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Susan Torrance- Working Together #housingfinance


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A Scottish model to provide long-term finance for housing associations

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Susan Torrance- Working Together #housingfinance

  1. 1. Working Together A Scottish model to provide long term finance for housing associations
  2. 2. Working Together • Scottish Housing Association landscape • 162 associations – from 33 units to 44,000 units – Glasgow/Wheatly Group • 97 have less than 1,000 homes • 8 have more than 5,000 homes – the remainder mainly between 1,000 and 2,000. • Wildly different to England • Small projects, 10 to 20 homes on average
  3. 3. Working Together • Subsidy to build new social rented homes – benchmark rent at about £ 325 a month for a 2 bedroom/3person unit • Set at £ 58,000 for the same unit for RSL’s. Higher subsidy for rural/energy efficient schemes • Affordable housing - higher rents or low cost home ownership. • Finance to 2015/16 of £ 1.3 Bn to build
  4. 4. Working Together • Remainder of capital to build comes from private finance • Up until 2010, system of borrowing mainly from banks worked well – long term loans – 35 years, low costs to set up and low margins over base/LIBOR • Wind of change – terms shortened to 5 years, costs jumped and availability of loans tightened – higher equity cover
  5. 5. Working Together • Still worse, banks looked to try and renegotiate old loans – either by making new loans conditional on repricing or by looking to enforce loan conditions very strictly • Associations that had used financial derivatives ( I am not an expert ) for fixed rate loans experienced difficulties • £ 12 Million quoted to release one association from obligations
  6. 6. Working Together • Work done by the SFHA over December/January last year • Contacted about 30 associations to ask about raising private finance and the impact on development programmes. • Sector divided broadly into three categories • A proportion had stopped developing – no development staff, focus on SHQS and EESSH – paying back long term debt
  7. 7. Working Together • Some large ( not necessarily ! ) HA’s had development programmes of scale and the financial capacity to borrow. Were asked to undertake projects in LA areas where community based RSL’s had built before • Majority were frustrated developers. Limited programmes, constrained by lack of access to long term finance and not able to see much beyond 24 months for new home provision
  8. 8. Working Together • Main reasons for limited programmes:- • Previous borrowing - the legacy of strictly enforced covenants and new activity triggering re-pricing. Some still building with pre 2008 facilities. High geared, no headroom • New terms not generous, high amounts of equity cover required, costs high, terms short • Range of finance providers – in theory, same as England – banks, pension funds, bonds
  9. 9. Working Together • Reality source of finance still the banks, perhaps THFC ( EIB) and possibly Carduus/other bond providers/pension funds • Brave new world of cheap finance not materialised for Scottish associations • Those in English/other Group structures – on lending and part of much bigger portfolios • Largest Scottish Associations – potential to go it alone to markets – LINK Group £ 45 M bond
  10. 10. Working Together • What other factors at work ? • Scale – average project is 15 to 20 units – £1.5M private finance requirement tops – so THFC’s £ 5M limit, not helpful – rural projects • Timing – common sense, to aggregate up borrowing requirement with others – Carduus. • Herding cats – money needed at different times, certainty difficult to predict
  11. 11. Working Together • Pre 2008 money that is being used - still cheap and certain, If no non utilisation fee. • If you can draw down funds in advance of need with a large active programme, fine – you can probably manage • BUT if uncertain about long term development, limited programme because of capacity, why would your Board risk existing tenants income ? Scottish Housing Regultor
  12. 12. Working Together • Is there anyway we can address :- • Scale • Collaboration • Covenants • Keeping small/medium sized associations in the development game • Balance of power between funders and our needs/requirements
  13. 13. Working Together • HARIS • Housing Association Resource for Investment Scheme – formerly “Sector Vehicle” • Idea is that all RSL’s in Scotland can join as members, a not for profit company. • Purpose of the company is two fold in relation to accessing private finance
  14. 14. Working Together • Firstly, HARIS will access a revolving fund, provided by Scottish Government, Europe or some other means • The revolving fund may be unsecured and as low cost as we can make it • Participating associations will then use the fund and combined with subsidy, build new homes.
  15. 15. Working Together • Participating associations will have a maximum period of 24 months from start on site, to build. • Secondly, every six months, HARIS will assemble a portfoilio of all homes completed in that time frame. • That portfolio, as 500 to 1,000 units of brand new unencumbered stock, will be put to the finance providers, to refinance
  16. 16. Working Together • Once the best deal has been secured from banks, pension funds, THFC, on lending etc., this will be drawn down to repay the revolving fund – to enable it to be relent for the next tranche of projects. • Prospectus put to the market can achieve competition amongst private funders and have the sector set requirements
  17. 17. Working Together • Whizzo, I hear you say, but a large number of issues to work through. • Have to be sure this still allows associations with covenant problems to participate • Thorny question of who will own the houses ? • An association which owns a site and wishes to participate – revolving fund only providing development finance, not assisting with long term finance
  18. 18. Working Together • Association with restrictive covenant problems – is there still a way through ? • Access to land – local authorities, other public sector, even private developers. • HARIS could acquire sites, participate in long term funding and enter into management agreements with association for the stock. • Association will still work up project – design, local consultation, planning.
  19. 19. Working Together • Issues – should HARIS be registered as an RSL? • This would enable it to draw down subsidy directly if required. Also transparency agenda with the SHR • Charitable Status ? To enable land transfers between HARIS and RSL’s with no land transfer tax implications • VAT and group structure issues.
  20. 20. Working Together • So how far has this all got ? • SFHA Board have endorsed further exploration • Scottish Government is enthusiastic • Lenders such as M & G, Carduus are wildly enthusiastic – takes away hassle of cat herding • SG now set a list of expectations from the project – mostly with a view to working up a business case and working through the issues
  21. 21. Working Together • Also need to ensure it meets the needs of our sector • Informal discussion, but now need to have a very well worked up case to put to Boards etc for participation. • SFHA has commissioned ST to work 2 days a week to deliver business case and talk to associations – 9 months to deliver
  22. 22. Working Together • Support also from Scottish Futures Trust – financial modelling, experience of working up documentation and models – NHT • Will be only for Social Housing delivery, to comply with State Aids • Governance – sector led, collaboration but will enable smaller associations to gain the advantages of scale that are currently only available to larger ones
  23. 23. Working Together • Seems there are parallels with JESSICA, JEREMIE – revolving infrastructure funds – so it is worth talking to Europe. • Relies on simplicity – member state could “guarantee” any part of the revolving fund at risk ( very small ) • Redresses balance of power between the small community based associations, those with covenat problems and the banks
  24. 24. Working Together • The real prize will be the revolving development fund to get the houses built. • Once finance market gets used to the portfolios and scale, we can begin to see lowering of cover requirements, cheapening of costs and competition on rates, terms. • Collaboration can bring other benefits – procurement, standards etc • Questions welcome