The social housing investment market
Published June 2022
For housing associations looking to access finance, the first half of 2022 has been a world away from the funding environment the same time last year.
New issuance was flowing thick and fast in the low-rate landscape of 2021, but the picture has changed significantly since then. The invasion of Ukraine, soaring inflation and rising interest rates have all given borrowers pause for thought.
However, the need for cash has not gone away, as investment in stock takes priority while the need for new affordable homes persists. As such, they will need to navigate volatile markets to access funding. Doing so has been quite straightforward for most until now, but how have things changed?
Private finance has been a feature of the HA funding landscape for several years now and it has become increasingly important since its introduction in the late 1980s.
Analysis of Regulator of Social Housing (RSH) data shows that total debt facilities in the sector have increased every year since 2013/14. Total debt facilities, for instance, rose from £71.8bn in 2013/14 to £118.7bn in the year to March 2022.
- 2013/14 total debt facilities = £71.8bn
- 2014/15 total debt facilities = £75.9bn
- 2015/16 total debt facilities = £80.1bn
- 2016/17 total debt facilities = £83.6bn
- 2017/18 total debt facilities = £89.1bn
- 2018/19 total debt facilities = £97.4bn
- 2019/20 total debt facilities = £103bn
- 2020/21 total debt facilities = £113bn
This figure is set to rise over the coming years given that social landlords now have to fund building safety remediation on top of new development. With this in mind, the sector’s relationship with lenders and investors has never been more important.
So, what are the challenges facing borrowers and how can the sector improve its relationships with lenders?
New HAs going to market
In the last few years, the sector has seen more housing associations issuing own-name bonds to raise finance. Primarily this has been the country’s largest landlords, who through mergers have grown substantially in size, who have the capacity and financial knowhow to issue bonds.
However, in recent times HA bonds have come from increasingly small associations, a notable example being Hexagon Housing Association. The 4,500-home London HA issued a £250m sustainability bond in April 2022, demonstrating the appetite for investment from HAs of all sizes.
Jigsaw homes is another example of a new borrower coming to market this year. The 35,000-home landlord issued a £360m bond to support its aim of building 4,000 social and affordable rent homes in the next five years.
Paul Chisnell, Executive Director of Finance, says: “This was our debut bond issue. We have raised debt via private placements and aggregators such as THFC in the past, but for the quantum we wanted we thought it best to do our own bond this time.
“It was a very new process for us but we had a series of advisors on board to help us along the way.”
The bond was nearly three times oversubscribed, reflecting the enduring interest in the sector. But that is not to say that investors are not cautious when it comes to the social housing sector.
As Paul notes: “Part of our investor presentation was about building safety and decarbonisation and the investors were keen to hear more on that. We were able to provide a lot of data on that which was well received.”
The popularity of HAs in the investment market is well-known. As Kirsty Garrett, Director, Lloyds Bank Corporate Markets explains, the sector comprises predominantly A-rated, secured, long dated issuance, which is not offered by many other corporate sectors – except some utilities.
“Therefore, new issues tend to be attractive to pension funds and insurance companies looking for low-risk assets to match their long-term liabilities, particularly when the broader credit market is widening and more cyclical sectors are suffering” she adds.
On top of this, Kirsty says the social housing Sustainability Reporting Standard (SRS) has given the sector a “distinct advantage” over other sectors and Lloyds provided £2.4bn in new ESG financing to the sector.
The SRS was created, in part, in response to investors coming with different questionnaires and asking different things of HAs, according to Will Stevenson, Deputy Treasurer and Relationship Manager at THFC.
There’s no doubt the SRS is timely as investors have become exponentially more ESG savvy in the last few years.
“We are now seeing different investors having different focusses within the ESG area – some focus on diversity and inclusion whilst others focus on scope emissions,” Will notes.
Investors becoming more discerning
Despite the myriad of pressures distorting the economic landscape, social housing remains a solid investment not least due to its strong credentials when it comes to Environmental, Social and Governance (ESG) factors.
Of course, a housing association’s core purpose of providing affordable housing for those means it comfortably satisfies the ‘S’ in ESG. But as ESG moves into the mainstream investors will be expecting more details across the E, S and the G.
Anthony Marriott, Director of Treasury and Corporate Finance at Peabody, says this is already happening to some extent.
The G15 landlord issued a £350m bond under its sustainable finance framework in April, in which 37 investors were involved. Peabody is an experienced borrower, having secured numerous bonds, private placements and loans in the past. But Anthony Marriott has noticed a change in the way investors are engaging in today’s market.
He says: “The questions from investors are now more detailed and people are asking questions on ESG, for example, about Scope Two and Three emissions and what we are doing to tackle them.”
Scope Two emissions relate to indirect emissions from the energy purchased by an organisation while Scope Three are those emissions produced in an organisation’s value chain.
This is one example of where investors are drilling down into the detail where they previously may not have. This is something housing association’s need to be mindful of when approaching investors in future as questioning will inevitably become more focused as ESG becomes more mainstream.
Kirsty Garrett also highlights this improved scrutiny on emissions. She says: “Although investors are naturally interested in financial performance, they are increasingly placing equal importance on the ESG performance of an organisation.
“Therefore, budgeted decarbonisation spend, including how this will be spread out over the 30 year plan, and availability of Scope Three carbon emissions data are also key. Finally, inflation pressures on delivering development pipeline and open market sales performance are crucial.”
Anthony Marriott suggests the sector’s relationship with investors is strong, especially for those larger HAs with multiple issuances under their belt. But he says that there is always room for improvement and Peabody is actively trying to improve in this area.
He notes that Peabody is currently only doing six-month reporting and that the group is seeking to move to quarterly reporting. He adds: “We are a FTSE-250-style organisations and we need to adopt that mentality when talking to investors.”
Kirsty Garrett agrees that continuous communication with investors is important as it supports their ongoing credit monitoring. She suggests that all HAs with outstanding bonds commit to offering and annual update to investors as best practice, as this also supports them ahead of any future issuance they are intending to do.
What the future holds
In many ways, the volatility in today’s market has cemented social housing’s position as a low-risk investment. While the cost of borrowing in general will rise there is no indication that appetite will not remain widespread. And as ESG reporting in the sector becomes more sophisticated this appetite will no doubt grow.
What is clear is that with mounting financial pressures, borrowers will need to demonstrate clearly how they plan to navigate them.
As Kirsty Garrett explains: “There are many areas of focus, but business plan assumptions, especially around inflation and interest rates, and how associations are helping tenants with rising costs of living and expectations are most likely closer to the top of the list. It is also worth noting that the next rent-rate rise period is from September 2022.”
When it comes to ESG, the social housing sector has clearly done well to adopt this agenda early on, setting it apart from others. However, the mood music suggests more and more sectors will improve their ESG storytelling, which reinforces the need for HAs to promote their own credentials.
Consensus among investors, housing associations and credit ratings agencies is that the sector will need to borrow substantial amounts in the coming years to meet the various financial pressures it faces. S&P has predicted that, between the HAs it rates, there will be a need to borrow more than £21bn in the next two financial years. Likewise, Moody’s has estimated that English HAs will need to spend £20bn over the next decade on building safety and decarbonisation.
The need for investment in social housing is clear, so getting the pitch to investors right will be crucial for HAs going forward.