The UK needs more affordable housing

Development of new council housing has fallen off a cliff over the last half century. Last year there were 1,155,285 households on local authorities’ housing waiting lists in England alone. Local authorities no longer have the resources to be significant developers of social housing and the burden now falls to private house builders, and, particularly for social housing, the Housing Association (HA) sector.

New homes built by private and social sectors in England

Source – Ministry of Housing, Communities and Local Government

HA’s have been somewhat reluctant participants in the development game; happy to cautiously grow their housing stock, but not picking up the slack from the dearth of council housing. In addition, government policy has, at times, not exactly been favourable towards the sector. However Theresa May seems to be more predisposed to the social housing sector. Recent proposals indicate rent levels will return to being linked to inflation in the coming years, and there has even been a return of government grants, albeit relatively small, to fund new social housing development. The quid-pro-quo for this friendlier relationship is that housing associations have to get out and build new affordable homes.

Many in the sector, especially the larger associations, have heard the call. They have responded with a spate of mergers designed to pool resources and flex balance sheets to launch ambitious development programmes. Some of this will be funded by government grants, but much of will come from debt raised by HA’s in the corporate bond market. Indeed, they have become some of the most prolific issuers of corporate bonds in the UK market in recent months. It’s rare if a week goes by that my colleagues and I don’t have a meeting with an HA looking to raise fresh bond market finance.

New development programmes often consist of a mix of “tenures”. Some new homes will be for traditional social housing, some will be for shared ownership schemes, and some will be for outright sale on the open market. The latter subsidises the former and is all very sensible and commendable. However, from a creditor’s point of view it introduces more risk. Developing homes for outright sale exposes them to potentially adverse movements in house prices, especially in volatile markets like London. This increase in risk has been reflected in a downward drift in the credit ratings of some of the larger corporate bond issuers in the sector. When I first started analysing the sector over a decade ago, the small number of issuers generally had very strong credit ratings – usually in the broad AA range. Today, there are still a few who can boast an AA rating but they are the exception rather than the rule, as the table below shows.

Part of these moves reflect the downgrade of the UK’s sovereign rating (to which HA ratings are linked) in recent years, but the increase in development risk has taken its toll on the credit rating of many an HA.

We have long been providers of finance to the housing association sector, often through our ethical fund range, where it will continue to be an area of focus. However, now, more than ever, we are being increasingly selective about where we invest in this sector. We see most value in those HA’s with a proven track record of development through different property cycles, and on those whose focus is on developing primarily social housing, without taking outright sale risk.

HA’s have a tricky path to navigate: developing new housing stock to keep policymakers happy whilst simultaneously maintaining good relations with bondholders on whom they rely for finance. The two aren’t mutually exclusive, but will provide a difficult challenge for management teams in the coming years.

About the author

Iain Buckle is an investment manager in the Fixed Income team with responsibility for credit analysis, particularly securitised and structured finance assets. Iain is the co-manager of several funds with a primary focus on sterling credit mandates. His funds include pooled and segregated mandates and included in our ethical bond franchise. As an experienced investment manager Iain is responsible for overseeing the institutional pooled and buy-and-hold portfolios managed across the team. Iain joined us in 2000 from Baillie Gifford where he was a fixed income analyst, and has 21 years’ industry experience*. He studied Economics at Heriot Watt University.

*As at 30 September 2018.

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