Is lifting the council borrowing cap good news for HAs?

Insight08 Oct 2018Sarah Williams

Plans to lift the cap on councils’ borrowing against the value of their housing stock have been seen as a win for affordable housing stakeholders – but where will local authorities borrow from, and at what impact to housing associations?

Theresa May’s announcement at the Conservative Party conference last week that she will lift the previous cap on councils’ borrowing against their Housing Revenue Account (HRA) was met across the sector with a sense of relief, jubilation and, in some cases, surprise. More borrowing – to a potential total of £10bn-£15bn in additional debt, according to analysis by Savills – means more development of the houses needed to fix what Theresa May referred to as a “broken market”.

A statement from the Ministry of Housing, Communities and Local Government (MHCLG) suggests that the extra capacity could enable councils to deliver up to 10,000 council homes a year, a projection Savills puts at a slightly higher figure – 15,000 in England.

As MHCLG alludes to in its statement, the appetite from councils bidding for a share of the £1bn borrowing increase previously made available to councils in areas of high affordability pressure – for which applications closed at the end of September – shows that “they are ready and willing to deliver the homes their communities need”.

That is, it’s very likely that councils will indeed take the government up on the new flexibility to borrow, once details are confirmed. Areas such as London, where bids were anecdotally oversubscribed several-fold, are likely to lead the charge.

But councils which did not qualify to participate in the recent bidding will also be eager to take up the offer, John Bibby, chief executive at the Association of Retained Council Housing says. “A lot of our members outside of those areas were saying, ‘Well we could do more if the debt cap was lifted in our areas’.”

He adds: “The next stage is what’s the detail behind it – when’s it from, is it a general listing, so that councils can borrow prudentially, or is it going to be subject to some sort of conditionality, or bidding process – perhaps linked to the number of homes that can be built relative to the increase in the debt cap. All of those things we need to know.”

For housing associations, meanwhile, questions worth considering are where will councils borrow from, and – should local authorities be drawn away from the Public Works Loan Board (PWLB) towards alternative forms of finance on the debt capital market – what impact will this have on their own ability to borrow. Could there be an advantage to housing associations, in terms of increased visibility of the sector to investors overseas, for example, or would council borrowing dilute the market?

For his part, Mr Bibby is doubtful that councils would look further than the PWLB. “The bottom line on that is, it depends on the interest rates. If [a local authority] can get interest rates through borrowing through the Public Works Loan Board at favourable interest rates, it doesn’t make sense to go outside of that arena and pay higher interest rates through the HRA.”

He sees housing associations as remaining strategically important to councils in delivering new developments, despite their increased borrowing ability. “I still think the government will direct most of the grant funding through the housing association sector, because of course the match funding that they can bring is off the books; it’s classed as private finance,” he says. “So I still think the housing association sector will be the major sector that the government will look to, to deliver new social and affordable rented housing.”

Steve Partridge, director at Savills Housing Consultancy, is similarly doubtful of the likelihood of councils seeking new borrowing sources. “It’s not just that the PWLB is so cheap and potentially plentiful, it’s [also] the path of least resistance in terms of just getting it done,” he tells Social Housing. “So I think the treasurer or finance director or director of resources of a local authority that goes and borrows from [a bank], or issues a bond instead of going to PLWB would have an explanation to make.”

Neil Waller, partner at Trowers & Hamlins, says he feels there could be a potential benefit to councils in diversifying their borrowing streams from the PWLB, particularly if they don’t want to be at the whim of the Treasury where interest rates are concerned in the longer term, and councils have a potential advantage over housing associations in being able to borrow unsecured. That said, he feels individual councils may hesitate to be the first to step outside of the routine of PWLB borrowing.

Should they choose to do so, the impact on housing association borrowing could be mixed. “Without wishing to talk down the market, the number of investors who typically take social housing bonds is actually quite limited, despite a lot of effort in that,” Mr Waller says.

He adds: “Point two is that demand is becoming a bit saturated, with quite a lot of people coming to the market in the next few months.”

The staggered progress of new funding aggregator, the UK Municipal Bonds Agency, is a case in point. Set up to attract investors to lend across a pool of councils, rather than concentrating risk on individual authorities, the aggregator has yet to meet expectations in terms of the number of councils enrolling, or indeed, the interest from investors – perhaps dissuaded in part by the high-profile struggles of Northamptonshire County Council.

The entry of more councils to the debt capital market could, then, further dilute the investor pool, and confound efforts to educate new investors as to what housing associations are. Or, Mr Waller posits, it could bring an opportunity to attract overseas investors into the market by engaging them with municipal bonds – a more universally identifiable product.

However they choose to borrow, when local authorities come to allocating their additional headroom, Mr Partridge sees two contrasting impacts on housing associations – the first positive. Many local authorities lack the capacity to build at scale, and will therefore rely upon bringing in resources and expertise through a partnership, with housing associations best placed to provide this. On the flip side, a potential downside he sees is that whereas historically some authorities had gifted land to housing associations, enabling them to use grant and private borrowing to build homes, “you get less and less of that these days, because local authorities have just decided to build out their own sites anyway rather than hand them over to housing associations”.

The greatest opportunity for housing associations, then, will be to make a compelling partnership offer to local authorities.