All posts from: November 2011
Another week, another major government announcement looms into view.
Following Monday’s launch of the long-awaited and already much-maligned housing strategy, George Osborne is next in line to explain whence he’s going to conjure up the cash we need to keep the country running.
The chancellor will make his autumn statement to parliament next Tuesday. The Treasury has been briefing that Genial George’s speech won’t have anything in the way of new policy announcements and will instead be an update on growth forecasts and the like.
Interestingly, the very same Treasury has simultaneously been briefing that the statement will reveal further details of a planned £50 billion privately funded pot for investment in infrastructure and housing.
That legendary bean counter F Scott Fitzgerald once described the test of ‘great intelligence’ as being the ‘ability to hold two opposing ideas in the mind at the same time and still retain the ability to function.’
Whether anyone would say that the Treasury possesses either ‘great intelligence’ or indeed the ability to function is a moot point. More pertinently, it might be worth asking whether the £50 billion announcement – one that was never officially confirmed remember – might have been quietly shelved.
Fifty billion quid of course sounds like a lot of money, which equals a lot of roads and a lot of houses (certainly more than 454!).
The point is that such a fund, should it come about, will be made up entirely of cash from the private sector – more specifically from institutional investors. As anyone who has managed to avoid falling into a persistent vegetative state over the past three years will have noticed, the government has not recently been in the habit of launching many £50 billion funds with its own money.
Instead, what it is saying is that it would like institutional investors to bring along £50 billion to help us out while we’re a bit short. (‘I’ll pay you back next week, guv, it’s just I don’t get paid ‘til Friday…’) That would be nice of course.
It would also be nice if weekends were four days long, if the interior of tube trains smelled like cherry blossom and if the England football team could settle on a decent centre-back combination. But it doesn’t mean it will happen.
These investors will come to the party only on their own terms, and not because we need more roads, houses, hospitals or anything else. And they will bring along as much money as they are prepared to lose.
So, while Canada Life’s entry as a lender to the social housing sector - as exclusively revealed in this week’s paper – should be welcomed, no one should lose sight of the fact that this is one lender, offering relatively small loans.
There is still a long way to go before the pension funds and insurers of this world plough into the sector in a major way. In the meantime, we might have to carry on paying for stuff ourselves.
The word on the block is that the housing strategy’s grand unveiling next week is likely to provide as many questions as answers.
What it won’t be is the great panacea for the housing crisis that the government and the sector as a whole would dearly like to see.
For months now, any questions about the specifics of what is increasingly looking like a patchwork quilt – or patchwork band-aid, depending on one’s level of cynicism – of government housing policy have been met with the uniform response: wait for the strategy.
Well, that wait is over and expectation is not exactly at fever pitch.
But let’s be positive for a moment. The very fact that David Cameron has gazumped Grant Shapps by pinching the grand announcement for himself shows how high on the political agenda housing is.
It also suggests that the time is now if the sector wants to get its voice heard.
So, from a financial point of view, what do we need to see?
To borrow a well-worn phrase, it’s all about showing us the money; or, more specifically, where the money is going to come from.
Any pledge to invest more government funds is a smokescreen. A few million quid here and there is not going to plug a massive funding gap or build the 70,000 plus homes the country will need every year from now on. The real game is about finding long-term, sustainable funding strategies.
One of the strands of the strategy is expected to focus on ways of making social housing appeal to institutional investors. The call for pension funds and their ilk to come and save the sector is feeling as old as the hills by now. But with banks running for those same hills, the clamour has never been stronger.
There has been much talk during the week of a £50 billion boost for infrastructure coming from private sector finance, with house building (along with transport) potentially being the main beneficiary.
The obvious source of that kind of capital would be pension funds and, with the government’s comms machine conspicuously failing to pour cold water on the story, it would be no surprise if there was some scheme being formed to access that pot of gold.
The devil, as with much of the strategy, is likely to be in the detail. And detail is one thing that plenty in the sector think might be in short supply come next week. Let’s hope they’re wrong.
Long-term bank lending, the mechanism which since time immemorial has allowed housing associations to plan their future developments, looks to have gone the way of the Betamax.
The last two major banks that were still theoretically offering 25-year loans to the social housing sector – Santander and RBS – have effectively drawn a line under their former generosity and have stopped offering the product. While loans of that length are still technically available, they are offered only at eye-watering rates and with repricing options included at regular intervals. So, from a borrowers’ point of view, it means the days of long-dated bank finance are over.
The line from the banks is that such loans are simply no longer economically viable and that social landlords had enjoyed a privileged position for way too long. In effect, RSLs are being told to wake up and smell the recessionary coffee.
And that makes perfect sense in many ways. After all, there’s no reason why a housing association should be able to access the kind of borrowing rates unavailable to those poor souls plugging away in other sectors. And, with tighter capital holding requirements on the horizon and no end to the eurozone crisis in sight, the banks’ attitude towards risk is only likely to go in one direction.
But these same housing associations are now at risk of being pulled in two entirely contradictory directions: on the one hand, there is increasing political pressure to develop like they have never developed before (except with limited government funding, of course); while simultaneously, many are in no position to commit to anything that is going to cost any significant amount of money for fear that the well may soon be running dry.
It is a damned if you do, damned if you don’t situation.
But there is a chink of light at the end of the tunnel. As the cost of UK government borrowing has fallen to historically low levels (yes, again), there has never been a better time for landlords to find their pots of gold at the end of the bonds rainbow. And the indications are that a good half a dozen might do just that early next year.
It’s not an option available to all, however, and the reality is that only three things might allow the smaller developing landlords to access the kind of financing they need: consolidation, consolidation, consolidation.
George Papandreou might not like to be reminded of it, but money knows no borders.
This week’s International Housing Summit in Rotterdam brought home the fact that, for the UK’s social landlords, the need to spread the funding net as wide as possible is more vital than ever.
For two days in Holland, delegates heard familiar tales of squeezed government subsidy, a shortage of long-term lending and a housing sector that faced a greater and more urgent demand for housing than ever.
Only this time, it was made clear that the problems are not confined to this sceptred isle, but are global.
There are now more than seven billion people on Earth to find homes for, and those homes are not going to pay for themselves.
So Steve Binks’ address to the conference on new sources of funding could not have been more timely.
As finance director at Places for People, Mr Binks has never been afraid to push the boundaries of housing association funding.
And the revelation that he has made exploratory investigations into tapping the vast reservoirs of cash sitting in the hands of investors in the Middle East and China shows that his appetite for new money has not yet been satisfied.
As any Man City fans will tell you, state-backed Middle Eastern finance can be something of a game changer for those on the receiving end.
Headline-grabbing as this is in theory, there are a few major caveats attached.
The received wisdom about these types of investors is that they look for one of two things: good returns or trophy assets.
Stable and vital as social housing is as an asset type, it can hardly lay claim to being either hugely profitable or kudos-laden.
After all, no one has yet suggested the inauguration of a housing Champions League (though with the coalition’s housing strategy still being stitched together, we can but hope).
And this is not the first time that sovereign wealth funds have been targeted by the sector.
But the timing could be right, with high returns harder to find than ever and stable income streams looking increasingly attractive.
If anyone can unlock the door to the mid and far East, it is Places for People.
After all, this is the association that launched the first retail bond earlier this year, and was not afraid to pay a high price for the harder to quantify exposure that came with it.
‘People don’t know who we are or what we do’ was Mr Binks’ damning indictment of the sector’s past efforts at selling itself. It’s something he’s actively trying to change.
The cry from many in his audience was that while such flights of financing fancy are all very well for Mr Binks’ organisation, it is playing a different ball game from most of the rest of the sector.
It’s all very well for a 62,000-home landlord with assets worth nearly £3 billion to fly off to China, but what about a lowly 1,600-home LSVT?
The answer, of course, is that they are operating in different arenas but might not be forever.
The consolidation of landlords – even across international borders, according to one speaker - is becoming a more likely scenario, and Places for People is not a lone voice telling associations to spread their wings and leave the parochial nest.
Family Mosaic chief executive Brendan Sarsfield thinks that PfP are just ahead of their time.
‘They’re in a position that I think all of us will be in five years’ time,’ he told the conference. ‘They are doing the cutting-edge work that all of us will be doing.’
If that’s true, it will do no good for finance directors to keep their heads in the sand and hope the financial storm passes them by.
Maybe it’s time to look to the east instead.