Meeting the need for social and affordable housing in Ireland requires new financial thinking. In recent years, the sector has moved beyond traditional exchequer funding to loan finance from state and private sources. With the establishment of a new regulator, Approved Housing Bodies (AHBs) have begun the transition from the voluntary sector to state regulation. This both imposes new standards of financial management and enhances the AHBs’ attractiveness to private lenders as borrowers and, potentially, as guarantors and issuers of listed debt.

Background – Traditional funding sources

Over the past decade, the composition of state financing of social housing has shifted from capital investment in construction towards loan financing of leased units, reflecting the post-financial crisis imperative for off-balance sheet delivery.

With an increasing proportion of state expenditure on housing now directed to current expenditure supports, the delivery of social housing has been entrusted to an increasing extent to the Approved Housing Bodies (AHBs). These entities have their origins in the voluntary and cooperative housing sector, and are organised as independent, not-for-profit charities. The terms of the relevant state support programmes require AHBs to additionally access private loan finance. While the AHBs (which are the equivalent of UK Housing Associations) are restricted by their status as non-profit entities, a handful of larger AHBs have begun to explore structures that can accommodate private investment while advancing their overall charitable objectives.

A regulated sector

The Approved Housing Bodies Regulatory Authority (AHBRA) was established as the regulator for the voluntary housing sector on 1 February 2021. The establishment of a new regulator is the first step in a process to move the AHBs from voluntary regulation to mandatory state regulation.

The overall aim of the AHBRA is to safeguard public and private investment in the AHB sector and ensure that the housing stock is managed sustainably. The statutory framework is intended provide assurance to investors, tenants, the government and the AHB sector itself that social housing providers operate in a well-regulated and stable environment.

Mandatory regulation imposes new standards of governance and financial management on AHBs, but it also enhances their attractiveness to private lenders as borrowers and, potentially, as guarantors and issuers of listed debt.

Innovative funding structures

To date, the biggest source of non-state funding on AHB balance sheets has been bank lending. However, bank debt has the key drawbacks of lack of flexibility, poor rates and covenant-heavy documentation.

One development that has yet to arrive in the Irish market, but which has made a dramatic impact in the UK, is the use of bond issuances by housing associations (HAs). These issuances include large public bond issues (listed on venues such as the London Stock Exchange and Euronext Dublin) and unlisted private placements.

Capital markets funding has emerged as the predominant source of new finance for UK HAs. In 2020, 66% of new funding for HAs was sourced from capital markets (the balance was predominantly bank lending). As at 31 December 2020, the total volume of capital markets funding available to HAs stood at £48.8bn (versus £61.3bn in bank facilities) (Source: UK Regulator of Social Housing).

In Ireland, certain AHBs have begun to explore private funding options beyond pillar bank lending. In 2018, Oaklee Housing was the first AHB to establish a project finance structure via a wholly owned subsidiary, organised as a limited recourse special purpose vehicle (SPV) with charitable objects. The facility is a €50 million long-dated debt financing agreement provided by German-based Nord LB, which provides Oaklee with access to long-term fixed rate debt from a private funder. In December 2020, Clúid Housing secured €54 million in senior secured long-term financing from Legal & General.

The transition of the Irish voluntary housing sector to statutory regulation should provide opportunities for AHBs to obtain lower-cost financing and a more diverse and sustainable base of funders. As in the UK, regulation is likely to make the sector attractive to investors. The obligations of UK HAs are not government-guaranteed, but the perception of market participants (particularly rating agencies) is that they benefit from implicit government support, which helps them achieve investment grade ratings.

Key features of a social housing bond issuance

Transaction structures

• Own-name:

  • Direct issue: where the main operating entity in the AHB group acts as the issuer.

  • Indirect issue: where a treasury subsidiary of the AHB, which can be an SPV, issues the bonds and on-lends the proceeds to the group.

• Pooled funding: these are issues by a funding vehicle raising finance on an aggregated basis for a number of different AHBs. The issuer will be independently managed and not owned by or affiliated with a particular AHB.

Typical covenants – these are generally far less restrictive than bank covenants

• Asset cover test: which is aimed at ensuring that the value of the security, together with the value of any charged cash, is not less than the aggregate amount of the bonds in issue. It would be subject to a “haircut” to ensure over-collateralisation. Two main methodologies are:

  • EUV-SH (Existing Use Value for Social Housing) – This is derived from rental cashflows and is appropriate where property titles are subject to legal restrictions – e.g. they may only be used for social housing.

  • MV-ST (Market Value Subject to Tenancies) – This values the property on the basis that it can be sold on the open market, subject to the rights of existing tenants.

• Income cover test: this is tailored to a particular AHB’s finances or to particular investor concerns – there are two main types:

• Portfolio tests: to compare income received on the charged assets with the interest payable on the bonds.

• Corporate tests: to compare the operating surplus of AHB with the interest payable on its aggregate borrowings.

• Deposit cash in a charged account: if all the properties have not been charged by the time of issuance a relevant portion of the bond proceeds can be charged instead. Also, property values may decrease or properties may need to be withdrawn from the security pool.

Security

• Direct issue: the AHB issuer grants security over its housing stock. There may also be a guarantee and additional security from other members of the group.

• Indirect issue: a joint and several guarantee of the group in favour of the issuer and security created over the housing stock to support the guarantee.

• Pooled funding: each on-loan of proceeds to an AHB in the consortium would be secured in favour of the issuer over that AHB’s housing stock. A reserve account may be part of the bond structure to protect bondholders from default.

• Unsecured issue: this is anticipated to result in a slightly higher rate, but there have been a couple of successful unsecured issues in the UK.

Conclusion

Private financing for social and affordable housing matches an investor demand for secure income and stable returns with an urgent social need. By taking advantage of the opportunities presented by state regulation, Irish AHBs and their investors and partners can achieve their social objectives by harnessing private financial resources.

For more information, please contact a member of our Corporate or Real Estate teams.

The content of this article is provided for information purposes only and does not constitute legal or other advice.