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

1. Working Together
A Scottish model to provide long term
finance for housing associations

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.

20. 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.

21. 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

22. 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

23. 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

24. 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

25. 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