Written evidence submitted by UK Finance [FSS 046]

UK Finance is the collective voice for the banking and finance industry.

Representing more than 300 firms across the industry, we act to enhance competitiveness, support customers and facilitate innovation.  In addition to representing residential mortgage lenders for home purchase and buy-to-let, UK Finance members also lend to support the social housing/ RSL sectors across the UK.

We welcome the opportunity to respond to the call for evidence by the Levelling Up Housing and Communities Committee to its inquiry on the finances and sustainability of the social housing sector in England.  

Overarching comments

From the perspective of UK Finance and our members as commercial funders and investors to the housing association sector in England, the key message is that there continues to be a strong appetite for commercial funding and investment in the sector.

We do not perceive the sector as “broken” or in a crisis.  It continues to perform well in delivering affordable homes for rent and plays a vital role in development of new homes for private sale and for shared ownership.

The sector remains investible and an attractive investment proposition although demands for new supply, retrofitting to meet net-zero carbon targets and the need for vital improvements in stock condition have increased the perceived risk levels of the sector.

While these are significant challenges to the sector, they are not beyond its capacity.  Registered Providers (RPs) have finite financial capacity and it is unlikely that all desired stock improvements and full transition to net zero carbon can be achieved without impacting the output of new homes, unless there is some change in the grant regime.

Specific comments

We have responded to parts of the call for evidence which are most relevant to the perspective and interests of our members, as follows:

The current state of financial resilience of social housing providers

Questions 1-5

The financial strength of the sector is seen and demonstrated through different lenses including the outputs of financial regulation; ratings agencies; funders’ own due diligence, and ongoing healthy appetite for the sector.

RPs demonstrate ongoing resilience in the face of strengthening headwinds such as the rising interest rate environment; pressures/ demands on cashflows through layering of government policy and other requirements such as building safety, stock quality, and retrofit/ decarbonisation for net-zero.

Despite demonstrating resilience, this should not be taken for granted: financial resilience is underpinned by a range of factors, some of which government can influence including the grant/ cross-subsidy model and rent policy.  These need to continue in a way that provides long-term certainty for RP business plans and avoids quick-fix interventions such as rent caps or withholding of grant which could have unintended consequences of destabilising RP finances over the longer-term to the detriment of tenants/ residents and local communities.

As rental income has been capped for the FYE 23/24 and is below inflation, this undoubtedly puts more pressure on RPs to manage already stretching goals. RPs must think more innovatively as to how manage their budgets and still deliver on their commitments. Some RPs use their surplus funds that they built over the years to continue delivering on their commitments, while others (usually smaller RPs) must revisit their development programmes and scale back.

Funder experience suggests more RPs opt for shorter-term funding solutions to give them required headroom or necessary liquidity to deliver on commitments.

Funders have observed a lowering of investment grade ratings from agencies such as S&P and Moody’s - reflecting the continuing challenging metrics of the sector with the most recent quarterly survey by the regulator showing a continued decline of financial metrics.  The sector’s long-standing ‘A’ rating is an important aspect of maintaining funder appetite (both banks and capital markets) and keeping funding costs as low as possible.  Government might wisht to consider whether there are interventions that could help to sustain this level of ‘A’ rating for the sector as a whole.

New challenges to the social housing sector

Question 8:  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?

Funder experience suggests that RPs will incorporate both goals in their financial plans/ budgets, however maintaining and improving the existing stock and improving its energy efficiency is now a major priority and, in the current economic environment, this is likely to mean delaying or scaling-back developmental aspirations for some RPs.

Question 9:  What issues does the requirement on Housing Associations to carry out building safety present?

Funders will continue to support their RP borrowers to ensure they meet regulatory/ safety requirements in the context of building and fire safety and other vital safety regulatory regimes such as those relating to gas and electrical safety.

Question 12:  Traditionally, struggling Housing Associations have merged with stronger, sometimes complementary, Housing Associations. Will this continue to be possible?  To what extent can mergers result in the creation of an umbrella group too large to discharge its duties and responsibilities to its tenants?

From a funder perspective, to provide comfort and confidence, the existing rescue model should continue.  It enables the regulator to facilitate the rescue of a failing RP with sufficient powers and resources to do so, ensuring effective and timely rescues where necessary.

While the sector has seen a number of “super-mergers”, there are risks posed by organisations which are or become “too big to fail” including financial consequences and concentration risk meaning there might not be a single rescuer, so the largest businesses could have to be split-up.

Funders and investors take comfort and assurance from continuation of the existing rescue model and from the toolkit available to the regulator and wider legislation which is designed around more structured intervention e.g. through a Housing Administrator to split up an RP business that is “too big to fail”.

Challenges and issues here feed-in to related questions about other demands on RPs.  Increasing demands for more decarbonisation, more retrofit, more development against a backdrop of rent caps and uncertainty about future grant and rent settlements will adversely impact financial strength meaning potentially reduced ability to step-in as a rescuer, if needed. It should also be recognised that there are a limited number of RPs with the financial and people resources necessary to successfully rescue a failing entity.

Question 14: 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 has been available for over 40 years and has supported many households to buy an equity stake in their home.  While it does have a significant role in addressing affordability challenges for first-time buyers, particularly outside London/ SE, shared ownership as a tenure has a number of well documented challenges in relation to delivery against customer understanding and expectations.  Despite this, for many it is their only route to achieving home ownership, although it is also important to note that shared ownership can be a legitimate destination tenure for many who choose not to staircase to full ownership of their home.

There are also challenges for housing association commercial funders arising from the operation of the mortgagee protection provision withing the shared ownership model lease meaning the interests of a commercial funder are structurally subordinated to those of the residential mortgage provider in possession cases.  This can limit commercial funder appetite for the proportion of shared ownership properties in loan security portfolios.

New Model shared ownership and Right to Shared Ownership also present challenges to both residential mortgage providers for shared ownership purchase, and commercial funders to RPs.

We welcome recent cross-industry initiatives looking at new ways to improve the shared ownership offer to consumers as well as calls for a major push on genuinely affordable social homes to address significant levels of homelessness across the country. UK Finance is keen to engage further on these important areas.

Question 16:  Will the introduction of the Infrastructure Levy and changes to section 106 significantly affect the capacity to develop affordable housing?

A significant proportion of affordable and social housing is built through s106 agreements/ planning obligations on developers.  There are concerns that a move to CIL could undermine this vital route to affordable/ social housing provision.

What are the policy and regulatory challenges to the DLUHC and the Regulator

Question 20:  Is the current range of grant funding available appropriate to address the issues and challenges that the social housing sector faces?

Subsidised housing needs subsidy.  It will be important to ensure there is long-term certainty on forthcoming grant and rent settlement regimes to support RPs’ long-term business plans for the development of new homes.  It should be noted that grant levels are significantly lower in England than other UK nations.  If government wishes to maximise the quantum of new affordable homes delivered, then a move towards increasing the levels of grant in England could have a major positive impact on output.

There will be effects on leverage if housing associations have to resort to more debt in absence of a strong grant regime.

The policy direction for grant and rent settlement regimes are intrinsically linked.  The cross-subsidy model which underpins the sector is prone to failure in a housing market with falling prices, if properties have to be sold at a loss – this would include losses on tranches of shared ownership homes or the conversion of unsold shared ownership homes to rent, as was seen following the financial crisis of 2007-8 and following years.  Exposure to housing market risk is an ongoing issue and one to which the regulator is attuned.

In relation to decarbonisation and retrofit for net-zero, there is a need for a joined-up approach to policy intervention and funding across government.  The UK Finance report Net Zero Homes: Time for a Reset includes a range of recommendations for government and policy makers in this area, which are now being proactively pursued via a range of follow-up actions and engagement. 

Grant-funding is paramount to being able to deliver on fire safety and retrofit aspirations, however grant application processes should be as simple as possible to maximise take-up.

For instance - a member has made us aware of a case where an RP was allocating grant funds to externally insulate properties, but insurers were not happy to provide cover for the specific product and wanted a product with a higher specification (even though the initial product was fire safety approved), which meant that the RP faced a dilemma – whether to abandon the project for the time being or find more funds to complete it, which would make retrofit cost per unit more expensive.

Question 22:  Does the Regulator of Social Housing have sufficient power to ensure that mergers result in a financially viable new organisation?

Generally, yes.  Funders take comfort form the range of powers available to the regulator (progressively modified to take account of past ‘near-misses’) to facilitate mergers where required.  Although it is inevitable that a new organisation might face financial viability challenges in its initial stages, the regulatory standards around financial viability and governance are robust to ensure compliance during the formative stages of a new organisation. Noted also that the powers of the regulator are a critical underpinning factor in the credit rating of the sector from external ratings agencies such as S&P and Moody’s. Please also see our response to question 12. 

Question 24:  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?

It is important that the regulator is able to keep pace with and, in many respects, be ahead of changes to financial and corporate structures in the sector.  This underlines the ongoing need for well-resourced economic regulation which supports funder confidence in the financial and governance strength of the sector.

May 2023