Investors raise concerns over sales and ‘zero to hero’ approach to new build

News19 May 2019Luke Cross

Investors have warned housing associations against taking a “zero to hero” approach to new build, while pointing to a weakened appetite for providers with exposure to the sales market in London.

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Speaking to around 350 delegates at the Social Housing Finance Conference in London in May 2019, one funder also called on UK housing associations (HAs) to “sing about” their social purpose to the huge number of global investors looking for a home for investments that meet environmental, social and governance (ESG) criteria.

The conference heard from Fiona Dickinson, investment director at sterling bond investor Aberdeen Standard Investments; Eilidh Mactaggart, managing director and head of European infrastructure and project finance at new-to-sector US funder MetLife; Fenella Edge, treasurer at bond aggregator The Housing Finance Corporation; and Henrietta Podd, director at advisory firm JCRA.

Ms Dickinson said that L&Q’s recent profit warning and ongoing reports on the levels of unsold homes in the sector are “very much at the forefront of investors’ minds”.

She said: “We’re told you can switch the tap off very quickly but the sector has never been so commercially focused before – we’ve never seen this in the sector before to such an extent, so how quickly will management teams be able to switch off that development tap?

“Management teams will tell me that, but where’s the evidence… what’s your management information like, how in touch are you with your joint venture partners? We won’t really believe it until we’re in a very negative situation with some of those.”

Welcoming suggestions by some housing association borrowers that they will be bringing down their level of market activity, she said “boring is good when you’re a bondholder”.

Ms Dickinson said that L&Q’s announcement that its 2018/19 surplus forecast was to fall short by £150m – of which £50m was blamed on a drop in sales profits – has “backed up some concerns about London development risk and how aggressive some of the big players in the sector have been”.

Ms Dickinson said: “It wasn’t expected, so it was a profit warning – that’s how we view it. If it was a corporate entity… it would be a profit warning and all over the press, and the share price would have dropped by 10 per cent or whatever, so we do view it in similar terms.

“Our appetite for aggressive, developing London-based associations is less than it was – and the profit warning hasn’t helped.”

Ms Mactaggart said as a new-to-sector investor, which has focused on the private placement market, MetLife has tried to avoid some of the bigger HAs, specifically because they have large development plans.

She also raised questions around what she described as a “zero to hero” approach, where HAs look to rapidly increase development in a small space of time, adding that there are lessons to learn from those that have been over-ambitious.

“Measured, sensible assumptions – to me that’s what’s the sector is about,” she added.
Ms Edge agreed, saying that rapid expansion means HAs “might be taking risks you’re not really ready for”.

Ms Podd said there is a very “clear differential” on spreads between big developers and those with smaller development ambitions.

“There’s also a North/South divide. There’s always been a bit of North/South divide but it’s usually been the London and south associations traded at a better price than the northern associations. But that’s completely reversed.”

Diversifying the portfolio

The panel also debated the pros and cons of a mix of maturities and unsecured borrowing.

THFC’s Ms Edge – whose non-profit aggregator raises long-dated bonds for HAs – said: “Can we agree as a sector that what we need and want is long-dated sterling debt, because we have long-dated sterling assets?

“Talk to any bank in the room about funding long-dated assets with short-dated debt and see the colour drain from their face. This is not a model that’s sustainable over the longer term.

“If you accept that what we want is long-dated sterling, there are very few people who can provide that.”

Ms Podd, whose company JCRA is an advisor to new bond aggregator MORhomes, challenged the point, saying: “You are a very, very sophisticated sector – most of you would be FTSE 350, 250, some of you FTSE 100 companies. Of course you have long [dated] assets.

“But most of you know how to manage your portfolio of debt in an efficient way, and if efficiency means borrowing some long, some short, some fixed, some floating, I’d encourage you to do that – because ultimately you can influence your cost of funds and your cost of funds affect your surpluses that drop down to your bottom line and the cash you have for development.”

Ms Dickinson added: “And short is relative. We’re sick of 30-year bullets – don’t give us any more of that, please. Banks [lend] at five years – there’s a big gap in between. Why not bring us a 10 year, 15 year or even a 20 year? It could be 18 years.”

Asked by the audience about unsecured lending, both Aberdeen Standard and MetLife said they would not partake in deals unless they were asset backed.

Ms Edge added: “As an investor in a secured entity, what will the interplay of creditors be like in a work out? And do you want to be that brave investor who’s the first unsecured creditor in a group of creditors?

“I think there are ways to tempt investors in to do that… but with special administration – you need to think about how that would play out.”

The conference also heard a call for associations to “sing about” their social purpose to the global investor markets.

Ms Dickinson said that ESG is a major focus of clients, funders and ratings agencies, and is something the social housing sector should be “absolutely singing about”.

“This sector should be able to [show ESG] standing on its head, and it is something you should be able to incorporate into any private placement or bondholder offer… it’s something the sector is very strong in.”

While she said it is more of an European market feature at the moment, she added that it is the one quick-moving area for a UK insurance industry that typically “doesn’t move fast”.

“It’s really coming into our industry in a very fast fashion and we need to be within it, rather than behind the curve.”