Private Finance for Social Housing

Background paper
Looking Back, Looking Forward:
Finance for Social Housing
(from Guarantee to Guarantee)
Christine Whitehead and Peter Williams
LSE London Private Finance Seminar
15 September 2014,
Initial Objectives
• To reduce public sector borrowing
• To gain greater control over subsidy streams by up-front
grant rather than open ended revenue subsidy
• To recycle past subsidy and capital gains
• To improve incentives to greater efficiency
• To expand the role of private finance – both equity and
debt – in the provision of housing of all types
• Fundamentally to lever in private funds from smaller and
smaller amounts of subsidy to enable additional housing
to be provided at lower cost to the public purse.
Pre 1988
• 1974 Housing and Planning Act
• Private initiatives (HAs; individuals) to fund against
existing housing association assets
• Growing interest in government/local authority
• National Home Loans Corporation 1985
• North Housing Association initiative using HAG 1986
• Government challenge fund
• 1985 Act introducing the possibility of LSVTs
• The Housing Finance Corporation set up
• Increasing interest from financial institutions
The Housing Act 1988
• Cash limited capital grants covering 75% of
projected costs ( expected to decline to 50%
• Development risks to lie with HAs
• Private finance for residual
• Lenders to have first charge – but no guarantee
• Rents to be set by HA in order to at least break
• Housing benefit to continue on rents up to
market levels
• Improved LSVT framework
Initial Developments
• Immediate interest quite limited
• Lack of understanding of the nature of HAs
• Only small number of interested banks and even fewer
building societies
• By 1991, £2bn mixed funding; £1bn LSVT but margins
high at over 200 bp above LIBOR
• Government sponsored initiatives: Housing Corporation
Private Finance Unit; THFC; Housing Market Package etc
• Market developments: range of products; bond market
• By 1996, £10bn from a full range of lenders; average
grant rate 47%; margins 70 bp falling to under 50bp
The Changing Environment
• Declining/volatile government funding
• Regulatory regime – initial co-location of
investment and regulation/move to light
touch regulation and separation of
• Rent controls – RPI+1% then ½% plus
rent restructuring
• Perceived threats to housing benefit
• Industry initiatives - mergers and group
2008 and immediately thereafter
• Separation of regulation and investment –and
bringing together English Partnerships and
Investment element of HC into HCA
• Initial impact of credit crunch limited BUT by
2009 more significant
• Lenders less willing to lend; renegotiation of
existing commitments; rapidly rising margins
back to 200bp +?
• Extra collateral for stand alone swaps
• Negative impact of LCHO unsold stock/reduced
capacity to cross subsidise/ reductions in S106
At the time of the 2009 seminar
• Structural decline in numbers of lenders: few
knowledgeable institutions with appetite
• HAs seen as more risky; lenders acting more
unilaterally; fundamental shortage of funds
• But government were looking to use affordable
housing to kick start developments: increasing
grant rates and targeting stalled sites
• Growing interest in raising bond finance
• Potential for equity investment
• Need to cut back public expenditure as soon as
some sign of improvement
The Coalition’s approach
• Regulation brought within HCA
• Affordable rents regime – 170,000 contracted by
HCA to 2015
• Welfare reform including ‘bedroom tax’ - first
time social rent commitment limited
• Shifting away from grant to guarantees
• Affordable Housing Guarantee Scheme
organised through subsidiary of THFC
• Build to rent fund for private renting
Scale of Lending 2008/9 – 2012/13
• England 2008/9 £5,887m; down to £1,491m in
• Scotland £356m in 2009/10; £144.9m in
• Wales £123.7m in 2008/9 down to £60m in
• GB £6,367m in 2009/10 down to £1709m in
• So major contraction of market and withdrawal
of lenders
Current Borrowing Facilities
£72.7 bn, 77% in form of bank loans
Around £60bn is currently drawn down
Cash held in sector around £4.2bn
Capital market funding accounted for over 60%
of new funding in latest quarter
• 48 providers make use of free standing
derivatives - some £9bn
• Total debt is expected to increase but
refinancing requirements limited over next 2
Private finance – a successful story?
• HAs raised £70 bn (£20 bn for LSVTs)
• Terms and conditions improved
consistently for twenty years but massive
changes since 2008
• Well organised adjustments in the face of
individual HA problems – only a tiny
number of insolvencies and minimal losses
• Remains a fundamentally low risk product
even though over 50% of HA revenue
comes from DWP
Private finance –a successful story?
• Still over-reliance on debt providers?
• Bonds have been the answer over last few
years – but will this continue long term?
• Moody’s – 75 investors/£1.7bn
• Rise of private placements & retail bonds
• HA capital base/reserves increasing but
partly the low interest rate environment govt wants to recycle more effectively?
• Costs likely to be higher in the future.
Private finance –a successful story?
• Belatedly reworking moratorium
• Valuation issues – reliance on EUV-SH;
exploit MV-ST
• New FRS and fair value
• On/off balance sheet exposures and
• Widening range of suppliers – equity?
• A qualified success?