Housing associations have left the bond market neither shaken nor stirred over the previous few months, but it seems another surge in capital market borrowing might soon be on the horizon.
This week’s quarterly survey from the Homes and Communities Agency showed the mix of sources for new funding has reversed recently, with only one third being raised by way of capital markets and around two thirds from banks.
That trend is in sharp contrast to 2012/13, when the majority of the sector’s new debt arose from bond issuances.
However, this shouldn’t scare the living daylights out of landlords as the change (apologies - Ed) wasn’t down to a tightening in the availability of finance.
Instead, this reversal was driven by the sector having its financing for the affordable homes programme 2011/15 firmly in hand.
The HCA reckons providers will likely return to the capital markets to raise additional finance as more detail emerges on the government’s next building programme, which was announced in the summer’s spending round.
Indeed, one senior bonds figure notes ‘there hasn’t exactly been a lack of origination’ anyway, it’s just that the comparable period was ‘a real bumper crop.’
He adds there might have been a change in the nature of issuance though, with the majority of output skewing towards private placements - for smaller sums than large scale public bonds.
That could be one factor undermining GB Social Housing, as it has emerged the aggregator’s credit rating has been downgraded due to a lack a business.
Its owner is now searching for a new manager to take over running the club bonds issuer and must be hoping this new rush to the capital markets comes just in time to tempt a taker.
Although Closed Circuit may be taking a slightly tongue-in-cheek approach, there has been plenty of serious news reported about the £2.6 billion, 64,950-member fund recently.
After all, experts have warned housing professionals will have to pay more in as the deficit may have risen to £1.3 billion, while an investigation also revealed the fund invests in companies offering short-term loans with outrageous annual percentage rates.
Social landlords took to Twitter to voice their opinion on this last issue, given their tenants (and business plans) are often gravely affected by the debt spirals such lending can cause.
Chief executives said they’ve contacted the SHPS committee to find out what other investments they are backing and are also looking to increase their oversight of the pension fund.
But even though an unusual amount has been happening in this often slow-moving world, landlords should be careful not to assume the frenetic pace of activity will let up any time soon.
For instance, one issue that needs pressing attention from smaller housing associations is auto-enrolment, as the government pushes employers to put staff into a workplace pension. The staging date for smaller companies is fast approaching, with those of between 50 and 249 workers set to make the move from April next year.
Anecdotally, these registered providers have currently got a pretty low pension take-up, as employee contributions aren’t particularly affordable. This means landlords’ pension costs will go up, initially by a small amount as contributions are phased in, with the full whack being paid from October 2018.
However, there are fears the management and processing needed to power the switch to auto-enrolment will be as onerous as increased contribution costs, with various age and earnings thresholds adding to the complexity. Landlords are being advised to finalise their plans soon to avoid any nasty surprises.
Meanwhile, some housing associations are also thought to be considering leaving the SHPS altogether and setting up their own stand-alone offers. Such a move can trigger what is known as a section 75 payment, where an organisation takes on its share of the deficit, which is often prohibitively high for a lot of landlords.
Earlier this year Radian became the first to exit the scheme after it agreed to take on its own share of liabilities and assets, so the sector will be keeping a close eye out for any other organisation willing to pay the debt and walk away.
It’s an interesting time in the world of housing pensions at the moment, not just for those professionals well on the road to retirement but for the entire sector in a myriad of different ways.
Watch this space.
After almost two years immersed in the intricacies of social housing finance, this is my last blog entry.
It’s probably worth reflecting on what’s changed in that time. In some ways, quite a lot; but in other more important ways, remarkably little.
Two years ago, the traditional banking lenders were still clinging on as the most viable source of finance for most housing associations. Now, the vast majority of new borrowing comes through the bond market.
Two years ago, all the talk was how we can bring institutional investment into the sector. Now, the Montague review and subsequent government incentives to produce more private rented housing has suggested that the golden goose, if you will allow me a horribly mixed metaphor, may soon be coming home to roost.
But changes to where the money that funds housing comes from – whether it be social, affordable or private rented – does nothing to mask the enduring fact that not enough new housing is being built.
If anything the problem is getting worse. The number of new households being created is expanding at an exponential rate, while the number of homes being built is, clearly, not.
The government has talked about land release schemes, about guaranteeing debt for housing associations and other developers, about supplying bridging finance for sites that have stalled because of the difficult funding environment. Yet no rational commentator could say anything other than the housing crisis is only getting deeper and more intractable by the month.
But I don’t want to take my leave of this sector on such a depressing note. There are solutions. Or, more accurately there is a solution: more subsidy.
It is a truth, universally acknowledged by the housing association sector, that you cannot build sub-market housing without subsidy. And, with an economy were wages are rising at below the rate of private rents, only increasing the supply sub-market housing will alleviate the crisis.
Developing private rent and outright sale homes is all well and good, but supply and demand dictates that if people can’t afford these homes, they won’t get built.
Every man and his dog is aware that this government is obsessed with cutting public spending. But there is a weight of evidence to say that upping the direct funding of social housing would provide an almost immediate boost to the economy through job creation and increased construction output.
Politically, the ‘strivers versus skivers’ debate has meant that the government has put itself in a position whereby funding social housing would be seen as a contradictory step.
Sometimes, the bravest thing to do is admit when you’ve made a mistake. Slashing funding for social and affordable housing in its first spending review was a mistake on the part of the coalition. That’s not a political point, it’s an economic one.
It might be a hopelessly optimistic thought, but with the next spending review coming up next month, maybe – just maybe – the message has got through. Maybe there will still be public money available for the sector…
It’s probably just a fantasy. But, hey, the weather’s nice, it’s a three-day weekend and I’m a bit demob happy. So what’s wrong with some positivity for a change?
It is not often I use my little corner of the internet for polemical purposes, so please indulge me for a few minutes. I have blogged for months on the tension that exists for social landlords between the need to take commercial risk and the natural ‘small c’ conservatism of the sector.
On this very site, every time a story pops up proclaiming the latest money-making venture from one of the bigger housing associations, a handful of keyboard warriors unleashes an overpowering volley of righteous anger at the very notion of profit.
When the larger landlords announce plans to move into the private rented sector to make a bit of cash so they can reinvest that money into their core business, as sure as night follows day, the indignant fury of these self-proclaimed moral guardians comes issuing forth.
Every year, Inside Housing publishes a chief executive salary survey. It’s always one of our most popular features. Of course it is. That’s because it’s the digital age’s equivalent of putting a few capitalists in the stocks so we can hurl tomato avatars at their fat cat faces. And don’t we, in all our small-minded human pettiness, just love seeing these people squirm?
Even the social housing regulator, admittedly without the same red-faced outrage, is wary of allowing too much innovation for fear of failure. Its latest discussion paper warns against unregulated activity being carried out on organisation’s balance sheet. It may well be prudent but is it helpful?
Sure, it is, in part a reaction to the events that nearly led to the collapse of Cosmopolitan, and in that sense it is a sensible one. But here are two facts to consider: 1) no major housing association has ever gone bust; and 2) we are currently building only around half the number of homes we need in the UK. To a businessman, these two facts, taken together, would suggest that more risks need to be taken, not fewer.
In the simplest terms, we have, in the shape of the housing crisis, a huge and deepening problem. We have a group of people and organisations that are in a position to do something to address it. And yet, we have a sector who’s natural inclination, far too often, is to say ‘no’.
All of which brings me on to Dan Pallotta.
Mr Pallotta is a US entrepreneur and activist, responsible for some of America’s most successful charity fundraising events. Last weekend, I was shown a video of a speech he gave at last month’s TED (Technology, Entertainment and Design) conference:
In the speech, he argues passionately that the way we think about the not for-profit sector is wrong and is actively preventing it from achieving its aims. He says we are squeamish about the idea that charities spend money on marketing, on recruitment, on development or, in fact, on anything that might help them become bigger and better businesses. It has, he argues, left the third sector in a position where it will never be allowed to grow to the point where any of its ambitions can be achieved.
He is, in my opinion, right. Furthermore, everything he says can be applied to the housing association sector in this country.
Its prudence, its conservatism, its unease with anything that smacks of commercialism, of profit, of personal gain, are all preventing it from coming up with a workable solution to a housing shortage that is quantifiably getting worse year after year after year.
I have often questioned the need for the seemingly endless merry-go-round of social housing conferences, seminars and workshops that are, too often, little more than talking shops. I have rarely seen any on-the-ground impact from this travelling circus of the well-intentioned.
But, for Mr Pallotta’s simple, elegant argument, I make an exception. Anyone involved in social housing should take 15 minutes out of their day to watch this and, maybe, have a think about why they are in the sector in the first place.
You have to feel a bit sorry for the Homes and Communities Agency. Like Doctor Dolittle’s famous two-headed pushmi-pullyu, the organisation must feel like it is being drawn in opposite directions.
On the one hand, it has begun the process of allocating what will ultimately amount to £1 billion in equity funding for private rented development, including a significant portion to housing associations.
Meanwhile, its regulatory arm has been busying itself warning landlords about the dangers of putting social housing assets at risk by diversifying their business.
In simple terms, while one part of the HCA is helping communicate the government’s message to the social housing sector that it must innovate to keep developing, the other part is urging caution.
As one housing association chief executive told me this week, a number of landlords are not likely to bid for the funding that government has made available for the PRS precisely because the message coming from the regulator is that they must ring fence their social housing assets.
And that is absolutely the right message. The Cosmopolitan case has served as a timely warning that commercial activity carries with it a commercial threat. And that’s fine, as long as the organisation involved has the capacity to absorb any downside. If it can only do so by putting up its social housing as security, then it is not a risk worth taking.
But the government must be made to realise that it is not enough to just tell housing associations to be creative and innovative – buzzwords that just mean: ‘throw some money at the problem’. It must also realise that, while the sector wants to build more homes – and to make those homes as affordable as possible – it will not and should not put what it already has at risk.
There is a rule that bloggers – especially those such as myself, who are prone to lapse into cliché – have to follow: if there has been big news, you have to reference it.
And this week, no news has been bigger than the death of an old woman after a sustained period of ill health. To be fair, that old woman did have quite a lot of influence on this country, not least the social housing sector.
Indeed, Margaret Thatcher (the Baroness epithet never quite sat right with those of us who grew up watching Roland Rat and Harry Enfield in the 1980s) could be seen as the figure who did most to diminish the supply of social homes through her typically polarising right to buy initiative.
But the real legacy of Mrs Thatcher is not the coalition government’s recent attempt to jolt the right to buy back into life after years of dwindling take-up, but the shifting focus of those in charge of solving the housing crisis away from social – or even affordable – rent to the private rented sector.
For better or for worse, Mrs Thatcher was the cover girl for privatisation. In social housing, privatisation took the curious form of housing associations taking over the development burden from local authorities. I say ‘curious’ because housing associations are generally seen as ‘quasi-public sector’ organisations.
So the privatisation – if that’s what we can call it – of housing has been a lot less abrasive than the overnight sell-offs of the gas, steel and telecoms industries back in the 1980s.
But no one following the current government’s machinations can be left in any doubt that it believes the answer to the problem of how to house the nation is to be found in the private sector.
Writing in today’s Inside Housing, the Homes and Communities Agency’s interim chief executive Richard Hill has hailed a deal to sell off an HCA developed private rent development to insurance giant Prudential. He echoed the sentiment in a speech to the Housing Forum yesterday.
Ever since the Montague Review last year, all the talk from government insiders has been about leveraging institutional money into large-scale private rented accommodation. There are myriad pots of funding and initiatives to boost supply in this sector – for too long seen as the preserve of accidental landlords and cowboy hucksters.
Now, however, even housing associations are getting in on the act, with several known to be bidding for the £1 billion HCA PRS fund.
All of this looks to be sidelining major investment in sub-market housing, especially with the prospect of ever decreasing grant funding. The housing association sector argues that PRS can plug the funding gap, allowing for cross subsidisation of social or affordable homes while also boosting the number of reliable, well-managed homes at market rent levels.
A win-win, surely. But while all this is going on, the HCA’s other arm – the social housing regulator – is preparing a document that many fear could put the brakes on housing associations looking to diversify their business. In the wake of Cosmopolitan, that seems entirely sensible. However, it means the sector is being pulled in two directions: on the one hand, it needs to find new ways to make money to build the homes for future generations; while on the other it needs to make sure it protects the crown jewels of its existing stock.
The commercialisation of the sector may be entirely necessary. But working out how to do it is proving divisive. When it comes to housing, perhaps that’s Mrs T’s most appropriate legacy.
There’s still only one word hovering on the lips of anyone who follows the social housing financing markets.
The Cosmopolitan deal may be done, but we are still raking over the coals, gazing into the tea leaves and employing any other number of empty clichés to work out what it all means.
There is, clearly, still much to unearth over what went wrong and the regulator has already begun its forensic examination. I, along with other commentators, have already looked at what questions need to be answered on that front.
Of potentially more immediate significance, however, is what getting the deal done will mean to funders.
A little over a month ago, Moody’s sparked a good deal of wailing and tooth-gnashing when it downgraded its credit rating across virtually all of its housing association bond issuers. Actually, that’s not strictly accurate. What prompted concern wasn’t the downgrade – an event that was inevitable given its downgrade of UK Plc only 48 hours earlier – but the fact that it placed the sector on a negative outlook.
In its narrative, Moody’s referenced the uncertainty over at Cosmo as a genuine factor that investors should weigh up when considering housing associations as a possible home for their hard-earned coin. I have since heard of one housing association borrower that has been told by investors that they wanted to wait and see what happened in the Cosmo deal before deciding which way to jump.
Such a tale suggests that Sanctuary’s takeover of the stricken landlord would have had a rejuvenating effect on the market.
But the reality is that both Moody’s assessment and the uncertainty over whether or not Cosmo should be saved reflects a reality that most people in the sector – and an increasingly savvy group of experienced investors – have known for a long time: that the idea that all associations will be bailed out as a matter of course if old-school bunkum.
And yet, they don’t seem to care too much. Immediately after Moody’s paper on housing associations came out, spreads on bond issues widened by about 5-10 basis points. But, in the weeks afterwards, as investors analysed the situation, they realised that nothing had changed and those spreads narrowed again. That’s before the resolution of the Cosmo deal.
What that says is that the money men on the front line already knew, and still know, that as housing associations become more commercial, so their risk profile increases. But risk assessment is what investment is all about and the word from the City is still that our sector is a safer haven than most. As it always has been.
So the Cosmopolitan saga has actually had surprisingly little impact when it comes to the sector’s financiers’ view. What it does is illustrate a new reality that, actually, isn’t all that new anymore.
I will hold my hands up and say I got this one wrong. When Riverside pulled out of merger talks with Cosmopolitan Housing Group and Sanctuary Group stepped into the void, I thought it was a desperate attempt to salvage a deal that was dead in the water.
However, the mood started to change over recent weeks and there were signs that the problems that had given the top brass at Riverside so many sleepless nights were being overcome. Yesterday’s news that the deal was finally signed, removing the Damoclean sword of insolvency that had hovered above Cosmopolitan’s head for so many months, was greeted with sighs of relief from the whole sector.
Those sighs were probably deepest at the HCA. The regulator has faced the most serious test of its mettle at a time when its own resources – as it has admitted in the past – were stretched.
While it is credit to the regulator that it played its part in steering the stricken Cosmo ship to safety, the story is far from over.
Like Rutger Hauer in Blade Runner, any observer of the social housing scene will be full of questions; questions about what the hell went wrong in the first place – and what will happen now.
Chief among these is whether the regulator – along with the professional advisors that scrutinised the deal – has any culpability in allowing Cosmopolitan to merge with Chester & District Housing Trust as recently as December 2011.
Had the nightmare scenario of insolvency come to pass, the saddest part of the tale would have been the demise of the well-run CDHT and its much-admired erstwhile chief executive John Denny, latterly boss at Cosmo.
Other questions will revolve around how the financial mismanagement at Cosmo – thought to stretch back a number of years – could have been left undetected for so long.
These questions are not just about raking over old ground and apportioning blame; they have real relevance for the future of social housing.
As, with one hand, government tells the sector to be more and more adventurous in how it funds its business, the Cosmopolitan saga shows that the associated risks could have very serious consequences indeed.
It may not be a ‘big deal’ in the strictest sense of the phrase, but there is something very significant hidden in Amicus Horizon’s latest piece of borrowing.
It may be only £2.4 million that the south-east landlord has borrowed to fund an important but, let’s face it, small-scale redevelopment. But the fact that the lender is the local council could have much wider significance.
It is thought to be the first time that a housing association has borrowed money from a local authority – in England at least. And I hear that the deal could be replicated elsewhere, with a number of providers and councils in discussions.
This new source of financing could help both RPs and cash-strapped councils achieve any burning building ambitions that have been thwarted in the past. Non-stock owning councils are reliant on their partner housing associations to build homes that are often badly needed. But these housing associations are also businesses – and so will not build unless the financing stacks up.
But if they can borrow cheaply from councils, it would be foolish not to take advantage.
Even more interesting is the news that Amicus Horizon is working with a consortium of housing groups to push the government to allow it to borrow directly from the Public Works Loan Board at the same preferential rates enjoyed by councils. It might be far-fetched but it would be a game-changer for many associations, particularly those smaller players that still don’t feel entirely comfortable operating in the bond market.
What this also shows is the shear wrongheadedness of the government’s needless local authority borrowing caps.
As we also revealed in this week’s Inside Housing, councils are taking advantage of their new-found financial freedom to build 25,000 new homes over the next five years. But that figure could go up to 60,000 if they weren’t constrained by the borrowing caps, seemingly imposed on them on an arbitrary basis.
The CIH and NHF have called for these caps to be lifted. For what it’s worth, I suspect that if they haven’t already been, then the sector is fighting a losing battle on this one. But if the government is serious about its desire to get more spades in the ground and more homes built, perhaps it should listen to the argument.
Here’s a tale you might be familiar with. It’s about a young attention-starved shepherd boy.
Sadly, the story dates from before diagnoses of ADHD were handed out like confetti at a summer wedding, so when he told his elders that he’d seen a wolf threatening to eat the flock they tended, his warning was taken seriously.
Unfortunately, when the wolf turned out to be a fiction, the boy’s credibility was – famously - shot, spelling bad news for the poor sheep.
It’s a cautionary old legend if ever there was one. But it seems like most of the financial community – not to mention the housing sector – hasn’t heard it. Because if they had, the dire news this week that Moody’s has downgraded the UK’s credit rating and, subsequently, that of the vast majority of housing associations, may have been greeted with shrugged shoulders rather than furrowed brows.
Ever since the financial crisis of 2008, the credibility of the ratings agencies has been called into question. The thinking was that these self-appointed tipsters failed to foresee one of the biggest crashes in the history.
Since then, S&P’s 2011 downgrade of the US federal government was met with criticism from all sides of the political spectrum. More significantly, US bond pricing actually rose after the judgment came down from the agency’s sandstone Mount Olympus.
The same happened this week, after the UK’s sovereign downgrade. Gilt pricing actually picked up, especially following the Italian election, as investors realised that the UK was a relatively safe haven compared with some of the European alternatives.
This reaction from the markets suggests two things: primarily that investors don’t take the word of the agencies as anything other than one opinion among many; and secondly, that the price of capital market debt is driven by comparison, not credit rating.
The only reason Moody’s action is a significant one is because George Osborne staked so much political capital in protecting the UK’s AAA rating. While ministers spent the weekend furiously backtracking, their assertion that, actually, the rating wasn’t that important actually – more by chance than anything else – reflected the view of the market.
The housing association downgrade was inevitable given the fact that the sector’s positive ratings have always been because of a perceived link with sovereign debt. What is more intriguing is that Moody’s has continued to place providers under review because of the ongoing situation at Cosmopolitan.
From Moody’s point of view, this reflects the fact that the implicit government bail out for failing organisations is no longer a given. But most of the sector, not least the regulator, would not dispute this. The regulator – and therefore the government – is more concerned about protecting a housing association’s social housing assets than the provider itself. The fact that Moody’s has only just cottoned on to this suggests a failing in its previous assessment rather than a change in priority from the regulator.
The upshot of a further review is likely to lead to further downgrades for some housing associations that have – or are likely to – issued bonds. Again, this just reflects the markets. Landlords have for too long been cramped together in two ratings bands yet the difference in the interest rates they pay on their bonds can vary by up to 2 per cent.
It suggests either the investors or the ratings agencies have got it wrong. To decide which it is, it might be helpful to employ a horseracing analogy: when you decide which nag to back on the 3.20 at Ludlow, should you listen to William Hill or John McCririck?
It’s not often that I blog about something we chose not to publish, but something curious struck me – and a few of my Inside Housing colleagues – about Eric Pickles’ response to the appointment of Andy Rose as new chief executive at the HCA.
The communities secretary welcomed the news by saying he wanted to work with Mr Rose ‘to deliver our £19.5 billion affordable homes programme’.
It’s not the first time this government has casually dropped this massive figure into the ether. Housing minister Mark Prisk has mentioned it in his blog – not to mention his debut column for this very magazine.
But using this number smacks of disingenuousness, and here’s why: we know that the direct investment this government is making in new homes for affordable – and bear in mind that’s ‘affordable’ not social – rent and shared ownership is less than a tenth of that number.
Yet anyone genning up the government’s house building policy for the first time would, from this figure, believe that it is investing an unprecedented amount of money into much-needed sub-market housing at a time when all other public spending is being squeezed like never before.
Of course, everyone in the sector knows that this is utter guff. However, it’s worth looking at how the £1.8 billion that is being invested in affordable homes has been inflated to such an extent.
Messrs Pickles and Prisk are wont to refer to the AHP as a 170,000-home programme. Fair enough – 170,000 affordable homes is the target for March 2015. What is not as regularly mentioned is that around 80,000 of these are the remaining commitment from the previous National Affordable Homes Programme. Those homes account for £2.28 billion of funding. To be clear, that is money coming from this government’s budget but that was committed by its predecessor.
There is another smaller sum – just over £400 million – that has been set aside for various other elements of the AHP, such as mortgage rescue and the empty homes programme.
That still leaves the not-inconsiderable matter of £15 billion to make up to get to that grandiose claim of £19.5 billion. And this is money that comes not from government, but from the organisations – housing associations and local authorities – that are the recipients of funding.
These are organisations whose borrowing capacity is being stretched to the limit – take a look at Cosmopolitan Housing Group’s recent troubles to see an extreme example of the dangers of trying to stretch too far. Yet, they need to do this to take advantage of what government funding there is.
It is not for me to say that there is any obligation for the government to fully subsidise social or affordable homes. That’s an argument for another day, with strong cases on both sides.
What is clear is that this programme, in direct contrast with the great post-war house building boom, has put the emphasis firmly on the providers themselves to raise the cash – something that is far from obvious when ministers talk about a £19.5 billion programme.
It’s not a lie to claim the programme is worth £19.5 billion. But that amount of money is the total cost of 170,000 homes, nearly half of which were committed by a previous government, and a far cry from the kind of money being directly committed.
This is not new information. But the more those in charge of this programme roll out numbers that could mislead, the more it is the obligation of journalists to point this out. Indeed, a Communities and Local Government spokesperson, in an email to a colleague, claimed not to know ‘what the £1.8 billion relates to’, which seems strange given that Inside Housing has regularly quoted this figure in reference to the AHP without being questioned, and the Homes and Communities Agency frequently uses the same number.
The exchange suggests the government will continue to use the inflated figure. And we, for our part, will continue to question it.
You may not realise it yet, but something very interesting is happening in the bond market.
The flurry of big name issues at the start of the year hasn’t returned but the arrival of a new aggregator, in the form of GB Social Housing, is no minor development.
The three housing associations that took a share of the £85 million raised by GBSH this week are proving that the capital markets are open for all. Add in the £68 million that B3 Living raised earlier in the month and it starts to look as if smaller landlords – and indeed stock transfer associations – can now access a pretty wide range of financial sources.
Although the GBSH bond came in at a relatively high price – the 5.19 per cent a fair bit higher than the 4.82 per cent achieved by B3 Living – it is still well below the kind of price achieved by Radian just under a year ago.
At the time, that 6 per cent price seemed to be a deterrent for any other than the big boys to make hay in the capital markets sun. But now it seems that many associations far smaller than 18,000-home Radian are raising money.
Indeed, B3 Living’s price is particularly interesting. Word reaches me that the Hertfordshire landlord had flirted with being part of GBSH’s debut bond before deciding to go it alone. The fact that it achieved such a good deal, albeit likely to have come with stricter covenants than those attached to GBSH’s participants, may urge those with the choice to think twice about aggregated deals.
That shouldn’t be a problem specifically for GBSH – or indeed the Housing Finance Corporation – as they both appear to have a decent volume of deals in the pipeline.
What it does do, however, is call in to question the purpose of the government’s £10 billion debt guarantee programme.
With details finally having emerged about the programme, several months after it was first announced, the government has issued a call for tenders for the aggregator role.
But the scheme seems very limited: associations can only raise money for new developments to be completed by 2015, although there is the possibility of an extension. Meanwhile, my conversations with investors suggest that they remain unconvinced about the merit of a guaranteed bond as it would essentially involve the creation of a whole new asset class.
Given that the bond market still hasn’t dried up, there seems every chance that the much-vaunted, long-awaited guarantee programme may fall flat.
The Cosmopolitan story has taken yet another twist after Sanctuary Group stepped into the space vacated by Riverside as the potential ‘white knight’.
While it is by no means a return to day one in terms of putting together a deal that could rescue Cosmopolitan, Sanctuary will still have plenty of catching up to do in order to get a deal done.
Furthermore, it’s hard to see how this is anything other than a bad sign when it comes to the prospects for Cosmopolitan’s future.
No significantly sized housing association has ever gone bust but the mood around those close to the Cosmopolitan debacle suggests that we are closer than ever to that happening.
If it does, there will be plenty of questions to ask both the social housing regulator and Cosmopolitan’s own board about how the organisation could slip so easily towards disaster, apparently unchecked.
But just as war is the locomotive of history, maybe extreme cases of mismanagement such as this are what is needed for financial regulation to get tough.
The HCA’s regulation committee has been increasingly vocal in recent months with its warnings over housing associations’ non-core business. It is surely no coincidence that its new-found toughness comes in the wake of Cosmopolitan’s woes, centred as they are on its student housing business.
And out of this clamp down comes what one hyperbolic housing observer described to me as ‘the best idea they’ve had in 100 years’, the ‘living will’.
The proposal will involve landlords creating a document outlining its full debt obligations and the security that is attached to those obligations. It will also involve an action plan to raise money if things go wrong.
It’s a belt and braces approach, but one which might have served Cosmopolitan well had it been in place two years ago.
Yes, the murkiness of the group’s financing may still have led down the path marked ‘trouble’, but the way out would certainly have been a lot clearer than it is right now.
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You know those institutional investors everyone has been talking about for time immemorial? Well, to misquote that little girl at the start of Poltergeist, it looks as if they’re finally here.
And just like Claudius’ famous sorrows, when they come, they come not single spies but in battalions.
First up, we had M&G taking a £125 million stake in the throbbing splendour of Genesis’ Stratford Halo. And the ink on that deal was barely dry before Thames Valley secured a £60 million injection from Aussie lender Macquarie for its Fizzy Living subsidiary. Strictly speaking, Macquarie is not an institutional investor, but the money came alongside a promise to find an extra £300 million from an institution.
Now, Grainger has tempted the very first investment from a European pension fund after persuading Dutch outfit APG to help it launch a £350 million fund for private rented investments.
The two defining features of all these deals, very different in most ways, are that they are all exclusively PRS investments and they are all very much London-centric.
From an investor’s point of view, this is entirely understandable given the more or less guaranteed returns available from decent quality private rented stock, especially in the capital. And with housing associations increasingly reliant on cross subsidy, there’s nothing wrong with them attracting money into the juicier part of the business on order to spread it round to the harder-to-fund stuff – ie social housing.
But the obsession with London is a problem.
At the Westminster launch of the Northern Housing Consortium’s report into the impact of the sector on the northern economy, former housing minister John Healey was one of a number of figures who voiced their concern that the M25 was acting like a black hole for investment. The greater divide there is between returns available in the north and south, and the more the former gets neglected.
It almost doesn’t matter that the report being presented showed the value of investment in the sector to the wider economy, if there is no government money and the commercially minded institutions can get better returns elsewhere, housing in the north might have to start looking behind the sofa for pennies.
There is a glimpse of light on the horizon however. Next month, bids for the HCA’s £200 million private rented equity fund will be submitted. This money, combined with the quasi-equity that could come from councils releasing some of their own land, would allow northern cities to develop schemes before refinancing with institutional cash.
This means investors can invest without taking development risk, meaning they are likely to demand less painful returns.
Projects more or less mirroring this model are well underway in Sheffield and Leeds, to name but two, while Manchester’s pilot PRS scheme is even further down the road.
If these small-scale projects can be shown to work then there’s a chance the City boys might rediscover their friends in the north.
The vultures have started circling over Cosmopolitan Housing Group.
As revealed in Inside Housing today, Cosmo has until the end of March before its next set of payments to the owners of its student housing leases are due. The quarterly payments are by no means huge – sources value them at around £1 million – but such is the precarious state of the Liverpool landlord’s balance sheet, they could be the final straw.
All of which puts added pressure on the merger negotiations with Riverside. Relative optimism over a deal last November has turned more guarded as the mercury has dropped in recent weeks and there is no guarantee that the white knight will save the day. I understand that the housing regulator, besides putting in train plans for a moratorium if things go pear-shaped, has also started leaning ever-so gently on Riverside over the time it has taken to get a deal on the table.
Looming over the talks are these leases – described on more than one occasion as ‘toxic’ and the source of Cosmo’s many troubles. Although the parties involved are not prepared to put it so starkly, it seems that there will be no takeover unless those leases are sold off. And therein lies a problem.
The owners of the leases – which include in their number one or two notoriously tough negotiators – are under no obligation to accept an offer that will see them ultimately out of pocket. Furthermore, they are likely to be aware of the looming deadline, which makes Cosmo’s bargaining position increasingly weak as the days and months tick by.
A bit like the wheeling and dealing of the last few days of football’s January transfer window, what we have on our hands is a high stakes game of chicken. But in this case, there’s more on the line than the future destination of a Uruguayan holding midfielder with dodgy knees.
Anecdotal reports have already reached me that some Cosmo tenants are being told to wait a bit longer for repair work to be done, with the financial squeeze hitting every part of the business.
It just goes to show: if the money men (and women) don’t get this deal moving in the right direction pretty soon, it’s the tenants who could suffer most.
T.S. Eliot was wrong. January is actually the cruellest month; breeding empty promises out of the dry mouths of hungover wretches, mixing steadfast resolve with crushing disappointment.
The shells of broken resolutions litter the dog days of the year’s first month. A flotsam derived from unused gym membership cards and discarded pizza boxes. Your own shame-faced correspondent lasted until the 2nd before breaking his own junk food embargo in spectacular fashion.
Our coalition overlords have also caught the national mood (how do they manage that, time and time again?) by doing their ‘reverse resolution’ audit this week, outlining all the wonderful things they said they’d do and – kind of, sort of, if you squint your eyes a little bit – have done in their two-and-a-half years of government.
Missing from the almost entirely meaningless mid-term review document was anything specifically on housing. Indeed, one of the only mentions is an odd passage chiding landlords for not doing enough to promote the newly discounted right to buy, suggesting that the policy isn’t universally popular among the councils that are being asked to flog their stock at Delboy-style prices.
Going against the spirit of this unforgiving season, I will cut the government a bit of slack. Their affordable house building targets can only be judged in 2015 – the new programme’s drop dead date.
Away from Whitehall, however, one group of people has finally made good on a promise. Institutional investors have for a long time been the Kraken of the housing world. Everyone knows what they look like and some have seen things that resemble them, but none has yet emerged from the murky depths.
Until this week.
M&G’s £125 million purchase of the market rent units in Genesis’ monolithic Halo Tower on the edge of the Olympic park is a big deal in every sense. It is the first time an institution has made a major play in the build-to-let sector and could be a sign that the urgings of the Montague Review are having an effect.
Now comes the interesting part: for months, analysts have said that this was the type of deal that everyone wanted to do but no one wanted to do first.
With M&G taking the plunge, this is the test of whether these vague promises had any substance or are as empty as most of our own New Year commitments.
‘Hypocrite lecteur – mon semblable – mon frère!’
Time was when every housing association bond was greeted in these pages with the fanfare usually accorded to a royal baby announcement.
Now, bond issues are becoming virtually commonplace, relegated to a brief mention in dispatches from the housing finance frontline.
But that fact in itself should be cause for celebration. A source of financing that was once mainly the preserve of the big south east-based housing is now being accessed by big and small alike in parts of the country that many capital markets investors had probably only previously heard of on The Weather Channel.
But even better news comes in the shape of Notting Hill Housing Trust’s £250 million issue yesterday. As one of the G15 group of leading London associations, Notting Hill is no stranger to bond financing. However, the record-breaking interest rate achieved (3.78 per cent) is an early Christmas present for the whole sector.
In September, I blogged about the pricing of housing association paper after a respected treasury adviser told me that the majority of landlords had been paying over the odds.
Since then, Affinity Sutton’s issue – a 4.25 per cent all-in cost with a spread of 125 basis points – has recalibrated the market.
Notting Hill’s spread of 108 basis points may be a one-off, particularly as it was a 20-year deal. But it comes after Together Group, based in Yorkshire and Lancashire, and Midlands group WM both launched debut bonds at 145 basis points.
Compare that with some of the deals being done over the summer, particularly Radian’s £75 million issue at 270 basis point, and it becomes clear that we are currently in a purple patch for housing association bonds.
The market says there is a wall of cash from investors keen to put money into a sector still seen as a pretty safe bet – despite the ongoing travails at Cosmopolitan. But that wall won’t last forever, so anyone looking to refinance would be best advised to get their skates on.
Another point that the recent slew of deals suggests is that housing associations have not, as was widely feared, waited for details of the government’s £10 billion guarantee programme before going to the market.
While that’s great news for them, it does invite the question of who the guarantee programme is intended to help in the first place? As ever, answers on a postcard.
In the literary world, there’s a school of thought which says there are only seven stories that it is possible to tell (all of which were pretty well worn by Shakespeare) and that everything since has been an endless rehashing of those.
Anyone who’s had to endure the full 97 minutes of She’s All That will probably be familiar with the concept.
George Osborne, however, seemed perfectly happy to roll out some of the old favourites when he took the stage at the most depressing gig of the party season, the misleadingly monikered autumn statement.
After opening with the shock news that the deficit was falling (or rising? Or not rising? Help us out here, Ed) the chancellor unveiled a bit of succour for the housing sector. Only he didn’t.
He spoke again about the £10 billion housing guarantee plan – an initiative trailed on so many occasions it probably qualifies for a loyalty card at its local camp site – but there is still less detail than an Antarctic landscape in a blizzard.
He ‘confirmed’ funding for 120,000 new homes. New homes, maybe, but not new funding given that at least 70,000 of these homes can be accounted for by previously allocated funding for schemes that are already under way.
The remaining 50,000 will be helped by a new £225 million pot to ‘support’ large-scale housing sites. The implication, however, is that the money will be used by contractors to build and develop infrastructure to help stalled sites get off the ground, rather than go direct to house builders or social landlords. At £4,500 per home, it’s certainly not the equivalent of a new round of grant funding.
Furthermore, this is not a new announcement. The chancellor’s new BFF and coalition partner Nick Clegg revealed this money to the National House Building Council last month.
In fact, the only bit of new news for social housing providers was the unexpected 1 per cent cap on the uprating of benefits, including the local housing allowance. This could make private rented housing even more unaffordable for many working tenants, putting extra pressure on a social sector that’s already straining under the weight.
So, nothing new except more doom and gloom. Merry Christmas everyone.
For the housing sector, next week’s autumn statement from George Osborne might be more significant in terms of what it doesn’t include than what it does.
And what it won’t include, by all accounts, is clarity over what could – potentially – be one of the biggest boons to housing associations in recent times.
Being clever chapesses and chaps over at Whitehall, there was very little in the way of firm commitment when Eric Pickles unveiled the housing stimulus package in September.
That package included a promise to offer £10 billion of guarantees to housing organisations to allow them to access cheaper borrowing and start building homes again.
Governments have never been overly keen on dishing out £10 billion on a whim, and with austerity being this season’s must-wear item, you’re about as likely to see Mario Balotelli crack a smile as you are to see the chancellor write out that kind of cheque.
However, the clever part is that he doesn’t have to. These guarantees are likely to be off the government’s balance sheet. They will allow housing associations, house builders and anyone else who is eligible to get cheaper loans from the capital markets because they will be government backed.
So far, so good.
But sharper-eyed readers will be aware that September is now almost three months ago and there is still no prospectus out to guide anyone looking to take advantage of these guarantees. Or, as one finance director put it to me this week, ‘we are totally in the dark’.
More worryingly, depending on where one stands on the power of the press, two different speakers at this week’s Northern Housing Consortium summit said that Inside Housing knows more about the guarantees than anyone else. Nice to hear – thanks – but slightly worrying for the sector.
Given that the aim of the stimulus package was to increase short to medium-term development, these kinds of delay are concerning. The CIH has called for ‘urgent’ clarity and many of its individual members have echoed that call.
The danger is that this will be a scheme that gets kicked into the long grass. And seasoned followers of government housing policy will know that ‘the long grass’ is becoming an increasingly popular destination.
Like alcohol, religion and Kriss Akubusi, ideology is a fine thing. In moderation.
The problem is that ideologies are often not all that pragmatic and, at worse, can lead to outright dogmatism.
I fully expect to see all the usual wailing and teeth gnashing to accompany our report today revealing that, for the second year in a row, surpluses among the leading housing associations have rocketed.
Coming in the same week that one of the country’s biggest private landlords – Grainger – became the most significant player so far to join the ranks of for-profit registered providers, there appears every reason for some commentators to bemoan the death of what was once social housing.
That attitude is misguided. As is the assertion from Grant Shapps last year that their continuing ability to generate ever larger surpluses is proof that housing associations have adapted to the new affordable rent regime.
The reality is that the spending cuts handed down to the sector by the coalition has forced it into a Darwinian ‘adapt or die’ stance. Whatever your political leanings, it has to be accepted that the cutting off of what was once the lifeblood of social – or now affordable – housing, namely direct subsidy, has been all but cut off.
The housing associations making extra money through commercial activity are not distributing this cash to fat cat shareholders. They are re-investing it. Whether they are reinvesting in the right way, the right areas or on the right type of housing are separate arguments to be left for another day.
A knee-jerk ideologically-based opposition to increased surpluses is dangerous. If these organisations were to rein in their ability to generate cash they would, at best, have to reduce their building ambitions and, I the most doomsday of scenarios, could be facing up to the situation Cosmopolitan is now in.
After the fall of the Berlin Wall, the political philosopher Francis Fukuyama wrote about ‘the end of history’. What he meant was that the days of polarised ideological difference were over.
He was wrong, of course. But anyone who continues to object to social housing providers trying to make some money so they can carry on helping build communities might want to give him a read.