Investment Opportunities in Social Housing

Investment Opportunities in Social Housing
Robin Caven,. Head of Private Finance, HCA
Redington Seminar
18th March 2011
Robin.caven@hca.gsx.gov.uk

Thriving communities, affordable homes
Overview
•Sector Summary
•Brief History
•Social Tenure
•Existing Funding
•Liability Matching
•Investment Opportunities
•Investment Considerations

Social Housing in England
 Total of c.4m units (18% of total housing stock)
 2.4m with Registered Providers ( 10% total housing stock)
 1.7m still retained by Local Authorities (8% of stock)
 46% of RPs units result from stock transfer
 Breakdown of RP stock:
 76% stock general needs
 18% supported/elderly
 6% other
 62% of rent paid by Department of Work and Pensions
 Registered Providers
 1700, but 393 with more than 1,000 units.
 These 393 represent 95% of the stock
 59 hold more than 10,000 units ( 44% of stock)
 4 RP Groups hold more than 50,000 units
 Management internalised
 Majority are Industrial & Provident Societies with charitable aims
 Larger RPs have open market development and/or letting activities
 Wider community /social role
 Private Sector Bodies

Registered Provider Stock
 Type
– c. 60% of social units are houses
– 62% suburban residential ( same as owner occupier)
– Less than 4% of stock are high rise flats
 Size
– Generally smaller than private rented and owner-occupied stock
(although new dwellings may be larger reflecting space standards)
 Age / condition
– 7 % built before 1919 (compared to 21% of owner-occupied and
41.3% of private rented stock)
– 31% stock was built after 1980 (compared to 21% for private sector).
 Regional VAriations
– London – 23.2%, North East – 23.8%
– South East – 12.9%, South West – 12.6%
Diverse by type and age

So more like
or
than

Registered Providers
 TSA publish annual accounts for the Sector ( latest 2009)
 Income and Expenditure
 Rent £9.2bn (c £75 per unit per week)
 Sector operating surplus £1.65bn,
 Comparison difficult between RP accounts
 Balance sheet
 Sector gross asset book value £95bn
 Funded by Grant £37bn, Debt £45bn, and reserves £16bn
 Debt per unit below £20k
 Grant – non interest bearing, repayable only on sale of
asset, if not recycled
 25% of assets held at existing use valuation, balance at
depreciated cost
 Est open market value of c £250bn

Historical Overview

Brief History
 In1979 stock of social homes peaked at 5.5m units (32% of stock),
following the post war building programme. Of these Housing
Associations ( HAs) held only c 400,000.
 The Thatcher government introduced Right to buy which resulted in 1.8m
sales .
 Social housing building rates fell from 100,000 per annum in the 1970s
to 30,000 in the 1990s, almost exclusively by HAs
 The Housing Act 1988 set a mixed grant /debt framework. Grant to be
75% reducing to 50% of cost. Debt slowly started to be raised from
banks and bond investors ( inc via THFC-a RP issuer conduit).
 HA 1988 facilitated stock transfers by Local Authorities ( LAs) to newly
created HAs. Also promoted shared ownership.
 By 1996 £10bn debt raised and average grant rate fallen to 47%
 The new Labour Government in 1997 remained keen on transfers , but
also the introduction of ALMOs , which did not require asset transfer.

Brief History - II
 Rents had been originally set by individual; HAs /LAs often influenced by their
funding position– in general LA rents were lower. In 2002 a rent convergence
regime was introduced :
 Rental levels should be similar for all social tenants across all Housing associations and Local
authorities for a given area and size
 Rents calculated 80% on local lower quartile incomes and 20% on capital values
 The convergence would occur by 2012 as there are annual caps on convergence increases.
 Target rents would increase by rpi plus 0.5%
 Service charges would also be subject scrutiny
 The Decent Homes programme was introduced 2000 originally requiring all
social housing to have met minimum quality standards by 2010, although now
extended . HAs would fund using their own funds, LSVTs ( stock transfers) or
Almos would be grant funded, LAs would fund internally or via PFI. Allocation
of £2.1bn decent homes backlog funding for 2011-5 recently announced. RP
stock 95% decent, LA 90%.
 The Housing Corporation acted as both grant distributor and regulator .
 With the Housing & Regeneration Act 2008 this role was split . Grant was to
be provided by the HCA , whilst a new regulator “ The Tenants Services
Authority “ was created to regulate any entity which received grant for social
housing. Regulated providers (RPs) can be either profit or non profit making.

Brief History - III
 the TSA has powers to step in to manage HAs. Although it
has appointed directors to some HAs, troubled RPs tend to
have been acquired by larger brethren ( e.g L & Q
acquiring Ujima in 2007) .
 The Universal Credit proposals includes cap on benefit for
under occupation , but retains a separate housing
component to meet actual RP and LA rents and recognises
the comfort that direct payment provides to social
landlords.
 The CSR 2010 announced for the period 2011/15 :
 £2.2bn in Social Housing Grant
 an affordable rent structure
 transfer of the responsibility for regulation from the TSA to HCA

Social Tenures
 General Needs
 Majority of social housing
 Allocation according to housing need
 Lifetime tenure -no subsequent means or needs test
 Subject to Rental regime
 RP Year end arrears – 4.3%
 Vacancy 2%
 Turnover 4-6% p.a.
 Intermediate Rent
 ASTs at max 80% open market rental
 Initiatives to target working poor or key workers
 Likely to be superseded by Affordable Rent
 Shared Ownership
 Occupier buys min 25% interest at pro rata market value
 Occupier has option to acquire further stakes at any time
 “rent “ payable on the balance typically at 2.75% p.a indexed
 Banks have priority in enforcement over interest in whole
 Tenant responsible for maintenance
 Shared Equity – e.g Homebuy Direct

Affordable Rent
 Framework document recently issued by HCA
 Rent at up to 80% of market rent
 Leases to be minimum 2 years, rents to be inflated at rpi + ½%
 No impact on existing tenancies
 RPs and LAs can apply to new build
 Available for a proportion of existing properties but only for those RPs who
agree deal with HCA.
 Of 150,000 new build targeted for 2011-2015, 56,00 expected to be affordable rent.
 Planning definition of social housing to be amended to include affordabel rent, but
Local Planning Authorities views will be important.
 £1.8bn grant to be allocated in Q3 2011 for 2011-5 , in return for development
pldeges. Grant c £30k per unit, compared with £60k recently for general needs.
 Other tenancies remain subject to target rents and rpi + ½% regime
 Impact likely to be limited as ability to apply to existing stock will apply only to
selected RPs

Relative costs between tenures:
England
Source: RSR, CORE and HSSA 2008/9 and Dataspring
0.00
50.00
100.00
150.00
200.00
250.00
2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09
Financial year
£/week
OO costs
Private rents
HA rents
LA rents
0
50
100
150
200
250
300
350
400
450
Bristol,C
ity
of(U
A)
Barking
and
D
agenham
(LB)
South
Ham
s
(District)
M
iddlesbrough
(U
A)
M
ansfield
(District)Islington
(LB)
£perweek
Renting (General needs)
Renting (Intermediate)
Renting (Private)

Regulation
 Rationale
 Grant/Governance
 Consumer protection
 Will revert to the HCA April 2012
 Separate Regulatory Committee within HCA – with
members appointed by SoS . Independence of role.
 Powers to
 6 standards , including viability/ governance and vfm
 Emphasis going forward expected to be more on
efficency/ vfm, and less on micro consumer issues.
 Rights include the ability to appoint Directors.

Local Authority Housing
 1.7m units – less recent build than RPs
 LAs recently encouraged to revisit provision – 10, 000 units projected 2011-2015
 From April 2012 the existing accounting arrangements will change
 Current : All rents ( after cost allowances ) and interest costs are pooled nationally - limited
incentive to pro actively mange
 Future – one off redistribution of debt based on debt service capacity with LAs retaining rent and
paying interest
 Debt settlement will be £28bn ( up from current £21bn debt, balance to HMT )
– ie £15k per unit, based on 30 year cashflow.
 Debt expected to be mostly from Public Works Loan Board, as currently –
although cost increased in CSR to gilt plus 1%.
 LAs will have freedom to use surplus cashflows to invest in existing or new
stock .
 Ability to raise debt will be subject to HMT caps – some LAs will have
borrowing headroom
 Given greater flexibility – will LAs look to use equity in existing stock to assist
funding new build or investment to existing stock ?
 But tenant vote needed to approve transfer.
 Given the various constraints will we see some imaginative financing
structures?

Social Housing Debt Funding
 Bank Lending dominant up to 2008
 £62bn loan facilities in place £ 49bn drawn
 Concentrated market – 5 lenders provide 85% of debt
 Historically 20 year money available at 20-40 bps margin
 Banks looking to lend shorter term 5- 10 years, or at least be able to reprice
 Margins 150 bp upwards
 Limited demand from HAs for new bank facilities given unused facilities and back
book issues.
 Capital Markets activity returned 2008, as bank terms changed against background
of demand for investment grade long term debt .
 Current out standings c £7.5 bn, of which £2.3bn issued since Sept 2008
 Typically 30 year bullet repayment, although some structured deals
 The Housing Finance Corporation ( THFC) is a conduit for mid size and smaller
associations , with issuance of over £1.3bn
 Minimal indexed issuance to date
 Current pricing 100 bps over gilt for the more liquid issues

RP – Credit Ratings
 Major Issuers have standalone corporate ratings in their own right
Issuer
Baseline credit
assessment Issuer rating Debt rating
Sanctuary Housing Association 6 Aa2, stable Aa2
Shaftesbury Housing Association 6 Aa2, stable --
Affinity Sutton Group 7 Aa2, stable Aa2
Sovereign Housing Group 7 Aa2, stable Aa2
L&Q Group 7 Aa2, stable --
PfP Homes 8 Aa3, stable Aa2*
Circle Anglia 9 Aa3, stable Aa3
Genesis Housing Group 10 A1, stable A1
THFC rated A+
Other capital market platforms under discussion
Regulation has positive impact on ratings
Lending typically secured
No credit losses sustained from social housing in either bank or capital
markets

Asset level yield profile
and in real terms
Indicative Cashflow Profile
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
0
2.
5
7.
10
12
15
17
20
22
25
27
30
32
35
37
40
Time
YieldonCost
Life cycle
Maintenance & Management
Void
Net Rent
Indicative Cashflow Profile
0.00%
5.00%
10.00%
15.00%
20.00%
0
2.
5
7.
10
12
15
17
20
22
25
27
30
32
35
37
40
Time
YieldonCost
Life cycle
Maintenance & Management
Void
Net Rent
Real
Nominal
Commerce will depend on :
Location
General Needs v affordable
Land cost
New v Existing
Grant
S 106 subsidy

Social Housing as Liability
Matching Asset
 Index linked cashflows : Rental regime – rpi plus ½% p.a.
 Naturally suited to lpi
 Sub market rental level and waiting list reduces void risk
 Deep pool of stock and potential property managers, mostly regulated
 Low obsolescence allows long durations and robust residual values
 Current “ tenure blind” and pepperpotting approach gives marketability
 Added comfort of possible reversion to open market .
 Historically limited interest from RPs in alternative funding sources
given access to long term cheap debt and high levels of grant
 But now:
– Tighter bank debt market and need to avoid repricing of back book
– Lower grant levels and one off settlement for 2011-15
– Impact of Housing Revenue Account changes :and
– Increased demand for Liability matching assets
 likely to increase interest in new structures

Opportunities for Investment
 Corporate Debt to RPs
 Solus or through aggregators
 Listed or private placements
 Index Linked initiatives e.g M & G lpi fund
 Varying repayment profiles – bullet, indexed, amortising
 Project based
 Debt or direct ownership.
 Management and maintenance outsourced to RPs or other contractors
 Could apply to general needs, affordable rent or mixed open
market/affordable.
 Fundamentally a cash flow driven investment with risk profile dependent
on:
 term of and risk share in leases/management contracts.
 Investor share of residual value
 Exposure to residential market factors ( rent and/or terminal value)
 Shared Ownership
 Initiatives re social stock held by RPs
 Open market structures with higher rental and no subsidy

Investor Considerations – Project Basis
 General needs - Income
 Income –low market risk, as most target rents materially below market
 Rental growth governed by framework
 Void risk, mitigated by waiting lists
 DWP funding role
 General Needs Cost
 Management and Maintenance/life cycle , well understood
 Use existing providers for management and maintenance
 Some ability to smooth non reactive maintenance spend
 Benefit of long term contract v ability to relet contracts
 General
 Residual value
 Regulation and Rent regime

Investor Considerations
 Affordable Rent
 Some market rental reference on lease expiry , but
discounted rent will have lower void risk.
 Housing Supply shortages unlikely to be reversed in the
near future
 Open market

“Borrower” Considerations
 Extent of lease/contract obligations
 term
 impact on accounts and existing funding
arrangements
 is funding displacing corporate debt or allowing more
activity?
 Ability to benchmark operating costs
 Impact on credit rating.
 Exposure to market – extent to which risks may be shared or
sub market income level underwritten with risk share above
 Interest in Residual value creates alignment
 Interest in continued management
 Flexibility on substitution , ability to sell units to tenants
 Use of void sales to cover shortfalls
 Funding over development period

Social Housing Summary
 General needs cash flows uncorrelated to other investment markets
 Natural indexation features and inherently long tenor
 Large potential asset pool
 Regulated Sector
 Underlying Housing Supply/Demand dynamics
 Low obsolescence
 Changing funding landscape
for RPs and LAs

Investment Opportunities in Social Housing

Investment Opportunities in Social Housing

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