Ireland has a widely publicised, critical shortage of social and affordable housing. Next year the State expects to deliver approximately 4,000 units across Ireland. Currently there are more than 19,000 people on housing waiting lists for the Dublin area alone. Traditionally social housing was something provided by the State or local authorities. We are now in an environment where there is so much demand and so little supply that State capital spending is quite unlikely to be sufficient to respond to demand requirements in the medium term.
Contrast this with the "wall of capital" infrastructure finance, currently available from funders and institutional investors to finance the development of infrastructure like social and affordable housing. This article looks at ways to incentivise access to this capital and considers the measures flagged in Budget 2018.
So What is Holding up Solutions to the Housing Crisis?
THERE ARE THREE KEY ISSUES CAUSING DELAY:
- structural constraints: The combination of local authority and Affordable Housing Bodies ("AHBs") who principally deliver social housing means social housing supply is currently managed via 100s of organisations. This system cannot easily deliver projects of scale.
- the planning system: while beyond the scope of this article, planning is broadly seen as a major inhibitor to infrastructure development in Ireland generally.
- access to funding: the State remains fiscally constrained meaning there are limited sources of (on balance sheet) finance available (including Housing Finance Agency finance) to apply to housing. The balance sheets of the majority of AHBs are not sufficiently large to leverage significant amounts of corporate finance which limits the size of schemes they can provide.
Streamline Structures: assessing a large volume of sites (and their suitability), a large number of contractors all adds time, cost and complexity. The more streamlined this is, the better. Establishing a centralised framework of contractors that are assessed to be in a position to deliver developments of a certain scale (and can be drawn on for a variety of developments) would offer a means of streamlining this element. For larger scale developments, centralising the site selection, planning and management process will also address multiple stakeholder engagement which can delay project procurement.
IMPROVE ACCESS TO FUNDING
Scale: third party or project finance requires significant due diligence of the project so upfront costs can be higher than other financing mechanisms. To offset that, projects generally need to be of a certain scale (30 to 50 million minimum). Any mechanism which combines or consolidates schemes centrally so that they are of sufficient scale would help.
Rent Certainty: Currently rent payments are linked to market rent which limits the pool of lenders/ investors to those who understand or are prepared to take the risk on market rent movements. More predictable bases of rent calculation would allow funders to profile debt and repayments in a stable environment. There are already examples of this approach being adopted.
Repayment Certainty: Structures which provide for payments to be made by the State directly would allow lenders to base their funding assessment on Sovereign risk. Ireland is seen as a very safe place to invest in from this perspective.
Indeed, once employed, project finance is an incredibly successful financing model. Examples of failed project finance projects in Ireland are very rare.
Social and Affordable Housing in Ireland Snapshot
SOCIAL HOUSING MODEL
Social housing provision in Ireland is principally managed by local authorities and AHBs with support from the Housing Agency.
In order to be eligible for social housing a prospective tenant must satisfy the criteria contained in the Social Housing Assessment Regulations.
There are generally four forms of supply of affordable housing:
- properties owned and managed by the local authority;
- properties owned and managed by an AHB;
- properties leased from a private property owner;
- properties available under the Rental Accommodation Scheme.
There are supply issues across all of these areas currently in Ireland.
APPROVED HOUSING BODIES
AHBs are independent, not for profit organisations. Many are registered charities. The Register of Approved Housing Bodies sets out a list of all the current AHBs (of which there are currently more than 500). Many of these are small organisations dealing with a small number of units.
Once approved as an AHB to make units available for social housing, the AHB must enter into a payment and availability agreement ("P&A Agreement") with the relevant housing authority which in turn makes the units available to housing authority nominees. In return for making units available, the AHBs receive either monthly or quarterly payments.
RENTAL ACCOMMODATION SCHEME ("RAS")
The RAS is an independent scheme allowing persons who have been in receipt of rent supplement (a State based support paid as a contribution to a person's rent) to reside in scheme approved accommodation. Local authorities enter into contracts with landlords to provide housing for an agreed term. Under RAS the properties are provided by landlords (not by the local authority). Persons under the RAS may pay a contribution to the rent but that contribution is paid to the local authority. To be eligible for RAS, landlords must register with the Private Residential Tenancies Board. The properties must also meet certain minimum standards for private rental accommodation set out in the Housing (Standards for Rented Houses) Regulations, 2017 which came into effect on 1 July 2017.
ROLE OF HOUSING AGENCY
The Housing Agency is effectively a centre of expertise and support function to assist local authorities, AHBs and the Department of Housing, Planning, Community and Local Government in delivering affordable housing. In 2013, the Housing Agency was given interim responsibility for regulating AHBs under a voluntary regulation code.
ROLE OF HOUSING FINANCE AGENCY
The Housing Finance Agency ("HFA") is a statutory company established under the Housing Finance Agency Act, 1981. The HFA provides loans to local authorities and AHBs. The HFA is a self-funding entity currently and sources funding from lenders and capital markets. HFA funding is currently considered to be on balance sheet.
Finance Mechanisms and Budget 2018
Currently a significant proportion of social and affordable housing is developed by AHBs using HFA funding.
The Capital Advance Leasing Facility ("CALF") is available to AHBs. It can provide up to 30% of the capital cost of a development upfront. The CALF loan can effectively be a cashflow loan available at the early stage of development of units to assist in securing more significant capital from either the HFA or private funders.
HOUSING ASSISTANCE PAYMENT SCHEME
For tenants in long term rented accommodation in receipt of rent supplement, the Housing Assistance Payment Scheme ("HAP"), provides that a HAP payment is to be paid directly by the local authority to the landlord. This is notwithstanding that a HAP tenant's contract is directly with the relevant landlord not with the local authority (unlike other schemes). HAP tenants have to find their own HAP approved landlord and accommodation.
The HAP will effectively replace RAS (by combining the old rent supplement and RAS for long term accommodation need).
BUILD TO RENT
Build to Rent is not really an established mechanism in Ireland for house supply. The market activation measures to date in Ireland include a recent Government circular (Circular (PL 11/2016; APH 5/2016) from October 2016 where planning authorities are expressly required to "prioritise all necessary actions to deliver build-to-rent housing". To date no specific aggregated funding mechanism has been put in place to support this prioritisation (unlike in the UK) so this sector is still in its infancy/emerging here.
On 10 October 2017 the Government introduced a number of measures aimed at boosting house supply:
- HAP to be increased by 149 million
- HAP PlaceFinder to assist those in emergency accommodation to transfer to HAP approved accommodation
- Additional 500m in capital expenditure for house building
- Establishment of House Building Finance Ireland(`HBFI') (using 750 million from the Irish Strategic Investment Fund).
The expansion of HAP, which provides for state payments directly to landlords will be attractive to investors and funders prepared to fund based on sovereign risk.
The impact of HBFI adds liquidity to a sector where liquidity does not appear to be an issue. If it is structured on an off balance sheet basis it does offer significant scope for further investment.