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Funding for-profit housing associations: what does the market offer?
As not-for-profit housing associations focus on legacy stock, new for-profit entrants can purchase S106 homes at attractive prices, but how are they being funded?
FINANCE
Lee Gibson
Director, Newbridge Advisors
Lee Gibson
Director, Newbridge Advisors
Issue 76 | February 2025
Everyone in the housing sector will be acutely aware of the new for-profit housing associations entering the market.
While the likes of Blackstone, operating through Sage with their 6,500 homes, and L&G Affordable Homes, who have delivered 15,000 homes in the last three years, monopolise the headlines, there are plenty of other players looking to break into the market.
The attraction is the long-term, predictable, inflation-linked rental revenues and the event fees associated with shared ownership homes.
New entrants are not burdened with legacy stock requiring investment and are able to offer EPC-friendly homes with lower maintenance costs.
Asking the big question
But the question everyone is asking is how are the for-profit housing associations being funded?
If you are backed by the likes of Blackstone or L&G, who themselves have deep pockets to provide equity, it is logical to use existing relationships with debt funders to provide competitively priced debt into the housing association entity.
Regrettably, it is not quite so easy to raise debt if you are a new entrant without these strong relationships to call upon.
The for-profit entrants into the market are typically private equity backed and therefore keen to put debt into the housing association and limit the use of equity.
You would naturally think the bank funding market for housing associations is mature and relatively easy to access at competitive rates. This is certainly the case if you are a long-established not-for-profit housing association.
New entrants, without a track record to demonstrate your capabilities or a formal credit rating from one of the three recognised rating agencies, are often driven to a more thoughtful approach to debt funding.
The policy gap
While the traditional high street banks have well-developed policies to lend to not-for-profit housing associations, typically no such policies exist for the new for-profit entrants. This means that the for-profit housing associations can fall between two stools, specifically the housing association desk and the real estate desk.
At this point, you could engage with the challenger banks as they have traditionally been more flexible in their approach. The issue with the flexibility a challenger bank can offer is typically the cost of funding.
While a housing association with a strong credit rating may be able to secure a 5-year loan facility at around 100 bps margin, challenger banks are typically looking for margins of between 300 bps to 500 bps.
Such a pricing differential can be hard to justify.
No magic wand
I would love to be able to tell you there is a magic wand but I cannot.
What I can tell you is that with early engagement with the right people at key banks, careful structuring of the property portfolio, the ability to utilise a reasonable level of equity and a strong management team able to demonstrate their ability to manage the homes, it is possible to engage with select high street lenders at the more competitive rates.
What is more, the new entrants need to consider splitting their portfolios and raising different debt on different schemes, creating a blended loan book that contains both high street lenders and challenger banks.
A high street lender will often be more inclined to lend against an established and stabilised scheme in a strong location, while a challenger bank may be prepared to lend against a scheme that is in the stabilisation period. By blending the debt, the for-profit housing association can ensure a constant flow of funding against the portfolio of homes.
Looking to the future, the funding options available to for-profit new entrants should improve. Several high street lenders are exploring reshaping their lending policies to allow them to better serve the for-profit market. Furthermore, discussions are in progress with capital markets participants, so they are primed to invest once portfolios become stabilised.
It is perfectly normal in any market for the first entrants to pave the way for those that follow and that is exactly what we are witnessing today.
