The 2010 Comprehensive Spending Review included a 60% cut in grant funding for social housing. That kind of cut doesn’t come without some changes for the sector.
Some of this change has been a good thing. The sector’s reputation – fair or otherwise – for being bloated and inefficient is now being re-engineered. In its place is a shift towards greater efficiency, leveraging balance sheets to raise capital and engaging directly in open-market activity to cross-subsidise affordable housing delivery.
For example, a recent JLL survey of registered providers suggested that 48% are now delivering “for sale” homes and 35% have created some form of build-to-rent capacity.
Now, I wouldn’t want to exaggerate these improvements. There are some big strides still to take for many of the sector’s more conservative organisations, particularly among the smaller and medium-sized registered providers. However, it is worth listing some of the highlights to get a better understanding of what has become a long-term shift in the way affordable housing is funded:
● First, with the implicit guarantee of government backing in case of default, the sector enjoys a low cost of borrowing. As a result, capital raised through bond issuances rose from £500m in 2007 to more than £4bn in 2014 and JLL expects 2015 volumes to continue at a similar level.
● Second, direct debt is also attractive, supporting a huge expansion of this market. Changes that could loosen some remaining elements of conservative valuation methodology for transfer organisations may yet provide further borrowing capacity before the end of the year.
● Third, the transition towards 80% of market rent (at most) and the resulting impact on the housing benefit bill (now £24bn pa), has not been without its detractors, but has increased the revenue that can be generated from affordable housing in most locations, if not yet leveraging more borrowing.
● Finally, the selling or letting of open-market housing generates revenue that can be used to cross-subsidise affordable housing development. In London, this meant that 4,100 homes for sale were under construction by registered providers at the end of 2014, compared with 880 in 2012.
Leveraging the sector’s collective balance sheet and advantageous credit rating has to be a good thing. Given the amount of government capital tied up in these assets, this feels prudent where the risks are well-managed.
Indeed, engaging in the private for-sale market or creating new 100% private rental communities is simply about taking advantage of strong sector skill sets and applying them to new, more commercial activities. Where this represents a complementary activity rather than a diversion of resources from core affordable delivery programmes, registered providers are a welcome addition to private housing delivery.
This activity is predicated on a few assumptions that may not last for ever, but are set to shape the sector’s future for some time to come. Cheap debt will begin to be eroded in 2016 as the base rate moves out, but this will be a gradual adjustment. There is still an estimated £10bn of headroom in borrowing capacity, and valuation changes may extend this further. In addition, a number of equity sources that are seeking long-term annuity-style returns should flow into affordable housing if debt rates become less competitive.
All of this sounds positive for the transition of the affordable housing sector to one that is based on a range of market-facing sources of capital that are aligned with the sector’s needs. It now falls on the sector to ensure that its governance is structured to manage these new risks appropriately, in line with the expectations of the regulator, the Homes & Communities Agency.
One of the other surprising results from our registered providers survey was to learn that fewer than half of registered provider respondents had set up ring-fenced subsidiaries or separate governance structures for market-facing activity. OK, not all will require organisational restructuring, but this does suggest that the sector still has some work to do to protect its enviable credit rating, which underpins all
of the above.
Adam Challis is head of residential research at JLL
