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The Chartered Institute of Housing is the independent voice for housing and the home of professional standards

Taking the plunge - why so many housing associations are diving in to capital markets

19/11/2019


Since the late 1980s housing associations have been dipping their toes into the capital markets, but now, more than ever, they are jumping in with both feet. In our latest blog featuring speakers at our North East conference this Thursday and Friday, Home Group chief executive Mark Henderson explains why more are taking the plunge - and securing strong outcomes.

Between 2017 and 2018 more than £7bn was raised to fund their development plans as more housing associations thought more strategically about our relationships with investors. That’s an incredible increase from the days before the 2008 financial crisis.

The reasons are obvious - as we know all too well. Government significantly reduced its grant funding, and banks eneded their relatively open-door policies and threw a ring of steel around their entries. With tighter capital requirements they were unwilling to lend for long periods at fixed interest rates.

What didn’t reduce or decline at the same time, however, was the demand to deliver more housing across the UK.

It was evident that housing associations were going to have to find alternative or supplementary funding streams, in the face of a growing drought. One of the most attractive streams was, and still is, bond issues – they fit a housing association’s MO very well.

Most HAs are charitable non-profit-making organisations and are generally risk averse. They desire a certainty of cashflow and prefer long maturity periods to avoid exposure to market forces and fixed interest rates to be protected from fluctuations.

Attracted by the sector’s regulated nature and its low default rate, investors were willing to step in and offer the above.

Prior to this year, Home Group’s last venture into the bond markets was in 1987. While I’m sure things have changed in part, the principles remain the same.

Preparation is key. You are asking for significant investment so you need to ensure you are in the best possible position before you go in front of investors, who are looking for a number of things, which will determine the amount you receive and at what rates.

Our preparation, underpinned by our credentials and reputation, meant we secured a £350m bond issue. The 24-year bond, at an effective fixed rate of 3.24%, was one of the lowest overall rates achieved in recent comparable housing association transactions when we issued.

The bond was structured as £250m to be received from investors at issue with an option for a further £100m at a future point.

Our preparation was one of the key factors in us being oversubscribed.

Oversubscription is not uncommon on strong offers like ours. And that is why investors are pleased housing associations are now doing more than just dipping their toes in the water. But before they make the plunge themselves investors want to be confident they won’t sink.


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