investment opportunities in social housing
TRANSCRIPT
Investment Opportunities in Social Housing
Robin Caven,. Head of Private Finance, HCA
Redington Seminar
18th March 2011
Thriving communities, affordable homes
Overview
•Sector Summary
•Brief History
•Social Tenure
•Existing Funding
•Liability Matching
•Investment Opportunities
•Investment Considerations
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
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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
Thriving communities, affordable homes
So more like
or
than
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
Thriving communities, affordable homes
Historical Overview
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.
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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.
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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
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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
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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
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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)
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.
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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?
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
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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
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
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
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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
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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
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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
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“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
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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