A Funder’s View on the Sector

Originally published in Issue 10 of Housing Executive by Arun Poobalasingam, Head of Relationship Management and Business Development at THFC

A turbulent landscape

When I first started working with the social housing sector several years ago, I was immediately taken by this relatively unknown sector that had positively impacted the lives of millions of families and provided homes for many of our society’s most vulnerable members. The sector had, in a relatively lowkey manner, gone about raising billions of pounds in private finance in support of its mission to improve people’s lives.

The sector now appears to be entering the public consciousness more than ever before, at a time when it also happens to be facing one of its most difficult periods to date – quite possibly ever.

The challenges

Following the Grenfell tragedy, the social housing sector has maintained a continued focus on building safety. This has now been compounded by the more universal pressures of rising interest rates and inflation, which are having far-reaching impacts on both housing associations and tenants alike. The result is an increasingly difficult operating environment for the sector.

Given these growing financial challenges, intervention in the rent formula only adds further pressure, despite the sector’s full recognition of the challenges tenants are facing. The relatively sensible rent cap of 7% strikes a reasonable balance between achieving affordability for tenants and allowing HAs to sufficiently manage cost inflation.

Another challenge for the sector is the decarbonisation agenda – a critical objective with an eye-watering price tag.

Despite all the good that the social housing sector does, perhaps the reason it has entered the public consciousness recently is the tragic death of two-year-old Awaab Ishak and issues concerning damp and mould. How the sector responds to these challenges will inform wider perceptions of the sector. While we as funders can see the depth of nuance underlying these issues, we cannot ignore them.

Strong core purpose and demand

While important to acknowledge its challenges, it is also essential to highlight the many positive aspects of the social housing sector, which have made it so investable and enabled it to attract over £117bn of private finance.

The sector’s fundamentals and business models are strong, with stable income streams driven by long-term assets. Demand for affordable housing is increasing and far outstrips supply. With 1 million families currently waiting for social homes, there is no getting around the fact that the UK needs more social housing. Not just as a nice-to-have, but out of pure, downright necessity. Naturally, this long-term demand for social housing makes the sector an attractive investment.

The sector also offers a strong sense of transparency and credibility through active regulation by the Regulator, while arguably boasting the best track record when it comes to defaults. Put simply, funders have gotten their money back when they have invested in this sector.

Finally, from an ESG standpoint, you’d be hard pressed to find a more genuine form of social impact. Housing associations have been delivering social value since the very beginning, providing lifelines to millions of families who otherwise would be left behind.

The challenges outlined above will have an impact on housing associations’ financial outlook in the medium term. Metrics like net leverage, EBITDA, and cash flow will take a hit. Credit ratings may slip in the interim. But as long-term businesses with robust, 30-year business plans, housing associations remain eminently viable.

Looking ahead

The social housing sector has been quietly going about its business for many years, increasing the supply of affordable housing and providing homes for those who need them most. It will continue to do so in the coming years and decades.

On an emotional level, the sector represents an investment with a strong social purpose that helps our communities. On a more rational level, it is an investment that provides a solid return with an unrivalled track record in repayment.

As the largest aggregator in the social housing sector, THFC continues to bang the drum for investing in the sector and will continue to support it as best as we can through the difficult times ahead.