Bridging the gap – a different approach to the social housing sector’s funding challenge

 

A sharp shortfall in state funding and bank lending has shifted the lending landscape for social housing providers. Housing charity Poplar HARCA is on the frontline of the sector’s search for new sources of finance, as CEO Steven Stride reports.

Steven StridePoplar HARCA prides itself on being an organisation that leads the way in the sector – and is prepared to be innovative if something is worth doing. “Prior to the financial crisis, we could count on securing 30-year debt from the banks with very low interest rates,” explains CEO Steven Stride. “There were also many Government grants to tap into – both for regeneration and for mainstream housing. But during the crisis, all of that virtually dried up. Some smaller housing associations now don’t even bother to seek grants from the Government.”

According to Steven, these conditions prevail today. “If there’s a hint of risk, interest rates are renegotiated, as it now costs banks more to lend. We also find that on bank debt, we have to refinance after five years. Before the crisis, bank financing used to be around 100% of our debt, but that’s down to around 50% now and going down.”

Securing the long-term financing that’s required for projects with significant scale now requires an ability to innovate and adapt to new market conditions, says Steven

“One of the things we do more of now is cross subsidies and sales, where typically we’ll enter a joint venture with a developer to regenerate our land,” he explains. “We then develop higher-density mixed-tenure housing, a significant chunk of which will be for sale.”

Adapting to change

This willingness to both adapt and evolve also led Steven to seek alternative sources of finance, looking beyond traditional lending routes. “The capital bond markets and institutional investors were both avenues that were key for us to explore,” affirms Steven.

In June 2013, Poplar HARCA signed a deal with investor M&G and private developer Wilmott Dixon to fund the development of 233 homes in Tower Hamlets for a mix of social, affordable and private rental units.

On board as part of the developer’s ‘Be:Here’ initiative – which aims to develop homes specifically for the private rental market – the project will be completed around two years faster than a normal housing development.

“If we’d just gone for simple development finance, we would typically have to build the first phase and then prove to the bank that we’d sold them all. Only then would they provide the rest of the finance,” maintains Steven. “Doing it this way means we build out straight away, delivering a regeneration bounce to one of the poorest estates in London."

Building a new business model

Steven believes this approach could set a precedent in the sector. “It’s innovative because it’s a different way to get the finance and it has a much quicker, positive impact on the community. There’s been a lot of interest in this model and I do think other housing associations will get into market rental. I expect there to be big growth in this area.”

It’s not without risk. Rental prices are linked to the retail price index (RPI), so if rents don’t keep track with this – because the market becomes over-supplied, for example – then a housing association may find its margin squeezed. It’s a carefully considered risk, but providing it applies to a small percentage of overall stock, then for many it’s one worth taking.

From bank finance to bond finance

Another innovative method Poplar HARCA used to secure financing was a bond issue, which was completed in July 2013. With Lloyds Bank as a book runner, the issue raised £140 million, generating such interest that one investor wanted to take all of the bonds. Of the money raised, £133 million was used to repay bank debt, and the rest used for development schemes and business costs.

The bond issue was a huge success for the association. “It went extremely well for us and we got a great deal, with a 4.843% all-in rate,” states Steven.

The key driver behind the deal was ensuring the housing association could keep making enough money to fund growth and development. “We wanted to ensure we could meet the aspirations we’d put in our business plan, and a bond issue was the best way of achieving this. It’s given us real certainty for the future,” he said.

A brighter financial future

Steven remains optimistic about the future of the sector, despite the financial challenges of recent years. “There is light on the horizon. Banks today seem to be showing more interest and there’s been talk of longer-term deals and better interest rates returning,” he said.

“Institutional investors can be like knights in shining armour, but as with most things there’s still an element of risk. With rents linked to the RPI there could be a possible mismatch, but they’re definitely a new source of finance for the sector.”

In terms of how he’d like the new funding environment to support social housing associations, Steven has a wish list, including a range of banking products to suit the different needs of different associations, and better consistency and understanding of the sector.

While his emphasis is on creating the sources of finance, he also believes housing associations have a role to play in making themselves attractive to the market.

“We’re a regulated sector, so investors can trust in this – especially when they see credit ratings agencies are happy. But it’s important to do more. When we first went to the bond market, we had a 12-13% operating surplus. We’ve been working hard to get that to 25% this year and aim to reach around 30%.

“This, along with a solid business plan and a key selling point like a strong local focus, makes us confident that the next time we go to the market, we’ll be seen as an even better investment,” concludes Steven.

With little certainty on future Government funding beyond next year’s election, becoming more confident and adept at securing alternative sources of finance may just be the key to navigating the new funding environment.

Poplar HARCA’s local commitment and success

  • Set up in 1998 as a stock transfer organisation
  • Leading a multi-million pound reshaping programme for the Poplar area with local authority Tower Hamlets
  • Residents’ satisfaction level of 83%, compared with an average of around 60-70% in inner London
  • 82% of residents would recommend Poplar HARCA to their friends and family
  • 96% of staff have high satisfaction in working for Poplar HARCA

Every pound invested in grass-roots community projects generates £12 for the local community1

Footnotes

1. Goldsmith’s University of London study

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