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, LSE 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 guarantees • 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 even • 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 interest • 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 inspection • Rent controls – RPI+1% then ½% plus rent restructuring • Perceived threats to housing benefit • Industry initiatives - mergers and group structures 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 contributions 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 2012/13 • Scotland £356m in 2009/10; £144.9m in 2012/13 • Wales £123.7m in 2008/9 down to £60m in 2012/13 • GB £6,367m in 2009/10 down to £1709m in 2012/13 • 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 years 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 arrangements? • Valuation issues – reliance on EUV-SH; exploit MV-ST • New FRS and fair value • On/off balance sheet exposures and diversification • Widening range of suppliers – equity? • A qualified success?