Written evidence submitted by the Housing Finance Corporation [FSS 010]

The Housing Finance Corporation (THFC) is the UK’s leading affordable housing aggregator. Set up in 1987, THFC issues long-term bonds in the Sterling capital markets and on-lends the proceeds to housing associations. Throughout its history THFC has demonstrated its commitment to the social purpose of housing associations by innovating new products to achieve the best possible terms of funding, allowing its 160+ HA borrowers to grow and meet the demand for affordable housing. As a not-for-profit, the Group’s surpluses are retained and reinvested to ensure THFC can continue to provide competitively priced funding for HAs long into the future. By serving the affordable housing sector in this way THFC has become a trusted name and achieved steady growth. Its Group loan book now totals over £8bn and it has a dedicated and experienced team, allowing it to offer a comprehensive in-house service. The THFC model allows investors to diversify risk through THFC as an aggregating financial intermediary, and housing associations to get long-term, low-cost funding on standardised terms. For more information please visit www.thfcorp.com             

THFC has responded to those questions that it considers it has relevant comment to contribute, as one of the largest lenders to the sector.

The current state of financial resilience of social housing providers:

1. How would you assess the financial resilience of the social housing sector currently? Are increasing pressures and requirements putting financial viability at risk?

Currently, the sector as a whole remains in good financial shape, although the combined effect of fire safety works, health & safety spend, and EPC/NZC expenses is gradually eroding credit quality. However, the sector averages mask a wide range of resilience levels, with a number of housing associations (“HAs”) finding themselves financially stretched with concomitant impact on the ability to develop new homes. The downward movement in financial resilience is evident in the significant number of HAs who are having to renegotiate their lender covenants to avoid defaulting

2. What pressure has high inflation, increased energy costs and any other additional costs placed on the finances of social housing providers?

High inflation has had a major impact on the cost base of housing associations, both in terms of payroll, but more significantly in the cost of improving and maintaining the housing stock. HA forecasts show an erosion in the ability to cover financing costs, which will become more acute as fixed rate loan deals expire and have to be refinanced with new loans at much higher interest rates. This will require HAs to make cost savings and it also likely that the number of new homes built will reduce, unless grant support is increased.

3. To what extent can social housing providers maintain output levels in housing development to provide a counter cyclical balance in otherwise tightening market conditions?

It is unlikely in our view that HAs will be able to maintain the level of new housing output seen in recent years as financial resilience reduces, leverage gradually increases, and expenditure on fire safety, damp and mould has to be prioritised

4. What impact have changes in the housing market in recent years had on the strength of housing associations’ balance sheets?

There has been a steady upward movement in leverage which means that the sector gradually becomes a less attractive target for new lending or investment. In other words, balance sheets have been weakened.

5. Does the cross-subsidy model, by which market housing helps pay for social and affordable housing, have any continuing viability?

It has continuing viability provided that the housing market remains resilient. Where there is a risk of a house price correction, HAs will be unlikely to risk their capital on “market housing” to cross subsidise affordable housing, the net effect being a reduction in both market and affordable housing output

New challenges to the social housing sector:

1. The Secretary of State has specified that more resources need to be directed towards maintaining and improving the existing stock. How feasible is this for social housing providers?
2. How do social housing providers choose whether to undertake new development or to focus on maintenance and upkeep of existing stock? Is it currently possible to achieve both objectives?
• Where social housing providers are undertaking new developments, what consideration has been given to the types of homes they are building? For example, houses versus flats?
3. What issues does the requirement on Housing Associations to carrying out building safety present?

Building safety expense adversely affects the risk profile of HAs, but we continue to support the sector as it meets all its statutory responsibilities/

4. Has the lifting of the cap on the Housing Revenue Account made a difference to supply or improved housing from Local Authorities?
5. Have for-profit Housing Associations made the sector, as a whole, more financially robust?
6. Traditionally, struggling Housing Associations have merged with stronger, sometimes complementary, Housing Associations. Will this continue to be possible? This should continue to be possible but it needs to be recognised that there is finite capacity among the strong HAs to absorb the weaker ones, especially taking into account the wider pressure on  sector cashflows.

The Social Housing Regulator has the appropriate “regulatory toolkit” should an HA not be rescued by another, and also has the appropriate framework in the HA Insolvency Regime to deal with a so-called “too big to fail” HA

• To what extent can mergers result in the creation of an umbrella group too large to discharge its duties and responsibilities to its tenants?
• Has the emergence of partnership working between councils and housing associations in local areas made the sector more resilient? What encouragement has the Department given to such partnerships?
• To what extent do local authorities and Housing Associations collaborate when considering development plans for housing locally?
• The Affordable Homes Programme includes a high proportion of shared ownership properties. To what extent is this form of tenure desirable for potential purchasers and for social housing providers?

Shared Ownership continues to be the only route to affordable home ownership for many people on lower incomes, hence why it has proven so attractive to many prospective owners.

9. What contribution have council owned housing companies made to increasing social housing supply?
• Is the collapse of Brick by Brick – wholly owned by the London Borough of Croydon – a one off or the tip of the iceberg?
10.                      Will the introduction of the Infrastructure Levy and changes to section 106 significantly affect the capacity to develop affordable housing?

What are the policy and regulatory challenges to the Department and the Regulator?

1. Is the current Departmental policy on social housing and affordable homes appropriately focused?
2. Is Homes England being directed appropriately by the Department, and is it achieving its objectives?
3. Has any evaluation been undertaken of the impact of the additionality guidance on the supply of social housing?
4. Is the current range of grant funding available appropriate to address the issues and challenges that the social housing sector faces?

Grant levels in England are very low compared to those in Scotland, Wales and NI, which is why English HAs tend to have higher leverage and are running out of financial capacity to develop new homes at the rates seen in recent years, when combined with the other demands on cash-flow. If grants were to be increased for new homes and also for NZC expense, then it is highly likely that an increase in output would be the result.

5. On our inquiry into Exempt Accommodation we found that issues have arisen when providers are not registered with the Regulator. How does the Regulator of Social Housing engage with Housing Associations whose registration is voluntary?
6. Does the Regulator of Social Housing have sufficient power to ensure that mergers result in a financially viable new organisation?

Yes, as has been evidenced in recent cases, albeit the Regulator’s statutory powers have not needed to be called upon. It is of fundamental importance to lenders that the Regulator has the appropriate powers to create the confidence for new lending to take place at competitive margins. The level of Regulatory supervision is also of critical importance in maintaining the high sector ratings awarded by external ratings agencies (Moody’s S&P etc) which in turn are fundamental in investors seeing the sector as a good place to invest their capital.  The appropriate powers (and importantly the regulatory skills and knowledge that go with it) vary with the market context.  It is important to keep in mind the public/private classification issues that accompany the consideration of powers, to ensure that HA debt is still considered to be off the public balance sheet. 

7. Does the Regulator of Social Housing have adequate powers to ensure:
• value for money; and
• low risk

         from new sources of finance such as private equity?

1. Does the Regulator of Social Housing have the resources and skills necessary to regulate the increasingly complex financial and corporate structures proliferating in the social housing sector?

We believe so, yes – see comments above about the reliance of lenders and investors on strong regulation and Government support for the sector.

2. How appropriate is the existing regime in respect of regulating for-profit housing associations?
3. It is already accepted that the numbers of dwellings likely to be produced under the 2021 Affordable Homes Programme will be less than initially forecast. Will the financial challenges that the sector faces reduce these numbers even further?

May 2023