Social housing: Opening doors

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.