20 February 2009
Housing associations are digging deep and increasingly turning to financial self-help measures – such as lending to one another – to fend off the worst effects of the credit crunch. Neil Merrick reports on a sector under pressure
Housing associations cherish their independence fiercely. They are equally proud of the fact that no association has ever defaulted on a loan from a bank or building society. But, following the credit crunch and last year’s dramatic collapse of the housing market, many are now finding the going tough.
Deprived of much of their regular income from selling homes at market prices, they cannot afford to build new social housing on the scale that they and the government want.
Meanwhile, lenders, who traditionally offer registered social landlords better terms than private sector borrowers, are reviewing the price of new and existing loans and considering whether to charge more for credit in future.
Towards the end of last year, the situation became so serious that, less than a month after taking over as the regulator for social housing, the Tenant Services Authority began discussing worst-case scenarios with the Department for Communities and Local Government and the Treasury. Ultimately, it asked, would the government step in and support an RSL that ran into major financial problems?
Two months later, we still don’t know the answer to that question and possibly never will. For the time being, TSA chief executive Peter Marsh believes the worst has passed. ‘I don’t see going to the Treasury for guarantees as being on our radar at the current time,’ he says. But much will depend on what happens over the next six months. ‘If there’s another crisis in the banking sector, it will be an economy-wide problem, not just a housing association problem,’ adds Marsh.
The TSA and others argue that RSLs look financially healthier in the eyes of lenders and private firms if the sector is seen to look after itself. Last month, at least three large associations with healthy surpluses responded to an appeal by the TSA and agreed that, if necessary, they would lend money to other landlords that were struggling to raise commercial loans. London & Quadrant Housing Group offered Genesis Housing Group £20m. It says the arrangement makes sense for both parties – although Genesis has yet to take up the offer and says it sees it only as a back-up facility.
‘We’ve got sufficient borrowing [in place] for another 18 months or two years,’ says Waqar Ahmed, group director of finance at L&Q. ‘It’s in the interest of the sector to ensure that there is liquidity that supports organisations’ immediate needs.’
Affinity Sutton, another association that has agreed, in principle, to offer loans to other RSLs, insists it will do so only if it makes sense at the time. ‘It needs to be the right business decision for Affinity Sutton,’ says group finance director Mark Washer.
Like other landlords, Affinity Sutton has seen banks and building societies taking a more aggressive stance in the past few months. Whereas RSLs were once seen as a good credit risk and enjoyed the luxury of borrowing at less than 0.5% above the London Interbank Offered Rate – the rate at which banks lend to one another – today’s loans typically cost 2% or more on top of Libor.
‘All banks and building societies are facing significant problems. Their borrowing costs have gone up significantly and they’re seeking to recover those costs across the sector,’ adds Washer. ‘They are looking much more closely at loans and compliance with those loan conditions.’
The panic in December that led to the TSA enquiring about government assistance mainly revolved around six RSLs. These were struggling to come up with extra money under agreements they had signed with banks to guard against future rises in interest rates. Eventually, the associations managed to find the sums required.
David Orr, chief executive of the National Housing Federation, says RSLs have got through the worst of any cash-flow problems and, in spite of the difficulties they face funding new developments, ‘the core business is pretty robust’. But Orr is angry at the attitude of some lenders. ‘They are looking for any opportunity to re-price existing loans and that has the potential to add a significant amount to the underlying cost base,’ he says.
In some cases, RSLs seeking new loans are warned that, as a condition, they will be charged more for existing borrowing. Two associations considering taking over Presentation – a London-based RSL that was placed under supervision last July following concerns about its financial viability – pulled out after their lenders said they would have to pay more for loans that were already in place. Presentation has since announced that it is to merge with Notting Hill Trust, which has not commented on whether it faced problems convincing its lenders about the value of the move.
Orr is pleased that associations with healthy surpluses are offering to lend money to other RSLs. ‘It shows the sector remains capable of identifying problems and finding solutions,’ he says.
For their part, lenders are reluctant to discuss their strategy for pricing loans. Last year, Nationwide, one of the largest lenders in the sector, announced it was no longer looking for new business from RSLs – a decision that has since been reversed. A Nationwide spokeswoman said enquiries from RSLs are down on previous years due to the reduction in house building. ‘It has been the case over many years that the terms of existing loans are reviewed at the time of increasing facilities to take account of the prevailing market,’ she added. ‘At the present time, this might involve some increases in lending margins.’
Marsh says associations should brace themselves for the cost of borrowing to increase. But he does not see why being asked to pay an extra 1%–2% for loans will make a huge difference to a landlord’s viability. ‘It’s a natural market adjustment that business plans can tolerate,’ he says.
But he is concerned that lenders are using the threat of higher borrowing costs as a ‘weapon’ that could prevent associations from coming to the rescue of a struggling RSL. ‘Any lender that uses a takeover or potential crisis situation to exploit either association’s position is not doing itself or the sector any favours,’ he says.
At the end of October, 9,955 properties built by housing associations, mainly for first-time buyers, were empty. Although the Homes and Communities Agency is promising to help RSLs convert some into social rented properties, associations have lost crucial income they expected to use to cross-subsidise further development.
Landlords dismiss any suggestion that they can make up the difference through loans. ‘Borrowing more doesn’t make the scheme add up. It only increases interest costs,’ says Washer. This means that, if the government’s target of 3 million new homes by 2020 is not going to be cast aside, the HCA will have to pay higher grants.
The next major test for RSLs will come when they file their 2008/09 financial reports. Some landlords that bought land up to three years ago – when prices were higher – might record significant ‘write-downs’ that put them in breach of loan agreements.
John Unsworth, finance director at the Hyde Group, says: ‘If organisations are about to breach covenants, then banks will look to increase margins.’ But Unsworth is quick to stress that the picture is not all doom and gloom. Hyde recently announced that it had secured a £65m Private Finance Initiative deal with Barclays and German Bank Nord L/B, which took over after the original bidder Halifax Bank of Scotland pulled out. The deal will provide 225 new homes in the London Borough of Brent.
