Housing associations increasingly seek alternative lenders

The housing association sector will continue to find it difficult to access funding from banks in coming years, according to ratings agency Moody’s.
The report says that the banking sector’s funding model has moved away from low-margin, long-term loans in favour of higher margin short-to-medium-term finance.
This, combined with a reduction in central government grants has seen housing associations move to capital markets for long-term finance.
The report said: “Moody’s expects investor demand to remain buoyant over the near term, with institutional investors continuing to find housing association bonds attractive reflecting their investment grade, sovereign-linked characteristics.”
It estimated that around half of the £3.4bn of external finance to be raised next year to be made via the capital markets.
However, Sam Wotton, finance policy officer at housing association representative body the National Housing Federation, said that there could also be opportunities for councils looking to lend.
He said: “For smaller housing associations it can be more difficult to access the bonds market, but they still face similar funding pressures.”
Wotton said that in 2012 the housing association sector raised more in bonds than through bank loans for the first time.
David Green, client director at treasury adviser Arlingclose Limited said that investment in housing associations was still seen as a reasonably secure investment as one of the few sectors to still receive government support.
However, he warned councils to make sure they did proper due diligence before investing in a housing association, due to wildly varying gearing ratios and interest cover from revenue.
He also warned: “If a council makes a loan to a housing association to build homes in its area then that has to count as capital expenditure.”
The Moody’s report said that the housing association sector’s total debt would increase as associations undertook development programmes in pursuit of growth.
It added that although the sector’s total debt is equivalent to around 3.7% of UK GDP, refinancing needs are limited over the next two years, with just 3% of total debt (£1.8 billion) due to be repaid.
But it said that £7.7bn of debt is due to be repaid between three and five years from now.