investment opportunities in social housing

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Investment Opportunities in Social Housing Robin Caven,. Head of Private Finance, HCA Redington Seminar 18 th March 2011 [email protected]

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Page 1: Investment Opportunities in Social Housing

Investment Opportunities in Social Housing

Robin Caven,. Head of Private Finance, HCA

Redington Seminar

18th March 2011

[email protected]

Page 2: Investment Opportunities in Social Housing

Thriving communities, affordable homes

Overview

•Sector Summary

•Brief History

•Social Tenure

•Existing Funding

•Liability Matching

•Investment Opportunities

•Investment Considerations

Page 3: Investment Opportunities in Social Housing

Thriving communities, affordable homes

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

Page 4: Investment Opportunities in Social Housing

Thriving communities, affordable homes

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

Page 5: Investment Opportunities in Social Housing

Thriving communities, affordable homes

So more like

or

than

Page 6: Investment Opportunities in Social Housing

Thriving communities, affordable homes

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

Page 7: Investment Opportunities in Social Housing

Thriving communities, affordable homes

Historical Overview

Page 8: Investment Opportunities in Social Housing

Thriving communities, affordable homes

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.

Page 9: Investment Opportunities in Social Housing

Thriving communities, affordable homes

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.

Page 10: Investment Opportunities in Social Housing

Thriving communities, affordable homes

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

Page 11: Investment Opportunities in Social Housing

Thriving communities, affordable homes

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

Page 12: Investment Opportunities in Social Housing

Thriving communities, affordable homes

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

Page 13: Investment Opportunities in Social Housing

Thriving communities, affordable homes

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

£/w

ee

k

OO costs

Private rents

HA rents

LA rents

0

50

100

150

200

250

300

350

400

450

Bris

tol, City

of (

UA)

Bar

king

and

Dag

enha

m (L

B)

Sou

th H

ams (D

istri

ct)

Middles

broug

h (U

A)

Man

sfie

ld (D

istri

ct)

Islin

gton

(LB)

£ p

er

week

Renting (General needs)

Renting (Intermediate)

Renting (Private)

Page 14: Investment Opportunities in Social Housing

Thriving communities, affordable homes

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.

Page 15: Investment Opportunities in Social Housing

Thriving communities, affordable homes

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?

Page 16: Investment Opportunities in Social Housing

Thriving communities, affordable homes

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

Page 17: Investment Opportunities in Social Housing

Thriving communities, affordable homes

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

Page 18: Investment Opportunities in Social Housing

Thriving communities, affordable homes

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

Yie

ld o

n C

ost

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

Yie

ld o

n C

ost

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

Page 19: Investment Opportunities in Social Housing

Thriving communities, affordable homes

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

Page 20: Investment Opportunities in Social Housing

Thriving communities, affordable homes

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

Page 21: Investment Opportunities in Social Housing

Thriving communities, affordable homes

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

Page 22: Investment Opportunities in Social Housing

Thriving communities, affordable homes

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

Page 23: Investment Opportunities in Social Housing

Thriving communities, affordable homes

“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

Page 24: Investment Opportunities in Social Housing

Thriving communities, affordable homes

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

Page 25: Investment Opportunities in Social Housing