2023 was a slow year for finance in the social housing sector. A combination of difficult markets, rising interest rates, higher costs of debt and the rent cap resulted in many registered providers (RPs) significantly reducing their development output and pressing pause on raising new funds.

The outlook for 2024 seems more positive. We have seen two high profile bond issues by RPs in the past two months showing that RPs are willing to be market makers and raise funds even though the all in pricing is very different from 2021 levels.

Key finance issues to consider in 2024 are:

Increased cost of debt is here to stay

While interest rates are slowly lowering, it looks like the increased cost of debt is here to stay. Housing providers have benefitted from a benign interest rate environment for years and are used to all in prices of less than 3%. While the capital markets are likely to stabilise in 2024 the market is unlikely to return to all in pricing of sub 3%, rates of 5-6% are more likely.

While this “new normal” represents a significant pricing increase, RPs are advised not to wait to the last second before raising funds in the hopes that pricing will fall. Whilst there is a huge amount of pent up demand from investors for safe sterling investments, investors will reach capacity quickly if RPs all hit the capital markets at the same time. In order to ensure the best possible pricing either from the capital markets or from funders offering bank loans, RPs should ensure that they give themselves plenty of time before their funding need becomes critical to scope out the best opportunities.

What you can do now

• Accept that rates are unlikely to drop below the new normal of 5-7% and model accordingly to plan. 
• Streamline board approval/signature processes, so that you can come to the capital markets quickly to take advantage of competitive rates when they arise. 
• Registered providers who plan to issue bonds more than once a year may want to consider putting in place a Euro Medium Term Note (EMTN) programme to facilitate that.
• Get your security ready through pre-charging, so you can be light on your feet and impress the funders when the time comes – not to mention maximising values.

Innovative Funding Arrangements

Given the turbulent capital markets over the past two years, housing providers have understandably turned to the banks to provide their funding via revolving credit facilities. This short term five to seven year monies can be put in place quickly and cheaply, but does leave borrowers at significant refinancing risk. The funders under such arrangements can also sometimes be tricky when it comes to seeking consents for group changes or covenant amendments.

In 2024 we envisage funders changing their approach slightly to deal with competition from the capital markets by offering a greater range of loan terms and offering tranches of unsecured funding. Whether this flexibility will come at a price point that the sector can bear remains to be seen.

What you can do now:

• Put capital market funding back on the table as an option for consideration.
• When considering what funding you want, take into account the flexibility of capital markets funding versus debt funding. What financial covenant package do you want and does it harmonise with your other arrangements?

ESG related finance products - essential or expensive?

Housing providers in the sector enthusiastically embraced environmental, social, and corporate governance (ESG) related financial products. They are a good match for the sector’s ethos and are a useful way for housing providers to match their financial products to their stated net zero and social impact aims. Sustainability linked loans in particular have proven to be hugely popular as the product in its initial form allowed for RPs to set their own ESG metrics and specific performance targets (SPTs) without the need for independent verification. A number of the initial loans operated on an “agreement to agree” basis where the metrics and SPTs could be identified and put in place at a later date.

However, the change in the LMA Sustainability Linked Loan Principles in 2023 meant that verification of ESG metrics and SPTs is now required. Not only is verification required but the metrics themselves must be science based, challenging and go beyond “business as usual”. This change was undoubtedly a response to the anti-greenwashing legislation set to be put in place by the Financial Conduct Authority (FCA) which will go live in May 2024.

However, it means that ESG related financial products now have an inherent cost of verification included. With a scarcity of auditors in the sector, ESG verification may need to be carried out by entities that provide second party opinions, at a price point that works for the sector, in order to allow these products to continue to thrive. However, for ESG related financial products to continue to be popular there may need to be an increased “greenium” from funders (the pricing discount offered for complying with the requirements of these products).

What you can do now

• If you are considering ESG funding assess what metrics/SPTs you want to report against and present them to the funder at term sheet stage verification costs – your auditor may not be the most cost effective option.
• Before focusing on “environmental” consider whether you may have a better story to tell on “social” or “governance”.

Covenant compliance

A pattern that we saw from the Regulator of Social Housing (RSH) in 2023 is that they will be quick to penalise organisations that showcase lax internal controls. So for 2024, covenant compliance and internal monitoring processes is something the Regulator will be heavily focused on.

While funders are (mostly) understanding about an accidental breach of a covenant if advised instantly by the RP concerned, it is when there are delays to notify or less than transparent conversations that the Regulator starts to become concerned. Covenant matrixes are a helpful tool to minimise the risk of inadvertent breaches of covenants and we can produce these for you at very low cost.

What you can do now

• Ask your advisors to help you prepare a covenant matrix to monitor compliance.
• Agree who will monitor covenant compliance, and at what frequency.
• Decide the trigger points for notifying the funder(s) and RSH of a potential breach situation (this should not be a hair-trigger, but should be once the scales have tipped so that breach is very likely).

Partnership arrangements and other group structures

With covenant constraints preventing some RPs from being able to meet their development aims, we anticipate that 2024 will see a wave of collaborative partnership arrangements between nonprofit and for-profit RPs and between nonprofit RPs and local authorities. We can assist with finding the best structure to suit such arrangements and with putting the necessary documentation in place. We also envisage that there may be a greater call for RPs to set up their own for-profit RPs to enable them to continue to grow and develop.

What you can do now

• Look at how joint ventures can help you manage risk, e.g. increasing construction costs/risk of contractor insolvency. 
• Keep an open mind to innovative structures.
• Ensure any deals are mutually beneficial, with an equal sharing of risk and reward, so that all partners are motivated to succeed.

Non-Financial Reporting 

The FCA will be consulting stakeholders in June 2024 on the implementation of IFRS S1 and S2, the two global sustainability standards established by the International Sustainability Standards Board.

IFRS S1 and S2 look at disclosure of climate related risks and opportunities, and focus on areas such as the skill levels of boards and internal decision making processes. While these standards are likely to apply to PLCs(Public Limited Companies) initially, it is inevitable that funders will want RPs to move towards reporting in line with these standards. It is very important to note that these standards are not currently captured by the Sustainability Reporting Standard (the gold standard for non-financial reporting in the sector) and that IFRS S1 & S2 contemplate the ESG disclosures forming part of the financial statements.

There is a significant difference between publishing a stand-alone sustainability report and ESG disclosures being captured in your accounts. We will be keeping a close eye on developments in this area.

What you can do now

• If you’re not already consider moving towards annual reporting in line with the Sustainability Reporting Standard.
• Familiarise yourself with IFRS S1 and S2 and start to consider what internal changes would need to be made to comply with them.
• Start to assess where climate change could impact on your business and supply chain.
• Prepare a skills matrix detailing the skill set of your board to identify any gaps in knowledge/experience that you may want to rectify (Capsticks can help with this).

Housing Forward View 2024

This article is part of Capsticks’ Housing Forward View 2023. Read the other articles featured in this publication below:

• Governance
• Building safety
• Housing development

How Capsticks can help

To discuss how this may affect your organisation, please get in touch with Naomi Roper.