Cuts could see social housing sector home in on new sources of finance
15 November 2010 | By Luke McLeod-Roberts
Advisers gear up for roles with new entrants.
According to the National Housing Federation, the representative body for not-for-profit housing associations, the UK’s social housing stock is expected to drop by 123,000 over the next four years as a result of the Government’s housing policies.
Last month’s Comprehensive Spending Review will have a major long-term impact by reducing substantially the public sector funding component made available through the Department for Communities and Local Government.
“The sector was broadly left to look after itself,” comments Mitch Brown, a social housing partner at Eversheds who acts for housing associations and funders. “One suspects it’s the beginning of [public sector finance] getting phased out completely. There’s a feeling that there’s a need for new sources of finance.”
At present the largest private source of finance is conventional bank debt. As such, it is concentrated in the hands of relatively few players - Barclays, Lloyds TSB, RBS and Santander in particular.
“There’s been a concentration in the hands of relatively few funders in the past 15 years,” explainsRichard Papworth, head of banking at Addleshaw Goddard. “This is because mandates became very large and there was increased competition among larger lenders to win those few mandates.
“At the same time margins declined dramatically, leading to the number of funders falling, which eventually caused some to exit and sell their portfolios.”
However, Eversheds’ Brown believes that some banks have struggled to dispose of their loan books.
“This particular sector was lending at ridiculously cut rates - 25 basis points over 25 years,” he says. “Nobody’s refinancing at those rates and the banks [are] stuck. Some of the clearing banks have ended up with overexposure due to bank sector rationalisation and are looking to limit this. There’s a need for new players.”
Enter M&G Investments. The asset management arm of Prudential is aiming to launch a social housing debt fund targeted at pension funds and institutional investors before the end of the year.
M&G has engaged a number of City advisers in the past, including Clifford Chance, Dechert, Hogan Lovells and Mayer Brown. But a partner at one of these firms tells The Lawyer that “[M&G is] very business-orientated. They instruct whoever they think’s best for that particular fund. They have a very entrepreneurial culture.”
However, in this case it is understood that M&G is looking to structure the fund through an Irish vehicle and that Dublin’s A&L Goodbody is the likely adviser. A&L corporate partner Michael Barr has been linked to the transaction, but neither he nor M&G would comment in relation to it.
Dechert funds partner Declan O’Sullivan says: “There’s a well-established, simple regime for the operation of property funds in Ireland through Qualifying Investor Funds that are targeted at investors putting up at least e100,000 [£87,000] each with no tax at the level of the fund for non-Irish investors.”
This is part of a wave of similar vehicles that Irish lawyers are hoping will launch as the Alternative Investment Fund Managers Directive legislation looks set to pass in the European Parliament imminently.
Still, Brown is sceptical as to whether there will be many housing associations that have the capacity to issue a bond on their own.
“You need to have 50,000 units in ownership to have enough mass,” he argues. “You might only be talking about 10 players [in the UK] that fit the bill. The rest will have to opt for club deals if they want to raise funds.”
His commercial partner Paul Pugh believes the M&G move is interesting, but that it is part of a longer-term trend rather than constituting anything new.
In the past year Pugh and his team have personally acted on a $200m (£125m) private placement in the US to raise money for UK housing association Places for People, as well as a £76m unsecured bond deal in the Japanese market for the same client.
One of the attractions for institutional investors of the new fund is expected to be its ability to insulate investments by indexing them to inflation.
“What we’re finding is that money’s looking for safe harbours,” comments Pugh. “The yields aren’t as big as the private equity funds’, but [capital markets opportunities in the] not-for-profit sector - social housing and universities - are expanding.”
Papworth agrees that things are poised to take off. “Our social housing finance team remains extremely busy,” he reveals. “Housing’s been one of the more resilient finance areas and is hugely important to our firm. The market hasn’t grown since the peak in 2008, when there were substantial Large Scale Voluntary Transfers, but we’ve built market share. We’re also expecting further work due to increased consolidation.”
The Government argues that housing associations can boost sources of revenue by allowing registered providers to charge rent equivalent of up to 80 per cent of local housing allowances - a major increase compared with the previous regime.
“An increase in the amount is interesting to commercial players,” says Brown. “But it’s not going to help people on low incomes.”
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