Finding the right gear
Steps are being taken to resolve funding challenges and drive the continued supply of new social housing in Ireland
Senior Associate Consultant, Campbell Tickell
Issue 66 | June 2023
Those familiar with the funding of new, general needs social housing provided by Approved Housing Bodies (AHBs) in Ireland will be aware that, for the past 10 years or more, this has largely been achieved via a 100% debt-funded model. Challenges have developed in this approach which need to be addressed if targets for new homes are to be achieved.
How the model works
The predominant source of senior debt has been the state’s Housing Finance Agency, which typically provides around 70% of the capital requirement, with the balance of 30% borrowed, also from the state, via a Capital Advanced Leasing Facility (CALF). Despite the name, the latter is effectively a ‘soft’ loan, with both capital and rolled-up interest paid in a lump sum at the end of the agreement term.
For the eight largest AHBs – which between them provide around 70% of the 52,000 housing units provided by the sector – HFA and CALF funding has allowed them to deliver at scale in recent years, in response to the country’s well-documented housing shortage.
This approach has, however, also given rise to high levels of gearing among some of this group. This now threatens to constrain their ability to deliver growth targets set out in the Irish government’s housing supply strategy. A recent review of the funding model by the Department of Housing, Local Government and Heritage (DHLGH) has recommended that a working group be established specifically to explore the issue and come up with solutions.
Range of solutions
Campbell Tickell explored this and other financial challenges facing the sector in a 2022 report for the Irish Council of Social Housing. We concluded that there was a strong case for the reintroduction of partial social housing grant, to begin the process of ‘diluting’ the gearing impact of continued development, and that scope might exist to secure the early repayment of CALF loans.
Our 2022 report further highlighted an imperative to address persistent revenue shortfalls in respect of older, grant-funded property. Although not immediately obvious, this can also influence gearing, insofar as it may impact an AHB’s ability to leverage these units as security in devising alternative options to fund new social housing provision. It could also prove to be a real fly in the ointment where opportunities might exist for AHBs to address high gearing via mergers.
At least one AHB client is now also questioning whether the time has come to revisit the VAT rules that apply to social housing construction in Ireland, where a rate of 13.5% currently applies. Given that capital costs are effectively 100%-funded by the state, the premise is that a move to zero-rating for social housing supply would reduce the level of state support required. This would potentially offset the reduction in VAT revenues and, at the same time, stem the growth of AHB debt.
There is clear recognition by the Irish government of both the progress made and the capacity that now exists within the AHB sector to continue delivering badly needed social housing across Ireland. We welcome the focus that has been brought to these challenges by our clients and the ICSH, and will continue to support efforts towards finding robust and workable solutions.
“At least one AHB client is now also questioning whether the time has come to revisit the VAT rules that apply to social housing construction in Ireland.”