It is time for a new chapter on social housing finance

We all know the important sector mantra that social housing needs subsidy. But we also know that the government won’t be able to do it all – and the funding gap can’t be closed with public money alone.

 

Encouragingly, appetite among investors and institutional capital providers to finance the sector is now there. What is currently missing, however, are the appropriate vehicles and models to channel this in a way that aligns interests and is viable for all.

 

So, where do we go from here?

 

We see the focus as two-fold. One is creating new financial products that can help improve existing stock and deliver retrofit. The second is looking at the bigger picture and how we crowd in capital to fund large-scale new development.

 

This is about being open-minded and entering a broader conversation around what the social and affordable housing funding model of tomorrow looks like.

 

The here and now

 

We all know that improving the quality of existing homes is a key priority – and indeed requirement – for housing associations. Fire and building safety updates, energy-efficiency measures and consumer regulation, among other factors, all form competing funding priorities.

 

Budgets here are tight. As the English social housing regulator has pointed out, there is “very little margin for error” when it comes to housing association finances. According to its latest quarterly survey, cash interest cover, excluding sales, stood at 82 per cent on average over the year.

 

The drive for retrofit is often taking priority focus at present, despite the pressing demand for new development. We need to address this first.

 

We need to see the government take steps to alleviate the current burden, and the sector needs new financial products dedicated specifically to supporting the retrofit process.

 

We have started to see some progress here. Lenders have offered flexibility – for example, we’ve seen carve-outs and waivers to the removal of EBITDA MRI (earnings before interest, tax, depreciation and amortisation, major repairs included), so that major repairs aren’t part of an already challenging equation.

 

However, as our Retrofitting social housing: a funding roadmap report from 2021 set out, the market needs to go further. The sector needs more access to lower cost debt and products that meet its increasing range of needs.

 

That is why the commitment the National Wealth Fund is now making to UK social housing is so welcome.

The National Wealth Fund’s recently announced programme, in partnership with The Housing Finance Corporation, will enable housing associations to access long-term, unsecured loans to retrofit existing social housing stock in the UK. 

 

The scheme has already received a commitment from Rothesay, the UK’s largest pensions insurance specialist, to provide 100 per cent of the initial £150m investment, with an ambition to grow this to £250m over the next six months.

 

Giving bond market investors access in this way will help accelerate retrofit, significantly reducing both the sector’s energy consumption and emissions. Scaling up funding solutions like this will be crucial to meeting sustainability and housing quality goals.

 

This is a direct example of the type of innovation and collaboration that the sector needs more of.

 

Thinking even bigger – new investment models for housing?

 

The other £100bn question: can the sector find new financing models for development and new build?

 

This is where new partnerships and thinking ‘outside the box’ will be vital.

 

Shorter-term loans, off-balance sheet vehicles, joint venture structures, securitisation and pooled assets to support development and operation of new homes, as well as other new ways to bring capital into group structures, are all routes for further exploration. 

 

There is an opportunity to learn from other sectors and geographies here – whereby specialised participants manage distinct stages of the property development and management lifecycle.

 

What’s clear for us overall is that the housing crisis isn’t for housing associations to try to tackle alone. There are like-minded partners out there that we can work with to take the sector forward.

 

We know that institutional capital providers are on the doorstep with significant dry powder to deploy, but do we have the pipeline of investable projects and means to utilise that wall of capital? This is the challenge.

 

There are several considerations to bear in mind as we seek solutions. For example, the ownership of social housing assets continues to divide opinion in the sector, but can housing associations still be effective stewards of social housing assets they don’t own?

 

If transformational approaches and new models emerge, how do we ensure that housing associations and the regulatory framework are reassured and on board?

 

Not to mention the need to ensure that risk is measured and managed, and that the interests of communities and residents come first.

 

We recognise the scale of the task that the sector faces. But there has never been a more opportune time to help transform the sector and move it into a new era – 2025 is an exciting time to be in housing finance. Our time is now.

 

Priya Nair, chief executive, The Housing Finance Corporation

 

Priya Nair will discuss new funding models at the Social Housing Finance Conference on 14 May. Find out more here.