Securing investment in a volatile market – how can housing associations get ready?

By Eugenia Korobova, Senior Debt Origination Manager, PIC

Yet at the same time, demand grows apace. In England alone, 145,000 social or affordable homes need to be built each year between now and 2031, according to research by the National Housing Federation and Crisis.

It’s no wonder that housing associations are struggling to bridge the gap between the challenging funding environment and the dire – and growing – need for new, high-quality, sustainable and, most importantly, affordable homes.

These challenges aren’t going away any time soon, but there are options available to help housing associations address the supply/demand gap through long-term, lower-risk, flexible borrowing.

Long-term, low-risk funding is still available

In the absence of central government support, many are being proactive in bridging that gap.

Between April 2021 and March 2022, housing associations raised £8.8 billion of capital with institutional investors ranging from bond issuances through to private placements. Some was raised through short-term lending by banks, but much of it was secured through long-term institutional investors, such as pension insurers.

Securing long-term, lower-risk funding from insurers, such as the Pension Insurance Corporation (PIC), provides several benefits. Because our appetite for risk is low and our timeframe for success is measured in decades, not the next quarter, the best way for us to match our responsibility to paying the pensions of policyholders from British Steel, House of Fraser and Marks & Spencer – to name a few of the schemes we have insured – is to invest in the socially valuable infrastructure the UK needs.

This makes us long-term partners to the social housing sector. As of year-end 2021, we have invested more than £3.2billion across the UK.  Many of these investments were repeat transactions with housing associations that have returned to PIC for additional funds, or an amendment, and who value the partnership with an organisation that understands the challenges and opportunities facing the sector over the long term.

Our long-term view means we can work with partners to offer flexible financing structures in line with need. For example, few lenders offer housing associations the option to defer drawdown of lending for several years to match specific spending requirements; this means they can access funds when business plans dictate the requirement, avoiding the need to pay interest from day one for a loan sitting untouched on a housing association’s balance sheet. The price of lending is set at the start of this agreement, allowing a certainty of funding cost that can be mapped across to any new development, or retrofit goals, over the next five years.

This leads to a lower cost of borrowing and more funding being available for developing new – or retrofitting existing – housing stock, not higher repayments. That’s better for our housing association partners, better for the many families on waiting lists and it helps us deliver on our responsibilities to paying the pensions of the schemes we insure.

Securing long-term funding

Despite the challenging financial environment, there are three steps that housing associations can take to ready themselves to be funded at more competitive rates of borrowing.

First, ensure business plans are stress-tested. Lenders will expect borrowers to have modelled and tested future scenarios against financial plans: how would price increases in construction materials impact development costs over the next five years? What impact would an uplift in tenant arrears have if the cost of living crisis is sustained? Having business plans up to date, stress-tested and with appropriate mitigation strategies will reassure investors that your plans are robust and future-proof.

“Having business plans up to date, stress-tested and with appropriate mitigation strategies will reassure investors that your plans are robust and future-proof”

Second, investors will expect high standards of governance before lending is considered. Securing a good score in the regulator’s governance rating (ideally G1) should be the objective. Ahead of the regulator’s rating assessment, ensure you meet requirements: a diverse board with a strong balance of skills, experience and knowledge of the sector is important, with clear lines of accountability and proper oversight. We point borrowers to the UK Governance Code and the National Audit Office, while the National Housing Federation has a good set of criteria.

Finally, housing associations looking to borrow more than £150m might consider getting an external credit rating, although this is not essential. Debt above this amount will likely be shared among investors, for which the capital markets are best suited. However, we do not require an external credit rating to make investments and can apply our own internal credit models. It is possible that ratings transition from ‘A’ range to ‘BBB’ range as finances come under sustained pressure, which would lead to higher funding costs to reflect increased risk.

Housing associations face one of the most challenging funding environments in memory, with no signs that challenges on either supply or demand sides will abate soon. The lower-cost lending environment that many became accustomed to during the last decade may be gone, but by taking steps now to ready themselves to borrow, housing associations can make progress against the delivery of new homes and retrofit of existing properties.

Despite the ongoing turbulence, long-term investors are still open for business, and will work with you to address your funding challenges in a way that works for you.

This article was first published on socialhousing.co.uk here -  Social Housing - Comment - Securing investment in a volatile market – how can HAs get ready? (login required).