only.

The sector has also been trying its hand at making more effective use of housing benefit, by turning welfare into bricks and mortar. The Local Space Housing Association, set up in partnership with Newham Council, is using a lease swap system to buy homes that are serviced through the rental income from housing benefit.

Newham has leased 450 homes valued at £50m to Local Space for 125 years. The association has leased the homes back and arranged a £200m loan with Royal Bank of Canada against the lease. It then aims to buy around 1,000 homes in the borough to house the homeless. The mortgages on these are serviced through its rental income. Bob Young, chief executive at Local Space says the association is making much better use of housing benefit and up to £50m a year in London alone could go to creating more affordable housing. “Now that we are able to capture the housing benefit flow and convert it into social housing, it would be a scandal to continue to pour such huge sums of public money into short-term private sector leasing,” he says.

For the social housing sector, the private finance initiative route has been slow to take off. Its long lead times and potential for delays have led many associations to opt for other routes of funding, but there have been some notable successes. London and Quadrant has used PFI alongside refinancing and bond issues as part of a portfolio. Housing 21 has used PFI to fill a niche in the market for care homes and is using the initiative to grow its business with local authorities. The association says that the care sector is set to grow and local authorities need non-statutory partners “with the credibility to bring together a range of funding streams”.

Innovation is not a word synonymous with social housing providers, but the sector has come a long way in a short time. The size of its financing, the new ways it is willing to use its assets to increase its funding capacity and its ability to provide more housing show that it’s no longer tied to government apron strings.

I have a couple of very reliable inside sources in some London HAs. Their books are simply shocking (but whose aren't these days?)... I have a suspicion that these doomed "social enterprises" (PFI in microcosm) will eventually have to be taken back into public ownership, at great expense to the taxpayer.

Share this post


Link to post
Share on other sites

I worked as a consultant to a HA, helping them to develop a cross-subsidy finance model to sustain their ambitious growth targets. The people at the top didn’t have a clue about what was going on in the ‘New Developments’ department which was made up of crooks on the take. None – and I mean none – of the schemes that they had me look at stacked up.

Before I left, they were, in my opinion, looking at losses running into the 10s of £m. Added to this, the whole industry is based on the assumption that people will always want shared ownership – general needs rental barely produces a surplus – so when the market turn the will be standing there with their dicks in the wind.

Honestly, what a shocking state of affairs. I blame Maggie, we should never have sold off the social housing stock. What a travesty!

Share this post


Link to post
Share on other sites
I worked as a consultant to a HA, helping them to develop a cross-subsidy finance model to sustain their ambitious growth targets. The people at the top didn’t have a clue about what was going on in the ‘New Developments’ department which was made up of crooks on the take. None – and I mean none – of the schemes that they had me look at stacked up.

Before I left, they were, in my opinion, looking at losses running into the 10s of £m. Added to this, the whole industry is based on the assumption that people will always want shared ownership – general needs rental barely produces a surplus – so when the market turn the will be standing there with their dicks in the wind.

Honestly, what a shocking state of affairs. I blame Maggie, we should never have sold off the social housing stock. What a travesty!

thanks for the observations... sadly, the whole industry is also based on the assumption that house prices always go up (there again, which industry isn't!) - so much so, that one of the latest wheezes they employ to try and fill the gap left by the withdrawal of government subsidy is property flipping. Ouch.

I have it on very good authority that one of the major London HAs is running monthly deficits into the millions - replicated across the board, this is very worrying.

Similarly, we know that the take-up for the new open market homebuy and shared ownership schemes is frankly, pitiful. Crunch time will come soonest for these organisations, I feel.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 356 The Prime Minister stated that there were three Brexit options available to the UK:

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.