Britain is facing a housing crisis. Put simply we are not building enough homes to meet demand. Estimates suggest that England alone faces a shortfall of 750,000 homes by 2025.
This crisis is especially acute across the social housing sector where the government is currently implementing spending cuts of 60% to the affordable housing budget. While the affordable rents programme is intended to help compensate for these cuts, the sector still faces a major funding shortfall.
What we found was that because banks, which historically account for 89% of funding, have sharply raised the cost of loans and reduced the period for which they will lend, listed bond markets have become the most popular option for new finance. They would be the first choice of a quarter of all providers far ahead of existing lenders.
This suggests a fundamental shift in social housing financing, from banks to debt capital markets. Historically only 10% of social housing provider funds have been obtained from capital markets, though larger groupings already obtain up to a quarter of their funding through bond issues. This now looks set to increase.
We also found evidence that providers are turning to joint ventures with private developers to expand or accelerate their development programmes, share risk, and access skills. Already 46% of social housing providers surveyed are working with or considering a private partner.
However, collaboration with private developers is not always straightforward. Over 70% of providers cite a lack of strategic alignment as the biggest challenge. Clearly building trust takes time. Sharing the workload, and finding an equal sense of urgency can also be a source of tension. But once partners have learned to work together, successful projects often lead to further joint ventures.
There are mixed views on Real Estate Investment Trusts (REITs). Although 56% of providers will look at using REITs as a way to raise new financing when rules are overhauled this year to make smaller REITs more viable, 44% are not interested in REITs.
Finally, a drive for economies of scale is likely to encourage more social housing providers to merge. Although mergers benefit from sharing skills and systems, and will reduce operating costs, they can be challenging on the financial front. For example, a typical merger of two large providers could affect more than 30 covenants across subsidiaries which would create significant challenges in negotiations with lenders.
Many will soon be severely challenged to source alternative financing from yesterday’s traditional lending model, and those who succeed will need financial innovation and imagination.
BDO Audits more than 30 of the UK’s leading social housing groups and provides a wide range of services to numerous other housing associations, including internal audit, tax compliance and corporate finance advice.
Our commercial real estate team has been an established player in the property market for over 30 years and has an extensive network of contacts in property development across the UK. Our strength in both sectors means we are uniquely positioned to help social housing providers and developers identify and align themselves to the right commercial partners, structuring joint ventures to enable both parties to achieve their strategic objectives.
7 March 2012