Housing- the State of Play
It can’t have escaped the attention of many that there is a crisis in Housing. Whether you’ve tried to buy, sell, let or rent a property recently, unless you have been lucky, you probably have found it pretty difficult. Mortgages are hard to access, deposits are out of the reach of many,[1] the availability of rented properties whether social or private is disproportionate to demand [2]and new regulations for the private sector landlords could see some down turn in the buy to let sector.[3]
And yet demand for Housing is high and rising. Population growth is expected to increase in Scotland by 21% in the next 25 years. A stagnant Housing sector affects fiscal growth, employment opportunities, quality of life and places additional strains on social, health and education services.
Without traditional bank lending and levels of subsidy to rely on the affordable housing sector has turned its attention to alternative funding streams and non traditional funding models as it searches for long term finance which is affordable, relatively secure, carries non prohibitive administrative fees, complies with regulatory controls and will maximise the delivery of affordable housing.
Some larger registered social landlords (RSLs) have turned to the Bonds market either directly or through aggregating vehicles like The Housing Finance Corporation, and through this route have tapped into both institutional investors like pensions funds and insurance companies or private investors. Recent reports indicate that the Treasury supports plans to provide cheaper borrowing from the capital markets through its quantitative easing programme.
Funding Models
Some of the new funding models designed to stretch public money and utilise private investment include these;
The National Housing Trust (NHT) is one such example where private sector funding and Council borrowing through the Public Works Loan Board supported by a Scottish Government guarantee (which should secure and encourage private funding at competitive interest rates) can deliver affordable homes for mid market rent without direct subsidy. A capped investor return is intended to ensure a reasonable profit on exit commensurate with a balanced spread of project risk, which sits post construction of the new build units, with a Development or Joint Venture Vehicle.
Pensions Investment- Sale and Lease Back
Pensions Funding Model 1
There seems to be many variations of this on offer but a basic model operates like this; the affordable housing provider (the RSL or a subsidiary) releases equity in rented stock to the pension provider who takes title and receives the net discounted rental income stream over the course of say anything upwards of say 30 years. The RSL remains the landlord and assumes the same management and maintenance role through a long lease. At the end of the investment period (or at termination of the lease ) the properties will return to the RSL. Whether or not there is any overage in the form of excess payments back to the RSL for investment purposes will depend on the model and essentially the “deal” on offer.
The model would require at least the consent of the Housing (and possibly the Charities) Regulator and the tenants through at least consultation.
Special challenges are likely to surround the application of this type of funding to new build stock where existing “stand still“ stock would have to be offered in security pending completion of the new build units.
Pensions Funding Model 2
This has similarities with the NHT funding model or less recent university accommodation models in that the housing is transferred to a SPV whose members are made up of the RSL, the investor or provider of the funds and the developer/monitor of the project.
The model can be expanded and enlarged to include a whole range of community facilities or urban regeneration project.
The SPV is constituted typically through an LLP where control is managed through Board representation, voting rights and reserved matters which separate operational activities from key risk areas in much the same way as local authority ALEOs (Arm’s Length External Organisations) are constituted
Institutional Investment- Buying a Landlord- The REIT Model
Is the idea of pension funds taking control of housing either limited or more extensive too radical for RSLs and indeed their Regulator? It’s certainly not so innovative an idea as one might think. There was an announcement this month ( May 2012) that a consortium of 10 housing associations in the south east of England intend to list a Company holding 10,000 social homes on the junior London stock exchange in September. The launch of this social housing real estate investment trust (REIT) has received mixed reactions with concerns that this marks the privatisation of social housing especially as it is claimed that the model will avoid the REIT being regulated.
HM Treasury has launched a Consultation “to explore the potential role social housing REITs could play to support the social housing sector[4]
Conclusion
Some of these and other models are fairly radical and involve a leap of faith to some degree. To what extent these and other similar models to attract institutional investment wooed by the security and attractiveness of regular rental income and a guaranteed customer base will ease the Housing crisis remains to be seen but difficult times call for imaginative thinking and grasping opportunities.
