As the political and economic landscape continues to change, housing associations, or registered providers (RPs), remain under pressure to build more with less whilst improving efficiency, leading to evolving business models.
As well as diversification and mergers, there is also an increasing focus on alternative sources and structures of funding and reconsideration whether some of their legacy non-social housing assets are ones which are best retained by them.
Although for some associations, raising funds through traditional bank debt or bond issues will remain the most appropriate option, a number of factors are paving the way for welcoming more equity funding into the sector at a time when institutional investors are showing a keen appetite for social housing assets. These include constraints on government grant, the imposition of affordable rent reductions, and in some cases the lack of availability of sufficient security in the form of existing housing stock.
Opposites attract
As well as reducing a housing association’s reliance on debt, equity investors can bring both investment and commercial expertise to the table, offering a more strategic perspective to complement the ambitions of those RPs seeking to broaden their operations as property development and asset management businesses.
For equity investors, RPs are also an attractive proposition. They offer a steady income stream and yield underpinned by government regulation, also bringing to the table their strong reputation and infrastructure in housing management as well as the skillset to manage stock effectively. Furthermore, their strong social and ethical purpose is likely to appeal to a number of private investors.
Possible constraints
Inevitably, however, there are potential hurdles to overcome when bringing together organisations from very different backgrounds as highlighted during a recent roundtable discussion sponsored by Devonshires.
Culturally, there may be differences in mind-sets and motives; different remuneration structures and incentives in the public and private sectors create different dynamics. Strategically, housing associations have tended to take much longer-term views on asset ownership which may not sit well with funds which may be under pressure from their own investors to realise investments within a defined period. Both parties must therefore be clear from the outset as to their expectations, making sure interests are aligned as part of a clear investment and exit strategy. RPs should also consider any potential reputational risks associated with their equity partners such as where they might invest their other capital and any other political or economic factors which might affect their own strategic outlook.
Regulation and the interests of other third party stakeholders is another area to be considered. Although deregulation has created opportunities for both RPs and investors, regulation has far from disappeared. Compliance with regulatory standards, charitable constraints, and dialogue with the HCA are day to day matters that RPs have become accustomed to but which may be an unfamiliar regime for an investor. An RP is also likely to be fettered by its existing loan covenants, and whilst lenders may well be supportive of a more balanced mix of debt and equity, early and ongoing dialogue with current lenders is essential.
Trailblazers
Despite these potential challenges, we are already seeing examples of successful equity investments.
One example is Genesis Housing Association, M&G Investments and LINQ Partners which have joined forces to develop a new delivery and financing model for affordable, shared ownership, market sale and market rented housing.
Other housing associations have created subsidiaries to secure capital for specific parts of the business. These include Thames Valley Housing, which has set up a private rental arm called Fizzy Living attracting capital funding from the Abu Dhabi Investment Authority whilst having also recently signed a £53.5m debt deal with the US investor PGIM Real Estate.
There are also a growing number of real estate investment trusts (REITS) seeking to acquire stock, including large players such as Civitas and Triple Point Social Housing (SOHO). And in November 2017 the new REIT Residential Secure Income plc (“ReSI”) completed on the £100m purchase of a portfolio of retirement housing managed by Places for People. This type of activity is attracting interest from RPs which may be considering divesting some of their own stock – whilst at the same time potentially securing an ongoing estate management role for the disposed stock on behalf of the REIT. Opportunities may also exist for RPs to procure a management role on stock acquired by a REIT from a third party.
The time is ripe
As with any partnership, there are benefits and risks to consider. However, with the pressure continuing to grow on housing associations to deliver more homes, now is the time to give serious consideration to the suitability of alternative sources of funding and partnerships.
Institutional investors are showing a strong willingness to partner with housing providers and there is growing evidence of success. As with any new concepts, “one size does not fit all”; nonetheless, senior management teams will be expected by their board members to consider new funding options whilst engaging consultatively with their lenders at an early stage of any dialogue. Being clear about the rationale for equity funding, and having this built into a business plan, will pave the way for a more successful partnership across all funders and stakeholders.
As first published in Social Housing on 23 January.
James Lyons is a Corporate Partner at Devonshires
