Interview: ‘real likelihood’ of Asia roadshows for new £3bn Affordable Homes Guarantee Scheme

ARA Venn may be new to the AHGS, but the firm formerly known as Venn Partners is also the provider on the sister to the previous scheme, the Private Rented Sector Guarantee Scheme (PRSGS), also worth £3.5bn. Launched in 2014, the PRSGS closed to applications in 2018 but is continuing to deploy capital, with £1.4bn of loans completed to date.

 

Mr Green said that the speed of uptake was reflective of the nascent nature of the PRS sector at that time, and the need for the fund to lend against existing buildings – many of which had not yet been built.

 

“The scheme really was launched very, very early in the development of the PRS sector so really in the first year there were no buildings that were completed for us to finance.”

 

By the close of applications in 2018, the fund had attracted more than £11bn of applications for funding, according to Mr Green.

 

“So far this year we’ve lent over £400m and we have a few more loans to fund before year-end – so you can see deployment is really picking up, so really it’s just tracking the maturity of the industry as buildings come out of the ground and are completed.”

 

£3bn MTN programme

 

Venn will raise funds for the AHGS 2020 through a Medium-Term Note (MTN) bond programme that it is currently setting up, to allow speedy access to the capital markets at a range of maturities.

 

Whereas the AHGS under THFC made use of around £1.5bn of long-dated lending from the European Investment Bank (EIB) alongside its capital markets issuances, this is unlikely to be an option for Venn.

 

However Mr Green does not see this as a barrier to cheap finance. “Not having access to EIB doesn’t make any difference to our funding; we have no concerns about accessing the bond market in size. We issue our PRS bonds at different maturities, and the longer the maturity you go, generally speaking the supply and demand gets more in your favour.

 

“If you look at the pricing across the curve for government guarantee schemes, probably the most attractively priced part is at the very long end where you have annuity insurers and pension funds who need long-dated, good-quality credit risk – so we have no concerns about being able to access really attractively priced funding at that point using the bond markets.”

 

What this might translate to in terms of a discount for borrowers will depend on market conditions when the programme comes to issue.

 

“I think the cost saving is going to be significant relative to other sources of borrowing that RPs will have access to – whether it’s one per cent, 1.5 per cent, time will tell, but it is going to be significant,” Mr Green said.

 

He added: “As interest rates move lower, proportionately I suspect the saving to RPs will be broadly similar. But the outright amount – the absolute amount – may be a bit smaller, I would imagine.”

 

Issuing through the MTN programme will enable Venn to issue bonds of any maturity up to 30 years, which is the maximum loan term available through AHGS 2020.

 

Mr Green said: “We’ve deliberately set it up as an MTN programme rather than a standalone issuer which can just issue one series of bonds of one maturity, which allows us to be more responsive to the markets. Our role now is to engage with RPs, and get a sense of where the appetite may be at different maturities. A lot of it I’m sure will be at the longer end but there may be some interesting pockets of demand in the more middle parts of the funding curve.”

 

The company’s MTN programme will have an initial value of £3bn, with an option to extend by a further £3bn should the government grant an extension to the scheme.

 

To date, MHCLG has confirmed only the initial £3bn value of the scheme, but the potential to extend would be in line with original tender documents for the AHGS 2020, as reported by Social Housing in November. These referred to the successful candidate needing to raise £3bn of capital from investors with a further £3bn top-up at the guarantor’s sole discretion.

 

Under the previous AHGS, through AHF, a total of around £3.2bn of loans were made to 67 housing associations by the scheme’s close in March 2018.

Saltaire Housing

 

Venn is currently preparing to announce a series of appointments to its team to support its delivery of the new scheme.

 

As with its PRS programme, AHGS will sit within a wholly owned subsidiary of Venn. Named Saltaire Housing (after the 19th century model village in Yorkshire built by Sir Titus Salt), the subsidiary will have a board overseeing the delivery of the scheme, including members of ARA Venn. Meanwhile ARA Venn as investment manager will also provide day-to-day resources – with further hires to be announced here.

 

A launch date for the scheme is not yet available, but is likely to be “later this year”, Mr Green said, following the establishment of the bond programme and further agreement on processes with government.

 

MHCLG also separately confirmed to Social Housing that the scheme would launch by the end of the 2020 calendar year.

 

The window for applications will then run for an initial three years, with the potential to extend by two years subject to government approval.

 

“[For-profits] have been made distinctly eligible within the [new] scheme rules. It was clear from the outset in the design for this scheme to allow them access”

 

Under the scheme, loans are made against existing affordable housing assets, but with additional covenants stating that the provider must start on site to build out schemes within its approved pipeline within 24 months of drawdown.

 

Draft rules published to date are “close to final”, Mr Green said, and while the final publication may look to clarify any areas of confusion, the core rules around security and lending are “unlikely to change”.

 

This includes interest cover covenants set at the corporate borrower level, requiring a minimum of “1.0x at all times”, the guidelines state.

 

All borrowers on the scheme will also be required to pay “the same ongoing percentage management fee”, the document adds, although ARA Venn has not disclosed what this is.

 

For-profit providers ’distinctly eligible’

 

One noteworthy feature of the new AHGS scheme is that it is open to for-profit RPs. While also technically eligible under the previous iteration, for-profit providers were then few and far between, and no such loans were ever taken out.

 

Mr Green said: “[For-profits] have been made distinctly eligible within the scheme rules. It was clear from the outset in the design for this scheme to allow them access, so I would be hoping that we would be engaged with a number of the for-profits in time.”

 

While loan terms may differ slightly, there will be no difference to the pricing or loan size (minimum £5m) available.

 

“Obviously their corporate structures are different so you’ll likely have a few more features of slightly more of a real estate loan than a more corporate loan, so there will be a few things you will have to adjust in your lending to reflect the slightly different nature of them and the fact that you have dividends coming out of these structures. But at the core, ultimately the pricing of the lending, for example, is the same across all borrowers under the scheme.”

 

Defensive characteristics

 

While Venn may have a strong presence in commercial real estate, it is also increasingly invested within residential sectors across Europe, including through a mortgage-lending business in the Netherlands, Venn Hypotheken. A new UK mortgage lending business is also due to be launched next year.

 

These ventures, alongside the successful bid for AHGS, reflect the business “spreading [its] wings” across Europe and within the UK, Mr Green says.

 

“We’ve got reasonably sizeable lending platforms across a range of residential sectors and we have dealt with registered providers in some of those previously. So we felt that as we have a big footprint in most or really all of the other residential mortgage or other residential lending businesses, to really grow what we do with the RP community is a really strong strategic fit as a part of our business.

 

“The [AHGS] programme means we have a really meaningful presence in almost every part of the residential lending sphere and we think that’s a really interesting USP for our business.”

 

The impact of COVID-19 on more commercial real estate sectors has further strengthened this.

 

“We’ve chosen sectors where we have felt that you can earn really good risk return and we are working typically with institutional investors to bring them into our funds. I think the thesis has been proven during the course of this year in particular that residential as an asset class clearly has some strong defensive characteristics, if you look at the performance of it relative to other parts of the commercial real estate broader universe.

 

“Clearly there are some areas like retail that have suffered and we within our broader real estate funds do lend across asset classes, but we’ve felt for a while that residential has particularly attractive risk return characteristics.”