PA Housing: ‘It’s not flavour of the month, it’s in our DNA’

Insight04 Jun 2021Sarah Williams

Dilip Kavi and Simon Hatchman of PA Housing speak to Sarah Williams about becoming only the third association to issue a sustainability bond, and why the principles outlined in its ESG framework are no fad

Dilip Kavi, chief executive of PA Housing, and Simon Hatchman, its executive director of resources

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PA Housing: ‘It’s not flavour of the month, it’s in our DNA’ #UKhousing #SocialHousingFinance

Dilip Kavi and Simon Hatchman of PA Housing speak @HousingMagazine about becoming only the third association to issue a sustainability bond, and why the principles outlined in its ESG framework are no fad

PA Housing issued its £400m, 15-year sustainability bond at the end of April, with investors – including a number of European environmental, social and governance (ESG) funds – reported to have responded positively to the organisation’s focus on supporting Black, Asian and minority ethnic (BAME) communities.

The issuance, of which £100m was retained, priced at 87bps over gilts, with a coupon of two per cent and all-in cost of 2.026 per cent.

But speaking to Social Housing, chief executive Dilip Kavi is keen to emphasise that for the landlord, which formed from the merger of Paragon and Asra in 2017, ESG considerations are very much cause, rather than effect.

“Asra was created in 1984, and it was specifically set up to address the needs of elderly Asians, and, effectively, those are our roots in terms of BME. PA Housing as it is now has been working on BME matters for a good few decades, so it is not flavour of the month because of the Black Lives Matter [movement] last year, it is very much in our DNA,” Mr Kavi says.

He adds: “To substantiate that, what’s really important is that about 40 per cent of all our customers are from BME backgrounds, and we have ensured that 40 per cent of our staff are also from BME backgrounds, and it does help enormously to understand the different cultures, languages, and requirements [of our residents].”

The organisation operates around 23,000 homes across the East Midlands, London and Surrey.

“When we did the first Paragon bond roadshow, to be honest the BME presence on the other side of the table I can probably count with one or two fingers,” Mr Kavi says. “This time round it was a complete change. It was a delight to see that within our stakeholders it is taken seriously, and indeed there are investors who have publicly stated across the corporate world what they want to see in terms of BME presence on the board at a senior level.”

PA will report annually on the allocations of the proceeds of its sustainability bond until maturity, as well as on its social impact, including its performance against the Sustainability Reporting Standard for Social Housing.

Core objectives set out in its corporate plan, and reiterated in the framework, include strong customer service and positive relationships within communities.

Against this backdrop, the triumph of the bond was thrown into sharp contrast in the days immediately following, as national headlines broke about a PA tenant living in a mould-infested flat who claimed to have been “dismissed” by the landlord. The group has since undertaken works to remediate the damp issues, and is investigating what went wrong in what it believes to be an isolated incident, but Mr Kavi holds his hands up that it is “not acceptable, it’s as simple as that”.

“Even one example is just not good enough,” he says. “However, it is where I think stakeholders take confidence in us that we are sorting it out. Like any other organisation, there are work-in-progress themes that we are constantly trying to address, and that example is no different.”

“Like any other organisation, there are work-in-progress themes that we are constantly trying to address”
Dilip Kavi, CEO, PA Housing

Another objective set out in PA’s corporate plan is its intention to reach net zero carbon before 2050 – a major challenge facing all landlords. This has led to some “massive numbers in the business plan”, Mr Kavi says, and he acknowledges that the planned expenditure represents a “trade-off”. “We could have spent those amounts on other things like new homes, but the board has made the right decision.”

Specifically, the ’massive number’ concerned is £230m, the cost PA currently thinks it will take to get its whole stock to net carbon neutral. Simon Hatchman, executive director of resources, explains that this is a “high-level estimate” based on data currently available. He says: “We’ve embedded that £230m within our core approved business plan, so it’s not a stress-test scenario, it’s part of the core plan going forward, but obviously phased across a number of years at this stage.

“Work is being undertaken now to drill into the detail; we’ve invested into new software which enables us to interrogate our stock, looking at the attributes of the properties and the stock condition data. That will then start to give us a more detailed granular plan of action around where, when and how we need to spend that money, and undoubtedly, that £230m figure will change.”

Work will start by addressing the 30 per cent of properties rated EPC Band D and below, with a target for all homes to be Band C or better by 2030.

Fire safety

While PA Housing’s trade-off is representative of the tricky decisions being faced across the sector, on another key agenda – fire safety spend - Mr Hatchman says that the impact on the organisation, while “significant” has been “more limited to date” than for some.

Latest work to assess higher-risk blocks has identified 11 medium and high-rise blocks requiring some remediation, with an assumed worst-case cost of £23m, which PA will endeavour to recover via government grant where leaseholders are involved, and/or via recourse back to the original contractors. Initial conversations with contractors on two schemes in particular accounting for the “bulk of that £23m cost” have been quite positive to date, Mr Hatchman adds.

“The impact is certainly significant, and it is having some short-term feed through into our numbers, but we perhaps don’t have the same level of exposure as some of the larger G15 associations and what they are grappling with."

Financing need

The proceeds of the sustainable bond will fuel PA’s development programme, as well as supporting its investment in the energy efficiency of homes. The landlord has an ambition to build 6,000 homes in the 10 years to 2030.

Mr Hatchman explains that the bond is the latest step in a refinancing process that started with a restructure of legacy banking facilities at the time of merger in 2017.

“We augmented that work in late 2019, early 2020, with the process to extend our bank facilities and give us the flexibility we needed to service our growth programme. And it was always the intention that at the right time we would look to term out a fair chunk of that relatively short-term bank debt into a longer fixed-rate bond issuance to give us the certainty of cost and aid with our longer-term financial planning.”

Work undertaken last year included a £185m funding deal with four lenders, of which a £60m sustainability-linked loan from Sumitomo Mitsui Banking Corporation has a margin discount mechanism tied to the social impact of PA’s tenancy sustainment team. The decision to pursue a 15-year bond stemmed from a desire to slot the new finance into PA’s existing maturity ladder, ahead of the Paragon issuance maturing in the 2040s.

But Mr Hatchman adds that the provider was also aware through conversations with its advisor (Chatham Financial) that the tenor is “particularly attractive for a number of the ESG investors”.

In practice, along with the sustainability wrap, this contributed to a “lot of new names on the transaction, a lot of interest particularly from mainland Europe investors”, he says.

The £400m raised gives the organisation around two years of extra capacity.

“We tend to plan two years ahead of need, in terms of our treasury arrangements and our financing arrangements,” Mr Hatchman says. “It gives us a good deal of breathing space now to take stock, get on with the growth programme, and we can revisit that as and when the financial forecasts dictate.”

Update: at 11:38am, 04/06/21

The article was updated to clarify that the latest work to assess higher-risk blocks has identified 11 medium and high-rise blocks requiring some remediation. The article previously stated that the blocks were all medium-rise.