Labour needs to develop alternative ways of funding new affordable homes that make available public funding stretch as far as possible. The Party has long supported greater investment in rented homes by large institutional investors in principle, but delivering real schemes has proved problematic in practice. Now Insurance Companies are showing interest in getting into this market and innovative ways of structuring loans may make it a realistic proposition.
Here, Red Brick guest contributor Graham Martin, a member of the Labour Housing Group Executive, describes how such schemes might work.
The credit crunch and reduced government grants are putting pressure on the finances of the country’s housing associations. Housing associations finance most of their new homes through a mixture of government grant and borrowing. Over time the rents paid by tenants are used to repay the loans used to build their home.
Since the credit crunch it has become a lot harder and more expensive to borrow money from banks and building societies. The money is more expensive, comes with stricter “covenants” or rules, and many lenders will not lend for the full 25 or 30 years housing associations plan for to pay off their debt. Additionally the amount Government pays in grant has fallen from a typical £80,000 per property (England, programme skewed to London) to just under £20,000 per property. Like home owners, housing associations struggle to get mortgages over around 60% of the value of their homes, so if grant rates are cut there is not only more borrowed money for tenants’ rents to have to pay off, but the housing associations need to mortgage rather more than one home to fund the cost of building a single property.
Over the past year or so some of Britain’s Insurance Companies have been looking at funding (or “investing in”) rented property. Some are looking at social housing (housing association properties, and possibly council housing), others at funding larger scale residential property companies (private or publicly owned commercial companies or REITS – Real Estate Investment Trusts).
The attraction of social housing is that the borrowers (housing associations) are well regulated, and have a 100% record of repaying all monies borrowed over the past 50 years. Additionally rents increase annually in line with (or above) inflation, and housing associations currently pay much more in interest to the banks than Insurance Companies can get from investing in Government Bonds. (Many associations have credit ratings much better than the big banks, and better than many Countries).
An “ideal” lending product for a UK life insurance company is one whose repayment increases annually, in line with inflation, to match the expected lifetime of the pensioner(s) whose pensions are being paid by the Insurance Company.
By favourable coincidence it is possible for the Insurance Companies to offer funding to housing associations (and potentially councils) which start much lower than a conventional bank loan, increase each year but only to take the same proportion of rent collected, and after an agreed period the funding is redeemed with the final annual payment.
This looks to have the potential to be a real “win win” situation – Insurance Companies will get a higher return on their investments, allowing pensioners to be paid a higher “annuity” on their pension savings when they retire (or working people to pay less into their pension fund for the same level of funding).
And housing associations (and hopefully in future Councils) will be able to borrow money for social housing on much more “friendly” terms than from the banks. Some simple modelling carried out by the writer indicates that social landlords may be able to build up to half as many homes again (or even more) for any given amount of grant, compared to what is possible with bank borrowing in the present climate.
If this is such a good deal, why is it only now starting to happen? In fact there has been a very small amount of activity for the past 20 or so years, but on terms not attractive to housing associations, and in amounts not attractive to insurance companies. Recently three things changed. Firstly Insurers have had to start looking much harder for good, safe, investments. Secondly Insurers appear to have had a minimum investment size of around £100m before they would consider looking at new ideas. This is too large an amount for most housing associations. Recently Insurers are offering finance for amounts of around £50 million (and perhaps much less) which makes their offer much more attractive. Finally there have been some regulatory changes (comprehensible only to those who understand such terms as BASEL III and SOLVENCY 2) which make it easier, in terms of their regulation, for Insurers to lend to social housing.
So far two Companies (AVIVA and MGN) are marketing Insurance funding to social landlords. AVIVA already has its first funding agreement in place, and MGN publicised the launch of a £200m fund on 4 December. At least six other Insurance Companies are investing in Residential Property companies, and may in time move to fund social housing.
Are Insurance Companies the answer to funding social housing? Time will tell. However banks are struggling to lend, and, for housing associations which are not able (or willing) to enter the Bond Market and issue their own bonds, Insurance Funding may be the best offer in town.