UK Affordable Housing Market Update | January 2024

January in numbers

  • December CPI of 4.0% surprised to the upside against expectations of 3.8% and the market reacted with the 5-year and 10-year swaps increasing by c. 20bps on the day of the announcement.
  • Expectations for rate cuts probably got a bit ahead of themselves, and following the correction, the market now expects the Bank of England to begin cutting in late summer 2024 steadily down to 3.5% in 2026 where it is expected to remain for some time.
  • Regular wage inflation of 6.6%, down from 7.2% in the prior 3 months, was in line with market expectations, and energy prices are expected to fall in the spring. The Bank of England is unlikely to be too concerned.
  • The SONIA curve remains remarkably flat at 3.8% from the 5-year through to 12-year swap rates.
  • The Government has launched the consultation on Awaab’s Law with a proposal that providers must investigate hazards within 14 days, start fixing within a further 7 days, and make emergency repairs within 24 hours.

Implications for our affordable housing clients

  1. Trouble in the Red Sea and connected geopolitical events are upside risks to inflation and interest rates. Predicting further volatility would not be a particularly brave call. It is important to include a risk buffer within the floating rate assumptions in the business plan.
  2. The flat SONIA curve means clients can hedge over a tenor that suits their loan portfolio and swap rates remain attractive. Why take the risk of variable rates, particularly when you can reduce short-term interest costs and remove that risk buffer?
  3. Housing Organisations should consider the benefit of longer dated and covenant light debt capital market funding, particularly when funding long term investments. Activity has been picking up in recent months.

Latest client activity

1. Hedging transactions for interest cost savings: Centrus has successfully advised several clients through hedging transactions, saving interest cost in the tightest years and creating additional headroom and certainty in our client’s business plans.

2. Strategic support for Newlon Housing: We provided analysis and advice to Newlon Housing on options as a £50m swap matured and supported through the execution of a new 10-year swap that closed in December at 3.6% plus margin.

3. Successful £400m public issuance for Sovereign Network Group: Sovereign Network Group completed a £400m new public issuance this week, pricing at 108 bps over gilts and a coupon of 5.5%. SNG are A3 Moody’s / A S&P rated, and the pricing highlights investor demand and the benefit of scale. Centrus provided advice on the transaction

4. Advising on mergers in a growing trend: We are currently advising on 6 mergers and note an accelerating trend of non-profit Housing Associations seeking to improve financial resilience and sustainability by combining resources.

To learn more about our work in the affordable housing sector, click here.

For more information, please contact Paul Stevens or John Tattersall.

Scotland leading the onshore wind industry | The Scotsman

Last year, the Scottish Government set out a deal with the onshore wind industry to deliver 20GW of onshore wind in Scotland by 2030. David Craig, Director at Centrus, describes the deal as a “blueprint for the rest of the UK”, and an example of the regulation and reforms needed to facilitate energy transition to net zero and build a green economy. 
Click here to read David Craig’s article in The Scotsman

For more information, please contact David Craig

Is a bit of confidence returning to the markets?

Is a bit of confidence returning to the markets?

I’m going to whisper it quietly, but after a brutal couple of years, we are starting to see signs of confidence, or as former Chancellor Norman Lamont famously described it, “green shoots of recovery” in the capital and M&A markets as we start 2024.

Real asset sectors are still benefiting from the tailwind of the sharp reversal in rate rises at the back end of 2023 – as demonstrated by the significant narrowing of discounts in the listed Infrastructure & Real Estate Investment Trusts. This has been followed by the tentative start of a long overdue process of consolidation in this sector which may also support (again whisper it quietly) fresh equity capital being raised this year by existing and new trusts. This would provide a real boost to the much maligned UK equity markets and I wonder whether 2024 might herald a broader recovery in this space as UK & International investors capitalise on the stark undervaluation of UK equities.

In turn, this would provide a platform for increased IPO volumes and M&A activity in both public and private markets – both of which have a significant confidence aspect to them. With confidence and fresh capital both in very short supply over the last two years, investors have largely sat on their hands and focused on managing the many risks they have faced. Anecdotally, 2024 has seen many of our clients returning with renewed vigour and confidence and a determination to get deals done and there are clear signs of Keynes’ “animal spirits” returning to the markets.

Although borrowing rates have reversed, the jury is still out as to whether this is a mid-cycle reversal in a secular higher-rate world or a return to a low rate environment. On balance, my view is that it is the latter. Either way, higher quality sponsors and businesses appear to have got past the shock phase and have now adjusted to the realities of a higher cost of capital. Public, private and banking markets are all feeling positive and confident going into 2024, albeit with a degree of price discovery taking place in the public bond market following a period of exceptionally low volumes. Tight credit spreads are indicative of strong investor demand and confidence and compared to January 2023, our own Capital Markets team is seeing a much stronger deal pipeline, which is hopefully indicative of a healthy broader market.

It would be unwise to become overly exuberant just yet – many risks remain – political, geopolitical, inflation and energy related – to name but a few, but investors and financial markets have perhaps become more resilient after the last two years and are learning to live with higher levels of uncertainty and volatility.

So I hope that I’m not tempting fate and that 2024 is a year which sees a bit of swagger returning to UK and European markets and in particular a reversal in the fortune of the UK listed equity and debt markets, with a positive knock on effect to private markets.

Phil Jenkins, Managing Director at Centrus

UK housing associations reduce spending on affordable homes for 2024

Reduction in spending on new affordable homes

Multi-year analysis conducted by Centrus has revealed that UK housing associations are having to make difficult decisions, with a significant reduction in the spending on new affordable homes for 2024 onwards. 

Plans drawn-up last year cut expected investment for 2024 by 9%, or £1.5bn, compared with the previous year’s forecast, while funding over the coming decade was cut by £20bn, or 15% (Centrus, 2023).

John Tattersall, Managing Director at Centrus, shared his thoughts on the research with The Financial Times, encouraging policy-makers to provide radical support to a “resilient” and “mission-focused” sector. 

“The substantial decrease in spending on new home delivery is driven by three core challenges; increased costs of building, increased costs of debt, and competing priorities. 
Assuming the election next year results in a change of party, we are likely to see affordable housing shoot up the political agenda – and rightly so. Housing associations are unsung heroes in the UK. Social housing is held to extremely high standards of tenancy conditions relative to the private sector. While charging lower rents, providers are working tirelessly to deliver high quality homes for people in need while navigating an economic landscape which is especially tricky given their business models.” 

John Tattersall, Managing Director – Centrus

Click here for Joshua Oliver’s article in The Financial Times.