UK Infrastructure Bank eyes direct lending to housing associations to fund retrofit

At the same time, he noted “a lot of interest in the sector”. Mr Barker was speaking at the National Housing Federation (NHF) Housing Finance conference in Liverpool, on Wednesday 13 March.

The director of banking and investment also said that the UKIB was working with a number of banks, including sector loan aggregator The Housing Finance Corporation (THFC), to put products together for which UKIB would “guarantee a large slug of the debt”.

“The advantage from the lender perspective is for that portion of the debt, say 70 per cent, 80 per cent of the loan, they have a government security, so that reduces their cost of capital, and that cost of capital saving can be passed on to the registered provider, the housing association,” Mr Barker said.

“If you’re a sufficient size [of borrower] we’re looking at some direct lending opportunities. One of the constraints there is, I mentioned, £25m [as a minimum lending criteria from UKIB]. Another is that we typically would like to be less than 50 per cent of the transaction, or 50 per cent maximum. So we’re talking about £50m [as a] sort of scale, which doesn’t mean everybody falls into that bucket.”

Because of this, the bank was looking at “potentially setting up a third-party-managed fund to target those smaller housing associations or public sector buildings, or even commercial buildings,” Mr Barker added.

Launched in 2021, the self-described ‘policy bank’ has £22bn of financing capacity to deploy, comprising £8bn of debt and equity, £10bn of sovereign guarantees and £4bn for local authority loans.

On this last category, Mr Barker said the bank is “cheaper than the Public Works Loan Board”.

The bank’s first strategic plan, published in 2022, set out an ambition for clean energy to become the largest sector for its investment.

It also established that the bank would apply a “triple bottom line” for all of its investments – “achieving policy objectives, crowding in private capital and generating a positive financial return on equity of between 2.5 per cent to four per cent”.

To date UKIB has invested around £2.5bn, according to Mr Barker. “And what impact has that made?” he said. “We already have saved 3.62 million tonnes of carbon, created nearly 6,000 jobs and crowded in, importantly, £10bn of investment from our two-and-a-half that we’ve invested.”

The UKIB director also emphasised that he and the bank, which is led by former HSBC group chief executive John Flint, are keen to tackle the longer road to net zero – as opposed to focusing on the fastest route to EPC C.

“We’re quite keen as a bank, or as a policy bank, that we don’t cherry pick the easy stuff. My fear, and the government’s fear is that if we [just] do solar on everything, and we generate revenue streams to justify the cost of solar, we’ve taken out a valuable revenue stream that might be able to support a wider fabric-first retrofit. Heat pumps, all that sort of stuff is real.

“So a lot of the stuff that we’re going to be talking about with lenders, our conditions of our products and when we’re negotiating this at the moment with the banks, is how do we encourage people with cheaper money – potentially unsecured money – to go the extra mile?

“We’re not interested in just getting to EPC C. We’re interested in going down that net zero pathway.”

Mr Barker emphasised that the bank would have a focus on outcomes.

“My bank is lending taxpayers’ money. So the taxpayer has a right to know what we spent it on and, with a mission to net zero and levelling up, what the impact has been. So we are not going to lend any money without having some sense of firstly predicting what [difference] our investment is going to make. And secondly, getting the information back to prove whether or not we were successful, and to what extent.”

But the bank’s data requirements would be complementary, rather than additional to, the reporting that associations already need to do for their boards and stakeholders, Mr Barker hopes.

“The better-run housing associations are increasingly improving their own data, and they want to know, for their own benefit, what their carbon footprint is, how many jobs they’ve got, what their supply chain is; all the things that we would ask.”

Speaking on the same session at the conference, THFC’s Arun Poobalasingam acknowledged that the company was working with UKIB and spoke of a need more broadly for funders to create something “a little bit more innovative” than the current loan products on offer.

The former banker joined THFC in 2021 and last year became funding and marketing director, as one of a number of key appointments in recent months. These came in the lead-up to the retirement of group treasurer Fenella Edge and, most recently, chief executive Piers Williamson, whose successor Priya Nair started in post last week.

Mr Poobalasingam said there was a question for associations as to whether, as they currently stand, green bonds and green loans actually provide any “pricing benefit” for borrowers.

“At the moment, a green loan is really the same as a normal loan with a bit of a label and maybe a few basis points off.”

He added: “The question I guess borrowers need to really ask is, well, all this extra paperwork and all these strings attached, am I actually getting any significant savings?

“I think [the] funding sector can come up with something that is a little bit more innovative.”

Mr Poobalasingam also referred to an ongoing debate within social housing over who will benefit from the cost savings of more energy-efficient homes – tenants, housing associations, energy companies. This, he said, was potentially a “bit of a red herring”.

“Let’s just find out how much money in savings first, and then we can worry about where it goes later,” Mr Poobalasingam said.

“Let’s try and identify the cash flow going forward. And then once you’ve got that, then funding solutions and innovative funding solutions can be thought of.”

Earlier at the conference, delegates heard from Selvin Brown, the government director leading the roll-out of the Social Housing Decarbonisation Fund (SHDF), about rule changes that will be made in the next wave of funding to ensure that ‘clean heat’ ambitions are not neglected.

Mr Brown also said that the timing of the upcoming general election would not delay the delivery of SHDF Wave 3.

Attend a focused session at the Social Housing Finance Conference to learn more about ‘holistic approaches to funding long-term, preventative repair and retrofit’. Plus, share learnings with your peers, and fine-tune your strategy around every letter of ESG, in our dedicated sustainable investing stream – one of two new workstreams for 2024. To learn more about the event, taking place in London on 8 May, click here.