Two to three new investors eyeing affordable housing each week, say advisors

Martin Watts, director of treasury at L&Q, set out the perceptions from traditional housing associations about the competition new entrants bring, particularly to Section 106 acquisitions.

However, he welcomed the prospect of equity and additionality into the sector.

Mr Watts also warned that some registered providers have failed to get appropriate legal advice when signing up to long-term lease structures.

Pete Gladwell, head of public sector partnerships at Legal & General (L&G) – which has also launched its own for-profit registered provider – said there is billions of pounds of patient capital, namely pension fund money, looking for stable assets to invest in.

But he also warned that it is crucial that providers “know thy counterparty”, having been challenged by chair and economist Christine Whitehead over the track record of private equity in parts of Europe.

The session came ahead of the launch of a report by Savills – the conference research partner – which found that while many homes currently owned by for-profit registered providers are Section 106 purchases, there are signs of an increasing focus on building additional affordable homes.

Helen Collins, head of Savills’ affordable housing consultancy, said: “Landlords will face rising investment requirements in existing homes in coming years due to updated safety and carbon regulations.

“As a result, they will have to balance building new affordable homes, with increased investment in existing stock. This presents a clear opportunity for new money to enter the sector.”

She added that the growth to date in UK affordable housing has been funded by “patient investors – principally pension funds”.

“Their requirements for ethical, long-term, low-risk investments exactly match the profile of affordable housing,” she added.

Last week, for-profit providers including Sage Housing and L&G Affordable Homes set out their expectations on returns of upwards of five per cent.

Housing association ‘A’ credit

The session also explored the appetite for providing capital markets debt to housing associations.

Karin Erlander, director and lead analyst – sovereign and international public finance ratings at Standard & Poor’s (S&P), pointed to a recent report by the agency that suggested most housing associations will remain in the ‘A’ credit rating category.

However, Ms Erlander reiterated the risk that exposure to the sales market introduces to credit quality.

Mr Watts said that L&Q had entered into joint ventures to reduce its exposure, but that this had resulted in that income being excluded by rating agencies when they assess the London association’s credit strength.

L&Q has recently opted to pause any new scheme approvals as it re-appraises existing commitments, while keeping “a close watch” on its sales pipeline.

The S&P report said UK social housing providers continue to face rising demand for housing and increased spending on maintaining existing stock, while Brexit uncertainty is weighing on the real estate market and constraining their financial flexibility.

It added that its rating actions on UK housing associations have been negative for the most part in the past 12 months. It has downgraded seven and revised the outlooks on 11 from stable to negative.

Almost half the 41 registered providers it rates publicly carry a negative outlook.

The report added: “Nevertheless, we still believe that the credit quality of the majority of rated housing associations is commensurate with the ‘A’ category.

“We assume that most of them would be able to honor debt obligations and carry out sizable, albeit reduced, capital programs even under severe microeconomic stress with limited access to the capital markets. Others will continue to benefit from a supportive regulatory framework.”