Government stimulus package could drive down social housing bond value
Bond investors deterred by £10bn guarantees plan
Institutional investors have questioned government plans to underwrite housing association borrowing as part of a £10 billion guarantees package to kick-start house building.
Legal & General, one of the biggest buyers of social housing bonds, said it ‘may look elsewhere’ if government guarantees drove down the price of housing association bonds.
‘If you want to buy government risk, you buy gilts [government bonds],’ said Georg Grodzki, head of credit research at L&G.
The proposal to guarantee bonds came as part of a major stimulus package for housing, which was announced by prime minister David Cameron yesterday (see key points box, below).
Some details of the package still remain unclear but it is expected that the government could use an ‘aggregator’ such as The Housing Finance Corporation to bring smaller associations’ bonds to the market.
Housing associations have raised more than £2 billion on the capital markets already this year but investors have warned they might not have the same appetite for government-backed bonds.
Recent bonds were issued at between 200 and 250 basis points over gilts, giving typical all-in costs of between 5 and 5.5 per cent. It is expected that a guarantee would bring that price down to 3.5 per cent but some investors have warned they might be put off by cheaper debt.
‘It would be nice if government guaranteed housing association bonds offer a pick-up over gilts but we may still have to look elsewhere to meet our yield targets,’ Mr Grodzki said.
Phil Jenkins, a founder of Centrus Advisors, added: ‘We’ve certainly had feedback from investors that they think this is unhelpful. Having achieved what they believe would be reasonable yields from housing associations there is a sense they would rather have the yield than the guarantees.’
Other senior sector figures questioned whether guarantees would result in any increase in the building of affordable homes. Other elements of the housing building stimulus package include a mechanism to allow developers to dodge section 106 requirements to build affordable homes.
Mark Washer, finance director at 57,000-home Affinity Sutton, said: ‘Anything that we can gain from underwriting [bonds] would be taken away by removal of section 106 obligations because we don’t know where the land would come from.’
Housing stimulus package: the key points
The £10 billion guarantee: The government is offering to guarantee £10 billion of loans to underpin investment in private rented sector and affordable housing. It is inviting expressions of interest from today, and expects housing associations, property management companies and developers to be among those that sign up.
Section 106: In early 2013 the government will introduce legislation to allow developers to refer stalled schemes to the Planning Inspectorate if they feel requirements for affordable housing are making the projects unviable. The inspectorate will be able to scrap or reduce the affordable housing requirements to allow schemes to progress.
Capital funding: The government is investing some money in housing, partly to offset the expected reduction in affordable homes as a result of the section 106 changes. A total of £300 million is expected to be allocated. Details are not yet available but a statement from communities secretary Eric Pickles yesterday said the move would ‘build on the success of the affordable homes programme’. The government wants the various measures to result in 15,000 affordable homes being built, and 5,000 empty homes returned to use.
First-buy extension: The government is putting an extra £280 million into its Firstbuy scheme, to allow it to be extended until March 2014. The initiative gives buyers an equity loan worth 20 per cent of the value of the property they wish to buy. They are expected to find a 5 per cent deposit, and a mortgage to cover the remaining 75 per cent. The extension is intended to allow the scheme to benefit an extra 16,500 buyers.