NIFHA Annual Conference

Transcription

1 NIFHA Annual Conference Alternative Funding Models for Social Housing: Ideas from GB and ROI 13 th October 2016 LONDON DUBLIN Centrus Advisors LLP is authorised and regulated by the FCA

2 Introduction to Centrus Independent specialist advice on Debt, Derivatives and Corporate Finance Combining traditional values, proven capability and leading edge ideas, Centrus is a source of valuable, independent and trusted advice Our client relationships are built upon the foundations of mutual respect, integrity, expertise and effective delivery Since 2012, Centrus has advised over 125 different clients from FTSE 100 to private organisations, on over 200 separate assignments with over 30 retained clients Our team has a breadth of knowledge from our experience in investment and corporate banking, treasury, derivatives advisory and accounting We are a FCA regulated business with offices in London and Dublin Specialist in social & affordable housing along with a range of other industry sectors WINNER 2016 Best External Professional Advisor Page 2 Centrus Advisors LLP is authorised and regulated by the FCA

3 Speaker Profiles Paul Stevens DMS MBA 25 years corporate banking, former Head of Santander Housing Lending Team, bank funding, re-structuring / renegotiations, mergers / distressed situations Jason Murphy BBS FCCA 15 years experience financing and advising on social infrastructure projects with some of the largest infrastructure investors and housing associations in the UK and Ireland Page 3 Centrus Advisors LLP is authorised and regulated by the FCA 3

4 Section 1: Ideas from the England and Wales Section 2: The Irish Funding Structure Page 4 Centrus Advisors LLP is authorised and regulated by the FCA 4

5 Section 1 Ideas from the England and Wales Page 5 Centrus Advisors LLP is authorised and regulated by the FCA

6 State of the Sector HA sector is in the midst of one of the greatest periods of challenge and change in its history Volatile political backdrop, significant uncertainty with regard to revenues, continued welfare reform, Right to Buy and changes to regulation Rapid consolidation underway, particularly amongst larger players At the same time as the sector is being asked to deliver more output, so what gives? Our assertion is that the existing HA structure and funding model will struggle to deliver sufficient volume to meet demand but a significant opportunity exists for the sector to evolve in the way it funds development Page 6 Centrus Advisors LLP is authorised and regulated by the FCA

7 Evolution of the Sector A bit safe and boring, not efficient, but plenty of boot capacity Still quite safe, but more exciting, more efficient to operate but running out of boot space Government / Regulators paying close attention to output and emissions Page 7 Centrus Advisors LLP is authorised and regulated by the FCA

8 On-lending Push Factors Valuations Business Diversification Traditional Funding Model Balance Sheet Constraints Page 8 Centrus Advisors LLP is authorised and regulated by the FCA

9 Pull Factors: New Models Capital Efficiency More efficient use of equity Output Respond to policy & corporate objectives Access to Capital Limitations of HA model for investment Risk Management Clearer ring fencing of commercial risk Regulatory Risk Has a strength turned into a weakness? Page 9 Centrus Advisors LLP is authorised and regulated by the FCA

10 Model 1: Development Only External Capital HA Development of sale, shared ownership or rental product Wholly owned sub or third party equity available, usually via JV partners Financed via equity and/or on-lending Gearing may also be applied through short term debt finance Profit delivered through margin on development Higher risk, higher return (up to 20%?) Centrus Advisors LLP is authorised and regulated by the FCA

11 Model 2: PRS with medium term exit (7-10 years) External Capital HA Acquisition of completed PRS units HA may co-invest with institutional equity / real estate funds Geared (modestly) through short-medium term bank or institutional debt Significant demand for debt and equity but for specific locations HA manages assets Returns through rental yield and capital appreciation Centrus Advisors LLP is authorised and regulated by the FCA

12 Case Study (Model 2): Fizzy Living Step 1 TVHA commits 30m of seed investment to establish Fizzy Living Total capital of 30m Step 2 TVHA raises commitment of up to 200m from additional equity providers Total capital of 230m Step 3 If equity fully deployed and geared to 50% Total capital of 460m, more than 15x initial equity investment by TVHA Page 12 Centrus Advisors LLP is authorised and regulated by the FCA

13 Model 3: PRS / Affordable with long term project finance External Capital HA Acquisition of completed PRS or affordable units HA may co-invest with other HAs or equity providers Highly geared through long term structured institutional debt Thin layer of equity, more akin to project financing HA manages assets Returns through rental yield only Centrus Advisors LLP is authorised and regulated by the FCA

14 Case Study: Welsh Housing Partnership WELSH HOUSING PARTNERSHIP LTD (Joint Venture Company) Innovative partnership comprising four prominent Welsh Registered Social Landlords working, with the support of Welsh Government and lenders, to deliver quality housing in Wales for affordable rent Lenders Loan Documentation 75% Debt 4 Housing Associations JV Agreement 25% Equity 10 Year FRI Leases LESSEE (4 Landlord Housing Associations) Welsh Government Grant Agreement (equivalent to 20%) Individual Tenancies TENANTS Homes Across Wales Let at Intermediate Rents (c85% of Market Levels) Centrus Advisors LLP is authorised and regulated by the FCA

15 Lessons from the Utilities Sector Experience shows that ring-fencing measures have needed to be tightened over time to avoid putting the regulated business under stress HoldCo and project finance structures used to fund non-regulated businesses, albeit that rating agency approaches to consolidated balance sheet and any subordination have shaped individual structures Halo impact of regulated business/ cash-flows on HoldCo borrowing rates/capacity Regulatory ring-fencing needs to reflect differences with for distribution equity models where customers/ other stakeholders need protecting from the actions of equity HAs should seek the fullest benefit of the halo impact for funding non regulated activities by implementing appropriate governance protections for the regulated businesses to avoid over zealous ring-fencing Page 15 Centrus Advisors LLP is authorised and regulated by the FCA

16 Concluding Thoughts Current environment represents a real opportunity for HAs to re-invent themselves and utilise their historic equity more efficiently Ambitious growth funded by increased market sales and debt is raising the risk profile of the rated UK housing association (HA) portfolio Turnover from market sales activity increased by 34% in 2015 (Moody s - 15 March 2015) Judicious use of capital in the right structures should allow HAs to magnify output and impact But requires clearer risk management, better capital allocation and a willingness to move away from the constraints of existing corporate and capital structures Increased sales and related risk are part but not all of the solution Page 16 Centrus Advisors LLP is authorised and regulated by the FCA

17 Section 2 The Irish Funding Structure Page 17 Centrus Advisors LLP is authorised and regulated by the FCA 17

18 Latest strategy, ambitious social housing delivery targets Rebuilding Ireland, An Action Plan Targets under Pillar 2 Accelerating Social Housing Page 18 Centrus Advisors LLP is authorised and regulated by the FCA

19 Reason: Collapse in provision of social housing units Breakdown of Built and Acquired Social Housing by source Source: Rebuilding Ireland, an Action Plan for Housing and Homelessness (2016) Page 19 Centrus Advisors LLP is authorised and regulated by the FCA

20 Impact of financial markets on availability of government finance to the sector Irish Govt CDS and 15 yr 6mth EURIBOR Swap Rates 20 Centrus Advisors LLP is authorised and regulated by the FCA

21 A new funding model, puts AHBs at centre of social housing Evolution of funding to AHBs Page 21 Centrus Advisors LLP is authorised and regulated by the FCA

22 Provision of social housing in Ireland by AHBs is growing Breakdown of all social housing provided by AHBs in 2015 Source: ICSH Housing Activity Report (2015) Page 22 Centrus Advisors LLP is authorised and regulated by the FCA

23 Today AHBs on site at 41 build projects delivering 680 units Announcement by Simon Coveney on October 6 th Page 23 Centrus Advisors LLP is authorised and regulated by the FCA

24 And AHBs are no 3 in terms of social housing providers The Local Authority remains the largest provider of social housing units Private Sector Leasing, 27,000 SOCIAL HOUSING UNITS, 2015 Housing Association, 30,000 Local Authority, 129,000 Rent Supplement, 67,000 Source: ICSH Housing Activity Report (2015) Page 24 Centrus Advisors LLP is authorised and regulated by the FCA

25 Funding: Combination of year revenue & upfront capital Social Housing Current Expenditure Programme + Capital Advance Leasing Facility Social Housing Current Expenditure Programme (SHCEP) Payment & Availability Agreement (P&A) entered with AHBs Build Acquisitions Mortgage to Rent Social Leases (LAs, private sector, NARPs) Capital Advance Leasing Facility (CALF) Upfront Capital for AHB units under SHCEP Upfront/ Accelerated CALF Multi-year CALF Pilot Page 25 Centrus Advisors LLP is authorised and regulated by the FCA

26 CALF, P&A and HFA/private finance provides 100% funding CALF and P&A Funding Structure Page 26 Centrus Advisors LLP is authorised and regulated by the FCA

27 CALF and P&A Explained How does the funding model work? Capital Advance Lending Facility (CALF) o Up to 30% of acquisition cost for up to 30 years at simple interest of 2% rolled up Payment and Availability Agreement (P&A) o Agreement with a local authority to make property available for typically years o Payment is set at 80% of market rent if property is leased, and 92% if property is owned o Tenants pay an affordable rent typically 15% of their earnings above an allowance o => AHB can receive more than market rent in total Remaining Finance o The remaining 70%-80% of acquisition cost borrowed from HFA or other private finance Page 27 Centrus Advisors LLP is authorised and regulated by the FCA

28 AHBs revenue finance: cash flow lending and higher gearing CALF and P&A Funding Structure Page 28 Centrus Advisors LLP is authorised and regulated by the FCA

29 In general CALF and P&A structure well received by funders Current private funders view on CALF and P&A support structure Strong appetite from banks and institutions Key risk areas include void risk and periodic adjustments for property rental sub-index of CPI Private Funders Introduction of statutory regulation in 2017 to attract further lenders Similar to typical cash flow lending structures eg PPPs, project finance Page 29 Centrus Advisors LLP is authorised and regulated by the FCA

30 Majority of finance to AHBs to date has been provided by HFA The Housing Finance Agency - a government owned lender o Raises the majority of its funding through the NTMA o On-lends to local authorities and AHBs for social housing o Can provide long term fixed rate loans to AHBs from 5-30 years o Given its public sector ownership status, all HFA s borrowing is included on the balance sheet of the Irish government Led to proposals for off-balance sheet mechanisms such as PPPs and third party funding vehicles (eg NAMA, Irish League of Credit Unions, etc) Page 30 Centrus Advisors LLP is authorised and regulated by the FCA

31 300m on three bundles which to deliver up to 1,500 units Standard DBFM Model for PPPs non recourse finance for government Bundle 1: units across 6 sites (PPQ expected in Q1 2017), Bundle 2: units across 8 sites, Bundle 3: to be announced Page 31 Centrus Advisors LLP is authorised and regulated by the FCA

32 AHBs central to delivery of action plan social housing targets Rebuilding Ireland, An Action Plan What next for AHBs? Increased own build and build through collaborations by AHBs using private finance Increased private sector supply to provide more acquisition opportunities (eg Part V, mixed tenure, etc) A one-stop shop within the Housing Agency to provide support to AHBs including capacity building and procurement A 70m fund in the Housing Agency to acquire portfolios of properties for social housing directly from financial institutions and investors for sale to AHBs Pathfinder projects in PPPs and affordable rental (with plans to make 10m pa available for affordable subsidy) An Innovation Fund to support the development by AHBs of innovative financial models, such as SPVs or mutual bodies The introduction of a two-year multi-annual CALF funding programme for AHBs A Government policy on release of CAS/CLSS charges by the end of 2016 The establishment of a Statutory Regulator for the sector in early 2017 Page 32 Centrus Advisors LLP is authorised and regulated by the FCA

33 Our Client Base Speaks Volumes Q & A Page 33 Centrus Advisors LLP is authorised and regulated by the FCA 33

34 Contact Us Phil Jenkins m: +44 (0) d: +44 (0) e: Robert St John m: +44 (0) d: +44 (0) e: Paul Stevens m: +44 (0) d: +44 (0) e: Jonathan Clarke m: +44 (0) d: +44 (0) LONDON DUBLIN Geoff Knight m: +44 (0) d: +44 (0) e: Jason Murphy m: +353 (0) d: +353 (1) e: Centrus Advisors LLP Mermaid House 2 Puddle Dock London EC4V 3DB T: +44 (0) Centrus Advisors Ltd Pembroke House Upper Pembroke Street Dublin 2 DO2 EK84 T: +353 (1) George Karalis m: +44 (0) d: +44 (0) e: georgekaralis@centrusadvisorscom John Shinton m: +44 (0) d: +44 (0) e: johnshinton@centrusadvisorscom centrusadvisorscom centrusadvisorscom Page 34 Centrus Advisors LLP is authorised and regulated by the FCA

35 Disclaimer Centrus Advisors Limited is a limited liability company incorporated in Republic of Ireland number Registered office at 70 Sir John Rogerson s Quay, Dublin 2 Centrus Advisors Limited is a Tied Agent of Centrus Advisors LLP Centrus Advisors LLP is authorised and regulated by the Financial Conduct Authority, Firm Reference Number Please visit wwwfcagovuk/register/homedo for more information Centrus Advisors LLP is a limited liability partnership incorporated in England and Wales with number OC Registered office at 3rd Floor, Mermaid House, 2 Puddle Dock, London, EC4V 3DB This document is only directed at those Clients that can be categorised as Professional Clients or Eligible Counterparties and not those categorised as Retail Clients under the rules of the Financial Conduct Authority in the United Kingdom The information contained in this Report obtained from sources other than Centrus Advisors Limited ( Centrus ) has been compiled by Centrus from sources believed to be reliable, but no representation or warranty, express or implied, is made by Centrus, its affiliates or any other person as to its accuracy, completeness or correctness Centrus is under no obligation to update, modify or amend the information This report is being provided to you based on our reasonable belief that you are a sophisticated institutional investor that is capable of assessing the merits and risks of the transactions and financial matters discussed herein All opinions and estimates contained in this Report constitute Centrus judgement as of the date of this Report, are subject to change without notice and are provided in good faith but without legal responsibility This Report is not an offer to sell or a solicitation of an offer to buy any securities This Report is not, and under no circumstances should be construed as, a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction To the full extent permitted by law neither Centrus nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein No matter contained in this document may be reproduced or copied by any means without the prior consent of Centrus All rights reserved Data is sourced from various sources including Bloomberg, Markit and Centrus Datasheet Page 35 Centrus Advisors LLP is authorised and regulated by the FCA