Author: Georgie Knight

Market update

• February CPI of 3.4% was lower than the expected 3.5% and interest rate projections fell.
• Service costs and wage inflation were both 6.1% and remain sticky, stubbornly holding up CPI for now. 
• Goods inflation is down to 1.1% and with the energy price cap set to fall over 12% in April, expectations are for CPI to fall below 2% in the second quarter.
• The swap curve is down 20 to 25 bps from a month ago, with most of the fall occurring after the CPI release and dovish tone from the Bank of England’s 8 ‘hold’ – 1 ‘cut’ vote, with two key members no longer voting for a rate rise.
• House prices continue to fall in real terms, but with rental growth of 9% YoY in February (the largest increase since records began in 2015), falling interest rate projections and a resilient jobs market, a sense of relative strength appears to be returning in the housing market. 

Implications for clients

• The SONIA curve remains flat, now at 3.7% from 6 years through to 30, meaning clients can hedge over a tenor that suits their loan portfolio. 
• Interest rate projections and swap rates are falling but are attractive at current levels. Waiting for further falls back to the December 2023 lows, or to new lows, is a gamble. Steady hedging over time and maintaining the right hedging ratio to mitigate interest risk is the objective of a hedging strategy, and we think now presents a good opportunity to lock in relatively attractive rates. 
• High investor demand and very low spreads creates opportunity for long term covenant light funding from the DCM market and activity continues to pick up in this space.

Recent client activity

1. Banking transactions and funding mix: As we approach year-end, numerous banking transactions are nearing completion, featuring a blend of Revolving Credit Facilities (RCF) and medium-term funding. The banking market continues to be supportive of the sector and clients are taking advantage of attractive deals from a select few banks offering 10-year funding and above. 
2. Strategic asset management: We’re actively engaged in and advising on strategic asset disposals and acquisition strategies, highlighting the sophisticated approaches housing associations (HAs) are adopting to unlock capacity and drive growth.
3. Focus on hedging strategy and covenant changes: Hedging strategy, covenant changes, and the strategic impact of combining business plans remain areas of focus for clients as they navigate evolving market conditions and optimise their financial positions.
4. Active bond market: Several new bond issues and retained bond sales are currently active or recently completed, with HAs seeking to spread maturities through medium and long-term notes with tight pricing achieved.

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

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

Market Update

• January CPI was flat at 4.0% against expectations of 4.2%. The market reacted with the 5-year and 10-year swaps increasing by c. 10bps on the day of the announcement. 
• The 10-year swap rate (3.8%) is pretty much where it was after the last month’s ‘surprise’ CPI release. It was at 3.8% almost exactly a year ago too. It peaked in August 2023 at 4.7% and has bounced from the December 2023 low of 3.2%.  
• Wage inflation was down from 6.7% in November to 6.2% in December, a sharp fall, but analysts expected a fall to 6%.
• Natural gas and power futures are down almost 10% in the last month, so a materially lower energy price cap from April 2024 appears ever the more likely. It has certainly been a mild winter.
• The SONIA curve remains remarkably flat with the 3.8% to 3.9% range from the 5-year through to 30-year swap rates.
• New issue premiums have decreased significantly in recent weeks with some bond issues reporting premiums as low as 0 bps. This is quite unusual. 
• The news that the Affordable Homes Guarantee Scheme has increased to £6bn and is extended with flexibility to invest up to 50% in existing stock is an encouraging opportunity for the sector. 

Implications for our affordable housing clients

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? 

High investor demand and very low spreads creates opportunity for long term covenant light funding. 

Latest client activity

1. Interest rate risk analysis: Using Resi Analytics, we’ve conducted thorough analyses of the interest rate risk buffers in our clients’ 2023 FFRs. The results showcase a spectrum of risk appetites, from no risk buffer to a cautious outlook.
2. Strategic deal closures: Following strategic reviews and lender negotiations, several deals are set to close before year-end (31st March 2024). These initiatives aim to bolster liquidity headroom and improve covenant definitions. It is a busy time of year for banks, advisors and lawyers. 
3. Active advisory on various fronts: Detailed strategic thinking is vibrant across our client base, we’re actively advising clients on strategic asset disposals, hedging strategies, covenant changes, and the impact of combining business plans.
4. Private placement mandate launch: Amidst high investor demand and low spreads, we’re gearing up to launch an active private placement mandate. We anticipate increased private placement activity in 2024, providing valuable opportunities for our clients.

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

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

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.

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.