The evolving relationship between housing associations and equity providers

Inevitably, however, there are potential hurdles to overcome when bringing together organisations from very different backgrounds, as highlighted during a recent roundtable discussion sponsored by Devonshires.

Culturally, there may be differences in mindsets and motives; different remuneration structures and incentives in the public and private sectors create different dynamics. Strategically, housing associations have tended to take much longer-term views on asset ownership, which may not sit well with funds under pressure from their own investors to realise investments within a defined period. Both parties must therefore be clear from the outset as to their expectations, making sure interests are aligned as part of a clear investment and exit strategy. RPs should also consider any potential reputational risks associated with their equity partners, such as where they invest their other capital and any political or economic factors which might affect their own strategic outlook.

Regulation and the interests of other third-party stakeholders is another area to be considered. Although deregulation has created opportunities for both RPs and investors, regulation has far from disappeared. Compliance with regulatory standards, charitable constraints and dialogue with the Regulator of Social Housing are day-to-day matters that RPs have become accustomed to, but which may be an unfamiliar regime for an investor. An RP is also likely to be fettered by its existing loan covenants, and while lenders may well be supportive of a more balanced mix of debt and equity, early and ongoing dialogue with current lenders is essential.

Despite these potential challenges, we are already seeing examples of successful equity investments.

One example is Genesis, M&G Investments and LINQ Partners, which have joined forces to develop a new delivery and financing model for affordable, shared ownership, market sale and market rented housing.

Other housing associations have created subsidiaries to secure capital for specific parts of their business. These include Thames Valley Housing, which has set up a private rental arm called Fizzy Living, attracting capital funding from the Abu Dhabi Investment Authority and also recently signing a £53.5m debt deal with the US investor PGIM Real Estate.

There are also a growing number of real estate investment trusts (REITS) seeking to acquire stock, including large players such as Civitas and Triple Point Social Housing (SOHO). And in November 2017, the new REIT Residential Secure Income (ReSI) completed on the £100m purchase of a portfolio of retirement housing managed by Places for People. This type of activity is attracting interest from RPs that may be considering divesting some of their own stock – while at the same time potentially securing an ongoing estate management role for the disposed stock on behalf of the REIT. Opportunities may also exist for RPs to procure a management role on stock acquired by a REIT from a third party.

As with any partnership, there are benefits and risks to consider. However, with the pressure continuing to grow on housing associations to deliver more homes, now is the time to give serious consideration to the suitability of alternative sources of funding and partnerships.

Institutional investors are showing a strong willingness to partner with housing providers, and there is growing evidence of success. As with any new concept, one size does not fit all; nonetheless, senior management teams will be expected by their board members to consider new funding options while engaging consultatively with their lenders at an early stage of any dialogue. Being clear about the rationale for equity funding, and having this built into a business plan, will pave the way for a more successful partnership across all funders and stakeholders.