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Regulator reiterates ‘confusion between financing and economics’ as new models appear

By 10/09/2021No Comments

The Regulator of Social Housing (RSH) has reiterated concerns that current discussions about the potential for new funding models to enter social housing mark “confusion between financing and economics”.

Fiona MacGregor: “Too often we see so-called ‘innovative solutions’ trying to solve a problem that does not currently exist” (picture: Guzelian)

Fiona MacGregor: “Too often we see so-called ‘innovative solutions’ trying to solve a problem that does not currently exist” (picture: Guzelian)

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The Regulator of Social Housing has reiterated concerns that current discussions about the potential for new funding models to enter social housing mark “confusion between financing and economics” #UKhousing #SocialHousingFinance


“Too often we see so-called ‘innovative solutions’ trying to solve a problem that does not currently exist” says CEO @RSHEngland #UKhousing #SocialHousingFinance


Speaking at the Housing 2021 conference in Manchester on Wednesday (8 September), Fiona MacGregor, the regulator’s chief executive, echoed concerns outlined by director of strategy Will Perry in a column for Social Housing last month.

Ms MacGregor referred to current concerns that providers cannot deliver on building safety and stock investment at the same time as delivering new supply. This, she suggested, appears to be an “overly stark dilemma”, given that this year’s business plans show development forecasts recovering their upward trend alongside increasing levels of investment in existing homes.

At the same time she acknowledged that “desirable and necessary investment in new supply and existing homes” can gradually erode the financial and economic capacity of providers, “leading some to try and find other ways to fund their business plans”.

“However, in the current debate about funding new social housing supply there is some confusion between financing and economics,” she said. “There is no shortage of finance, and most providers have the capacity to raise more debt. Too often we see so-called ‘innovative solutions’ trying to solve a problem that does not currently exist.

“There is no shortage of available capital, but the difficult economic problem is generating sufficient return on that capital from sub-market rents whilst paying market prices for land and development.”



Ms MacGregor also warned that new providers, including for-profit models, could face economic challenges, despite appearing to have fewer demands on their balance sheets from stock investment requirements.

“New models with higher expected rates of return still face the same challenges (arguably even greater challenges) when it comes to making the development economics of affordable housing stack up.”

The regulator has previously sounded warnings over the presence in some cases of “reverse engineering” around funding models, in terms of investors seeking a certain financial return then working back to find how this can be extracted from housing models.

The Chartered Institute of Housing event was taking place on 7-9 September as an in-person event in Manchester for the first time since 2019, following the impact of the pandemic last year.

The regulator’s words of warning arrived a day before another session at the conference saw panellists including representatives from Civitas and Homes England discuss ‘innovative funding models to deliver new homes’.

Speaking on 9 September, Fay Mitchelson, head of joint ventures at Homes England, said that the agency is “in listening mode” with the sector to understand how the “natural alignment” between institutional capital and social housing could be explored.

She said: “There are attractions to the sector using equity models because it can move assets off balance sheet, it can create a new income stream through fee arrangements and obviously release capital to undertake delivery of the new units.”

Ms Mitchelson said that, to date, Homes England’s involvement in this unlocking had been to support the creation of new investment managers and fund managers in the market, including cornerstone investments.

The agency has previously invested £10m in a fund set up by M&G in collaboration with Hyde Group, as well as a £20m commitment to Man Group’s Community Housing Fund.

However she suggested that Homes England is also keen to support investors to actively fund new supply.

“Can institutional funding be used in the context of the actual funding of the product, can we work in a way with capital to get them involved in the development of the supply rather than just taking supply that is already there or letting someone else do it and that being funded in the traditional way? That’s an interesting space. And we’re in listening mode and we are working with various people in the market and trying to explore that concept.”

Ms Mitchelson said that investors are attracted to the ‘low volatility’ nature of the sector.

Social Housing asked panellists whether the low-volatility reputation of the sector was threatened by the growing presence of lease-based providers found to be non-compliant by the RSH over viability concerns. These include several of the counterparties of Civitas Social Housing REIT, for whom nine of 15 of the counterparties listed on the investment firm’s 2021 financial accounts have been found non-compliant to date.

Ms Mitchelson said: “It’s recognised when we’re talking abut innovative new things that it creates a fear about how do we manage and work through risks, and to be honest that is a process of time, and precedent, and the market evolving, and the demystifying of both sides. It is about partnership and cultural fit and the ability to have these conversations.”

Tayo Bilewu, investment director at Civitas Investment Management (the investment advisor to Civitas REIT) said that collaboration is important.

“We’ve got a challenge that has built up over a number of years. Grant funding, government funding is not an option. If institutional capital is coming in, if we then try to measure these new funder arrangements using our old structures, we will always come up with a problem.”

He added: “What we need to do is come up with solutions. I think as humans we find it easier to say what’s wrong, and not how we put it right and what we can do to put it right, to make sure we get the end results, which is about delivering roofs over the heads of people who need it. We just need to think differently – and regulate it differently.”

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