By Daniel Hunter
Social housing providers are being forced to seek out new sources of funding to revive their development programmes, according to a new survey conducted by BDO, the accountancy and business advisory firm.
BDO surveyed senior executives from 60 registered providers to assess their current position and how they view the future. Banks, which historically provide 89% of funding, are limiting their exposure to the sector by either sharply raising the cost of loans or reducing the period for which they will lend. Despite this, over 70% of social housing providers are seeking to raise new funding this year.
In searching to bridge this funding gap, providers told BDO that bonds are easily the most popular option for new finance. They would be the first choice of a quarter of all borrowers surveyed - far ahead of existing lenders - and are ranked the most attractive choice overall. The longer-term loan profile preferred by social housing providers, often over 30 years, also lends itself to bond financing as banks tend to cap lending periods at a decade or less. Housing Association Bonds are also popular with UK institutions, especially pension funds and insurers, where these can cover their longer term liabilities.
“It is clear from what providers are telling us that the sector faces a severe funding gap," Philip Rego, Partner and Head of BDO’s Social Housing practise commented.
"The need for an increase in social housing stock in the UK has never been greater, so it’s concerning that providers are experiencing difficulties. It’s not for everyone, but Capital markets provide a definite alternative to bank debt financing and this option should be explored by those social housing providers that require capital to fund expansion. Both bond and equity markets provide borrowers with an excellent stream of long-term funding and financial institutions with an alternative way to cover long term liabilities.”
BDO advises that there are many factors for borrowers to consider before jumping into the bond market; most obviously, the size of loan. A usual initial bond issue is likely to be for between £100m to £300m, much larger sums than most housing associations need to finance immediate development plans. The BDO survey identified that current funding needs are relatively modest, with a quarter looking to borrow over £100 million once existing facilities are exhausted and 41% looking for between £10 million to £50 million. Therefore, only larger players are likely to go to the market alone.
However, once borrowers have entered the market, they can obtain smaller additional sums, typically of £50m or more, via a tap, a procedure that allows borrowers to sell bonds from past issues. This offers an attractive route to progressively replace maturing long term bank loans with bond finance. Borrowing from banks to fund developments, then refinancing in the bond market may become a more common practise in the sector.
The impending changes to the UK Real Estate Investment Trust (REIT) regime are moving some way towards providing another stream of funding for social housing. The changes should enable smaller entities to enter the UK REIT regime at lower cost. This could enable social housing providers to put part or all of their rented housing portfolio into a UK-REIT which would then list on AIM, with the ability to raise equity instead of, or in addition, to debt to fund development, but this is still an area where further refinement is needed. Over half of respondents to the survey would be interested in looking at converting to a UK-REIT as a way to raise funds and spreading risk. This figure went up to 78% from social housing providers with more than 10,000 units.
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