Social housing sector remains attractive to investors

The social housing sector remains attractive to lenders, with significant amounts of cash available to registered providers to cover their development and operating costs, according to the latest quarterly survey published by the Homes and Communities Agency (HCA).

The regulator monitors and reports on the financial health of the sector as part of a robust approach to protecting social housing assets and helping ensure providers’ contribution to new housing supply.

The 2014 to 2015 Q3 survey (October to December) reports that the sector’s borrowing facilities total £74.5 billion – of which 75% is bank loans – with £12.3 billion of undrawn facilities. The vast majority of providers anticipate that debt facilities are sufficient for more than 12 months.

However, challenges remain and providers must balance the risks of ensuring the availability of funds against the risk and costs of holding surplus cash, while managing the uncertain timing of sales receipts in cashflow planning.

Capital market funding contributed 73% of new facilities in the quarter. Providers making use of freestanding derivatives reported increased cash calls in the quarter with a corresponding drop in the headroom on collateral provided to meet mark-to-market exposures. As regulator, the HCA has sought additional assurance from the 47 providers currently using free standing derivatives that they have the capacity to meet future cash calls, and is monitoring a small number of providers more closely as a result.

Income collection data suggests that a large majority of providers (92%) are managing the impact of welfare reform on their cashflows with levels of arrears, rent collection and voids within or outperforming business plan assumptions.

Jonathan Walters, Deputy Director of Regulation at the HCA, said:

“We continue to monitor the sector’s financial health, and that of individual providers, closely. Overall, the sector remains financially strong and the sector’s position on meeting mark-to-market exposures, for example, remains positive.

“However, providers will be aware that economic conditions remain relatively favourable with low interest rates and increasing sales values, and should monitor their business plan assumptions accordingly. We have recently seen the swap curve fall below 2012 levels; a development that we will continue to monitor. Providers should do the same.

“The regulator’s message remains that the sector is increasingly complex and providers must have a firm grip on the risks they face, with appropriate management strategies in place to mitigate those risks.”

The regulator’s quarterly survey is one of the ways in which it gains assurance of the sector’s financial strength and the continued viability of individual providers. Its findings are based on the responses of 255 providers that own or manage more than 1,000 homes.

Other key highlights from the Q3 survey include:

  • cash available to the sector is £4.6 billion (September £4.2 billion)
  • new facilities arranged in the quarter totalled £1.7 billion
  • the current mark-to-market exposure net of unsecured thresholds increased to £1.9 billion (September £1.1 billion) with collateral of £2.4 billion (September £2.1 billion) given in the form of property or cash
  • 2,227 first tranche sales were achieved in the quarter (September 2,207), while 3,161 homes remained unsold (September 2,800). Of these 955 had been unsold for over 6 months (September 968)
  • there were 2,562 AHO completions and acquisitions in the quarter (September 1,983) while pipeline completions expected in the next 18 months are 18,515 (September 18,521)
  • 481 market sales were achieved (September 774) with 448 homes remaining unsold (September 427) of which 169 had been unsold for over 6 months (September 112)
  • there were 477 homes developed for market sale in the quarter (September 549), with pipeline market sales completions expected in the next 18 months at 5,092 (September 5,529)
  • total asset sales of £787 million (September £792 million) were achieved in the quarter generating a surplus of £254 million (September £237 million)

Some data reported in the Q2 survey has been restated in Q3, due to additional reporting from providers in November 2014.