Welsh Housing Finance Grant was launched in September with support from the Welsh Government and gives housing associations access to long-term finance while stimulating the construction industry. Steve Evans explains
For the first time, Wales’s social housing sector is participating in a large-scale collective borrowing product. The sector needed a new type of long-term funding, following the withdrawal of such facilities from the banking industry. This is also the first large-scale lending provided to Wales by the main financier, M&G Investments.
The project, which will lever in borrowing of £130 million into the Welsh RSL sector to assist the building of up to 1,000 new properties over the next two years, was launched in Cardiff on September 26 by the minister for housing Carl Sargeant and the minister for finance Jane Hutt.
Welsh Government has committed a £4 million per annum revenue subsidy over a 30-year period which will underpin the collective borrowing to address the shortage of affordable homes in Wales. Some 20 housing associations are participating spanning all 22 local authority areas with development commencing during the final quarter of 2013.
Since the economic downturn banks and traditional funding providers have taken a more cautious approach to lending to housing associations on a long-term basis. It has been difficult to obtain 30-year finance at suitable rates with lending of up to ten years more commonplace. Even though there are signs the economy is stabilising, attracting new sources of funding into the sector had to be explored and tested. With a number of housing associations not having previously used other types of borrowing (such as bonds), this has provided an opportunity to introduce alternative forms of funding to several associations.
A key driver from the outset was to put in place flexible finance products where terms could be strengthened by the Welsh Government’s 30-year funding commitment alongside the collective nature of the borrowing. Using this collective facility supports value for money in terms of interest rates payable and balance
sheet efficiency so as not to significantly compromise future borrowing capacity of participating associations. The housing associations themselves will undertake the borrowing by drawing down against the facilities with repayments met from usual income streams with Welsh Government grant issued to the housing associations over the 30-year period.
The overarching principle behind Welsh Government’s commitment of funding is two-fold: to address the acute shortage of affordable homes; but also to stimulate the construction industry in Wales, which will in turn have a positive multiplier effect on jobs, growth and the economy.
The housing schemes
Collaborative engagement between Community Housing Cymru, the Welsh housing association sector, local authorities and Welsh Government has ensured pan- Wales projects have been identified and earmarked for development with identified schemes consisting of both social and intermediate rental units.
The financial products
The working group, consisting of representatives from Welsh Government and Community Housing Cymru’s Finance Forum, completed a detailed options appraisal exercise on collective borrowing products. This process established two viable options that could deliver beneficial borrowing for the housing associations based on cost, covenant impact and overall flexibility. The first option is a long-term debt product provided by M&G Investments, which will provide £98 million of the total £130 million and offers relative certainty on pricing with a high level of balance sheet efficiency.
The second option available is funding via Affordable Housing Finance Plc, a subsidiary of The Housing Finance Corporation (THFC), and is backed with a UK government guarantee. This government initiative has been implemented to bring down the cost of borrowing for the development of affordable homes and is more aligned to a typical bond financing solution. There are distinctions between both so housing associations have flexibility to utilise whichever is best suited to their own organisational and borrowing requirements.
The launch included a visit to a site anticipated to be one of the first affordable housing projects funded under the innovative scheme. Linc acquired the Bronte site on Newport Road, Cardiff, on the open market in May 2012 and proceeded to demolish the rather old and tired buildings and secured planning consent for a new affordable housing scheme in an area of very high demand. Bronte House will consist of 38 apartments with a mix of 16 one-bed and 22 two-bed units. The apartments will be targeted at people currently living in housing association and local authority accommodation who wish to downsize from accommodation that might now be too large for their needs. This is a direct response to tackle the effects of the UK Government’s welfare reforms and rents will be set at intermediate rent levels.
This project has offered the RSL sector in Wales a unique opening to work in partnership and participate in new large- scale borrowing, reinforcing progress towards innovative funding solutions to increase the supply of affordable homes for those with the greatest need.
Steve Evans is group head of finance & ICT at Community Housing Cymru