AHBs and the debt challenge

The Week in Housing 16/12/22

For this last issue of The Week in Housing for 2022 I’m delighted to bring you another guest post written by Fiona Dunkin, Housing Policy Manager with Clúid Housing, looking at the challenge associated with AHBs’ increasing reliance on debt to finance housing delivery. A huge thanks to Fiona for this piece. You can read Fiona’s previous piece, Is Cost Rental Making a Difference, here. I’ll be taking a break for the next few weeks, but will be back in the second half of January. Thank you to everyone who read The Week in Housing in 2022, and Happy Christmas!

In recent years, Approved Housing Bodies or AHBs, like Clúid Housing, have delivered around 40% of all new supply, with a focus on new build units and adding to our overall housing stock. As a sector, we currently manage almost 45,000 units and we have increased our delivery in the last three years. The Housing Alliance, which comprises six of Ireland’s largest AHBs, provided over 3,000 new homes last year and hopes to deliver a further 4,000+ by the end of this year. Looking ahead, the overall new build social housing target under Housing for All is 47,600 homes, with AHBs tasked to provide 45%, or almost 21,500 of these.

As Clúid, we offer a unique solution to the housing situation. As a not-for-profit housing provider, we focus on the value of quality and affordability over corporate gain, and can be highly innovative in how we address the needs of our current and future residents. Our impact on the current property market is significant and the level of property transactions engaged in by the sector has an influence that reaches beyond social housing. As well as this, there is a consistent demand for social housing, regardless of the economic situation, meaning that, as a sector, we can offer stability of demand to the construction industry.

There can be a misconception that AHBs are solely concerned with management of our existing stock, but this is absolutely not the case. In fact, the larger AHBs are now some of the largest developers in the State. Clúid, alone, now has 10,000 homes in management, and will have delivered more than 1,000 new homes in 2022.

In order to add to this stock of new housing, we need to continue to access funding. The current funding mechanism in Ireland for General Needs social housing, in place since 2011, is called the Capital Advance Leasing Facility (CALF). This allows us to access a loan of up to 30% from the local authority where the housing is located. We source the remaining amount from a loan via the Housing Finance Agency (HFA), or another private funder. While we are hugely appreciative of this financial support, it does mean that our units are 100% debt financed. Previously, we had access to 100% grant funding for General Needs social housing, under a mechanism called the Capital Loan and Subsidy Scheme (CLSS).  However, the CLSS scheme was wound up in 2012, following the Global Financial Crisis.

But what does this mean in reality? Does it matter that the sector is so heavily financed by debt? The short answer is, yes, it does. According to the report, Building on Success: A Financial Roadmap for AHBs, recently commissioned by the Irish Council for Social Housing (ICSH) and authored by UK non-profit consultancy Campbell Tickell, 10 Irish AHBs, including five of the larger ones ‘presently active in delivering social rented housing at scale’, have a projected gearing ratio of 67%, by the end of 2026.

This is moving towards a level of gearing that private funders will baulk at, due to the level of risk that this creates. Indeed, Campbell Tickell were of the view that ‘few, in our experience, are prepared to offer covenants in excess of 70%, and are more likely to seek a covenant in the 50-60% range’. It’s a similar theory to that of a deposit for households taking out mortgages – banks want to see ‘leverage’, or some level of buffering or asset cover, in order to protect themselves and, indeed, the wider economy. While AHBs do have to generate some surpluses to prevent risk, to cover our loans and to use to recirculate into the delivery and maintenance of housing, we do not generate profits, on the basis that we have a social mission – we are, therefore, very different to private developers – we are third sector developers.

As well as this, our voluntary Boards (given we are charities), who hold significant levels of legal and financial responsibility, are increasingly reluctant to accept such high levels of debt, in the interests of financial prudence, financial risk management and the welfare and security of our existing residents. Such a situation is incompatible, however, with the encouragement, in recent years, of the sector to diversify funding sources, with Housing for All stating that AHBs have ‘a key role to play as agents for attracting sustainable investment into social and affordable housing’. The existing funding structure is making, and will continue to make, the AHBs increasingly unattractive to commercial lenders.

The Irish social housing system is actually very unique in offering only debt finance – grants for the delivery of social and affordable housing are available in most other European countries where governments are investing directly in social housing, not just lending. More mature social housing structures have been built on a mix of grant and debt funding, keeping the level of borrowing by the AHB under control, maintaining their ability to borrow into the long term and enabling them to manage their financial risk.  This is set out in a 2014 report from the National Economic and Social Council (NESC) on the financing of housing across Europe, Financing of Social Housing in Selected European Countries.

Anecdotally, we know that an AHB (or housing associations, as they’re called there) in England, with similar levels of debt to Clúid, has 30,000 - 35,000 homes in their stock, in comparison to our 10,000, demonstrating a massive disparity in terms of debt levels. Grants from government make sense - the fact is that investment in social and affordable housing is investment in our society and economy. In fact, Clúid and two other AHBs (Circle and Respond) are currently in the process of commissioning a framework for the measurement of social impact of social and affordable housing. We want to be able to demonstrate the impact (we believe positive!) of social and affordable housing to people’s lives, sense of wellbeing and community. We understand that we, in Clúid, do not receive the economic benefit of what we spend but our tenants, communities and public agencies who work with them do. This may go some way towards strengthening the argument that it is logical to provide robust funding to our sector. As well as this, as is stated by NESC in the 2014 report mentioned above, the state is usually ‘in a position to borrow at the lowest cost so that funds raised by the state and provided as grants to social-housing providers will usually represent the lowest cost finance that can be used for social housing’.

So, what is the solution? We believe that a portion of our current debt finance needs to be replaced with equity or grant funding. This would resolve the issues regarding risk for funders and boards and would also allow for government to maintain a greater financial interest in the social housing we deliver. If, however, change does not happen, larger AHBs could potentially, among other options, be forced to limit our delivery of new homes, in order to maintain a gearing ratio that is acceptable to the social housing regulator. This, in turn, would have a negative impact on supply of new homes to the market at a time when new supply is already constrained on the basis on high production and finance costs. In the current context of huge demand and need for housing, this is something that we absolutely cannot afford to do.

Fiona Dunkin – Housing Policy Manager – Clúid Housing

Fiona Dunkin is Housing Policy Manager with Clúid Housing, where she has worked for over 3 years. Clúid is one of the largest approved housing bodies (AHBs) in Ireland with over 10,000 social and cost rental properties in management. Prior to this, Fiona worked in policy and communications in other housing/non-for-profit organisations, including Co-operative Housing Ireland and ALONE.

Events

No events to announce this week as it’s holiday season!

What I’m reading

This really interesting new report from the Chartered Institute of Building looks at incentivizing residential retrofit through an innovative ‘green flipping’ model. Focus published new research on their Shielding service. My colleagues Aideen Quilty and Michelle Norris have this new paper on LGBTQI+ youth homelessness. And finally, across the water in the UK, CACHE have published a new report looking at race, inequality and housing.