RPs and Corporate lending: Louise Leaver and Ruby Giblin write for Private Debt Investor
Fri 18 Aug 2017
This article first appeared in Private Debt Investor on 31 May 2017
Deregulation, supposedly the big bang of the social housing world, could be perceived by some as opening the door to new opportunities for housing associations in the free market. Funders instead of lending to a regulated entity with a strong public service ethos, could now be seen to be lending to “corporate-lite” entities with market orientated priorities at some variance from their pre-regulation persona. With non-governmental lending to registered providers of social housing (RPs) at some £65bn, is it time to take another look at lending criteria for RPs?
The increasingly corporate nature of RPs has been evolving in this direction for some time before the deregulation debate began, with the commercial side of the business being ring-fenced but running alongside the core social housing function - no mean feat as three quarters of RPs are charitable. But what type of investment are funders of RPs looking for
There has evolved over time the G15 group of RPs (now 13 following recent merger activity with the chair of the G15 sitting on the board with the Mayor of London) with no less than 50,000 units and a net value of each RP well in excess of £1bn. Some of these entities are no longer building much traditional social housing, but are involved mostly in providing affordable housing (being 80% of the market rent, particularly lucrative in the affluent South), shared ownership, outright sales, and market lets to the private rented sector (PRS). Shared ownership, in particular, is extremely popular bearing in mind rising property prices in the residential market. They are also acting as property managers outside the social housing sector, competing with the likes of Grosvenor and Grainger. These entities have a different agenda from the smaller RPs, seeking to maximise the benefit of their construction and management expertise in the private sector where margins are high, and to use the profits for investment in their bespoke RP products, as they remain not-for profit RPs.
Funding for development programmes and working capital has historically been accessed by charging large portfolios of existing housing to secure long-term (30 year) loan facilities from the main retail banks. But increasingly RPs have turned to the public bond market and private placement initiatives as well as considering specific development funding. Typically, loans are made to the RP “mother ship”, or parent, who are increasingly on-lending, (subject to regulations) to their ring-fenced commercial subsidiaries, as this is usually a cheaper option than direct development finance. However, with the changing nature of the sector, it is likely that development finance (secured on specific projects in the process of being built) and unsecured corporate-style working capital facilities will be more widely sought.
Moody’s 2017 outlook sets out the percentage of borrowing across the sector for commercial activities. Bond funding (with investors typically from insurers and pension funds) to be used for sole social housing purposes was at 50% of the sector in 2012 falling to 30% in 2017, with the balance being spent to fund commercial market activities.
Because of their increasingly market-led activity, whereas the rating agencies once gave RPs predominantly AA ratings, there has been a steady decline as the level of risk is perceived to increase. However, with the safety net of regulation, which investors are reasonably satisfied with, despite some relaxation in process, 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 appeared that £7.5bn had been invested in new and existing stock, up 39 percent from the year before. Debt, too increased by £2.2bn over the year.
Those that take the lead in the new branding of RPs, predominantly 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, and as has been said most often by Places for People, they are looking to borrow without security on covenant strength. They appreciate that the cost of borrowing will be higher, but ultimately overall costs will be lower; they are not paying for the cost of valuations and charging, and are benefitting from speedier transactions, and importantly they are looking for greater flexibility to operate their wider business.
There are also tax benefits when 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 London & Quadrant, are seeking to expand in size to and rival commercial property companies, treading on certain aspects of their territory. L&Q purchased earlier this year a £505 million land bank from commercial property owners Gallagher Estates, 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 in excess of £2.6bn. They own 998,930 sq foot of London, creeping into the top 100 of the capital’s landowners, and have ambitious plans to build 100,000 homes in the next ten years.
Much of this value and critical mass has been created by a wave of mergers during the course of the last two years or so, led by Affinity Sutton and Circle Housing who have joined to form Clarion, and L&Q merged with East Thames. With general increases for RPs in running costs, decreases in housing benefit and the government restrictions on increasing rents in the social housing sector, financial arguments make sense for RPs to merge and cut costs. But not all RPs have the same ambition. At some point the merger market will stabilise, with some seriously significant players in the property sector emerging.
The search for cheap funding goes on, the G15 have been out in force at MIPIM looking for overseas investors - Places for People, for example, issued a bond through the Japanese Stock Exchange. Back home, Places for People, Home Group and Clarion are on the £2bn regeneration panel for Haringey amongst the bone fide house developers. Many are linking up with developers to cover all bases.
Perhaps with this change in attitude by many RPs to their role in providing housing the time has come for more corporate style lending arrangements?