Affordable homes guaranteed? The return of guarantees finance for housing analysed

“But THFC, which facilitated, were very helpful in that. They know the industry really well anyway and we had some good conversations with them about where the credit committee concerns would be.”

Paul Phillips, finance director at Notting Hill Genesis, agrees, saying: “Certainly, my hope would be that if this is going to be done that THFC does it again. They know how to do it, basically. They’re people we know. They know the sector.”

Mr Williamson from THFC says it plans to bid to run the new scheme again, but says he’s not “complacent” and believes “there will be a lot more competition” this time around.

While it’s not certain that the new scheme will follow the same model as the one THFC ran, analysing the effectiveness of the previous programme should be helpful in considering whether this policy will deliver on the chancellor’s promise of 30,000 homes.

Like the new scheme, its explicit aim was to deliver new homes and so housing associations were only permitted to borrow money to build affordable housing that was not already being funded by government grant.

Piers Williamson

Mr Williamson says that the £3.2bn borrowed directly financed the construction of 27,000 homes.

Of course, housing associations can already borrow money on the bond markets in their own name to build homes. Although interest rates would be higher, social housing is seen as a relatively reliable investment due to the link with government spending and so interest rates tend to be fairly low even without a government guarantee.

THFC itself last week drew down £11.8m from a previously issued bond without a guarantee for the housing association Irwell Valley Homes, at an interest rate of just 3.18%. The association Incommunities also recently borrowed £250m on its own at a rate of 3.25%.

With that in mind, it is perfectly possible these homes would have been built anyway, with associations issuing their own bonds.

Mr Williamson, however, also argues that a further 6,000 homes can be attributed directly to the government guarantees, bringing the total up to 33,000. If so, this would be quite a coup for the government, which would have increased the development capacity of this borrowing by 22%.

His argument runs like this.

“Ultimately, housing associations are more fundamentally constrained by the volume of debt they can take on than by their marginal cost of debt”

Housing associations saved a total of £32m on interest rates when they borrowed through AHF. Assuming a cost per home of £150,000, this would deliver only an extra 213 homes.

However, interest rates on own-name bonds are generally around 3.5%. Therefore, £32m could be used to pay interest on another £900m of debt, which would deliver an extra 6,000 homes.

That extra £900m of debt, though, is a hypothetical figure, and some in the social housing sector are sceptical of it.

Phil Jenkins, managing director of Centrus, tells Inside Housing: “Ultimately, housing associations are more fundamentally constrained by the volume of debt they can take on than by their marginal cost of debt.

“Typically, they will be constrained by interest coverage or gearing in their business plan. A reduction in their marginal cost of debt is not going to make a material difference in terms of delivery capacity.”

In other words, although housing associations might be able to afford to pay more interest, their ‘gearing’, the level of debt relative to equity capital, would be the same with or without a guarantee.

For this reason, Mr Jenkins thinks the figure of 213 homes is the accurate one.

Ms Costain says this is a “fair point”, adding: “If you’re looking at the organisation in the longer term, one of the main metrics Moody’s or any credit ratings agency will look at is your debt levels and your gearing levels, so the fact you’re bringing that further debt in would impact your gearing levels and potential your ability to raise future debt anyway, regardless of the percentage cost of that debt.

“That may be a consideration before the actual interest costs becomes unaffordable.”

Anne Costain

One finance director of a medium-sized housing association says bluntly: “It makes diddly squat difference. We can borrow money at 3% so we’re not going to borrow more money. It’s not going to change our spending plans.

“The bottom line is, we can get more cheap money than we can spend. The restriction for us is being able to find the homes to buy and build.”

Nevertheless, they add: “Where it will make more of a difference is to smaller operators who can’t go out and get 3% bond money. They’d be paying a lot more, 4%, 4.5% for the money. So for them it’s a much better proposition.”

Ms Costain also makes the point that the money borrowed through AHF was at a fixed rate, meaning that the low interest rates will remain steady whatever happens to the economy. At the moment, historically low interest rates mean that most borrowing is pretty cheap, but in the event of a downturn, this could change.

“It makes diddly squat difference. We can borrow money at 3% so we’re not going to borrow more money. It’s not going to change our spending plans”

Especially with the uncertainty of Brexit at the moment, being able to have confidence that the cost of borrowing will remain low could be invaluable for social landlords.

In the end, it seems unlikely that anyone would deny that for a housing association, it’s positive to be able to borrow money at lower interest rates.

What’s more doubtful is whether the policy can really ever claim to have delivered the chancellor’s promise of 30,000 additional homes.