Special report: UK associations complete £8.8bn of deals with investors

He added: “North American investors were less competitive in 2021 [since] they focus on the interest and currency environment. This has become more favourable to them this year, but of course the market has slowed down.

“[North American investors] also tend to have a slightly different tenor preference to UK investors, who tend to go for longer-dated, more comfortable, 25-35 [year terms]. Whereas North American investors have a preference for 15-20 years and, in private placements, the borrowers like longer-dated transactions, so they weren’t as competitive.

“Ironically, they have become more competitive now this year because the currencies are much more in their favour and also gilt yields are higher. But the private placement market has ground to a halt at the moment. So just as they were maybe coming back in and becoming more competitive, the market has slowed down completely. So we haven’t seen the re-entrance that maybe we would have liked to.”

The largest bonds over this period were sized at £400m. The first was issued by PA Housing for £400m, for which Chatham Financial acted as funding advisor. Paragon Treasury issued the second.

There were three bonds each with a value of £350m, all sustainability bonds. The first was issued by Paradigm, with £100m retained and the remaining £250m priced on 12 May at a spread of 88 basis points over gilts. Anchor and Peabody were the other two bond issuers.

Aggregators

There were 16 deals completed through aggregators during the 2021-22 period, totalling £471m. The bulk of these (10) were through Blend, with four completed through MORhomes and the remaining through The Housing Finance Corporation (THFC), Blend’s parent company.

The largest of these deals was GreenSquareAccord’s £75m, 40-year bond. This was issued in June 2021 at an all-in rate of 2.467 per cent and a spread of 128 basis points over gilts. It was the first deal for the group after its merger in April that year.

Note: Bond issues include retail, charity and retained bonds, bond taps

Source: Various, including housing associations and advisors

MORhomes’ deals were smaller in size, ranging between £15m and £19m. Andrew Morton, the group’s deputy chief executive and chief financial officer, said this “played to our strengths”, with the group able to go to the market for amounts as small as £10m.

He added that with interest rates on the up and uncertainty as to where they might head, organisations could increasingly look for smaller deals “to keep them going until they have a clearer view on where things are going
to land”.

Speaking on the drivers behind 2021-22 deal activity, Mr Morton said that sustainability continued to climb up the priority list for HAs, with MORhomes also launching its first sustainability bond in November 2021.

“If we look back a number of years, people would typically be borrowing to build new houses as you might expect, but there is increasingly the element now of HAs looking to do retrofit as we move towards net zero,” he said.

The two remaining aggregators – GB Social Housing and ARA Venn – were unable to or did not respond to a request for a list of deals done during the period. Newbridge and Aviva were unable to provide data and Chatham did not respond.

Advisors, lawyers and valuers

Chatham Financial and Savills Financial Consultants both advised on 11 deals. The majority of Savills’ deals (six) were private placements, while the bulk of Chatham Financial’s (six) were bonds. Centrus followed with 11 deals, half of which were private placements. There were 30 deals where the financial advisor had not been disclosed.

Out of the 69 deals, Addleshaw Goddard acted as the funder’s legal advisor on more than half of the deals (36). Pinsent Masons acted on three deals, while Greenberg Traurig and Devonshires both acted on two. There were, however, 21 deals where the funder’s legal advisor had not been disclosed. 

On the HA side, Devonshires acted on the most deals (28), as well as appearing as joint legal advisor on one deal with Clarke Willmott and another with Penningtons.

Trowers & Hamlins acted on 10 deals, plus one more with Morrison Foerster, while Anthony Collins acted across nine, which included one where it was joint legal advisor with Capsticks.

Future deal flow

The market turmoil currently driving up interest rates is having a big impact on deal flow, with borrowers likely moving towards shorter-term funding amid the volatility, experts said.

Mr Waller said activity in the bond markets is “just not happening at the moment”, while Mr Morton said that MORhomes has “already seen a very significant slowdown in deal activity”, with “very few” deals done in recent months. 

Ms Singh said that the uncertainty means more HAs are looking to the banks rather than the capital markets for any current funding requirements. 

She added: “There’s just too much uncertainty out there at the moment. So, it’s a case of ‘wait and see’ what happens to the gilt rates. 

“I don’t think people will hold out, I think they’re just waiting to see how things settle because the danger of going to the capital markets at the moment is there’s absolutely no certainty about what pricing is going to look like.”

Mr Waller said that borrowers could increasingly move towards shorter-term funding amid the pricing volatility. 

He said: “There undoubtedly will be a move towards shorter-term funding. Whether that’s as a sort of bridge-type structure, where you’re looking forward to a time where hopefully you can make those investment decisions, or whether it’s just an acceptance that for a little while associations can’t take out longer-term products because the rates required for those don’t stack up. So, I think undoubtedly there will be more churn and shorter-term arrangements at least for a little while.”

Other factors that could impact deal flow (that both investors and borrowers are watching) include proposals to introduce a new cap on the amount social housing providers can increase rent for the financial year 2023-24, which at the time of writing is under consultation. 

On this, Ms Singh said: “[Providers] are probably holding tight for the outputs of the consultation and ascertaining – if there’s a cap of five per cent or even three per cent – what the impact is and where savings need to be made. I suspect savings will immediately come in the form of cutting development programmes.

“Certainly, what we’re hearing from a lot of investors is that they would rather see that [providers] are not cutting spend on existing stock, so there needs to be a mind to that for providers as well because that can affect their credit quality. 

“If they keep going with their development programmes at the expense of existing stock, that’s not going to make them very attractive to investors.”

PIC’s Ms Cain said that UK investors will likely be watching credit ratings across the sector in the months ahead. “The sector needs to remain investment-grade to be fundable is our view. And we are seeing downward pressure on credit ratings [such as] Swan Housing, which is obviously having financial difficulty. That will be a real test of regulatory support for the sector… That is probably the key thing that a lot of the UK investors, like ourselves, will be keeping a close eye on.”

Sanctuary is in merger talks with Swan at the time of writing, after Orbit pulled out of discussions in September. So whether Sanctuary’s rescue of Swan succeeds will be a key test of the regulatory regime.

Despite the volatility, however, Ms Cain said there are reasons to be hopeful. “Ultimately this is a core UK sector [with] core assets, with strong long-term demand. We will always need social housing so in that respect, it remains a key sector for us.”

Auditors

As part of this report, Social Housing has analysed HAs’ 2020-21 financial accounts to find the total amount paid to auditors by associations with a bill of £100,000 or more.

A total of £12m was paid in fees by HAs over the period, which was up nearly five per cent on the 2019-20 period. This was made up of £10m in audit fees (up six per cent on the previous year) and £2m in other services (down 1.4 per cent on the previous period).

BDO had the highest number of clients (24), with a total of £4m in fees. KPMG followed with a total of 17 clients, although its fees totalled more at £5.7m. Grant Thornton, with six, came third, with fees totalling £1m.

PwC had the biggest decrease in its total fees. They reduced by 33 per cent to £630,000, with its clients going from three in 2019-20 to two in 2020-21.