UK Affordable Housing Market Update | March 2024

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.

Centrus Leaders: Advice for Women in Finance

Centrus Leaders: Advice for Women in Finance

To celebrate International Women’s Day 2024, we asked Maria Goroh, Managing Director, Laura Thomas, Director and Myrto Charamis, Director at Centrus to share their experiences and advice for young women in the finance industry. 



As leaders at Centrus, what advice would you give to young women aspiring to build successful careers in finance, and how can they navigate potential obstacles or biases they may encounter along the way?

Maria Goroh emphasises the importance of preparation and flexibility. She states, “Prepare to work hard and be flexible; usually, the bias towards women is positive if you are delivering results” … “don’t forget to have fun along the way!” Laura Thomas echoes this sentiment, adding, “Build and demonstrate more confidence in yourself and reflect that in your communication style. If you see obstacles, identify them, come up with a plan to overcome them, and talk to someone in the organisation to help you.”

Myrto Charamis advises women to embrace challenges and actively network. She says “View challenges as opportunities to learn and grow. Build a robust professional network, make your voice heard, and always maintain your professional integrity.”


Could you discuss the importance of mentorship in your career journey, and offer advice on how women can seek out and cultivate mentor relationships within the industry?

Maria encourages women to seek mentors both within and outside their organisations. She notes, “Don’t be afraid to seek mentors; usually, people (both women and men) are very happy to help women in finance. LinkedIn and industry conferences are a fantastic tool for this. ”

Laura shares Maria’s positive experience with mentorships stating, “The best mentors I’ve had over the years have been informal. Through those early mentoring relationships, I learned huge lessons about authenticity at work and the value of asking questions.”


The finance sector is known for its fast-paced and competitive nature. How do you maintain a healthy work-life balance, and do you have any tips for other women striving to achieve this equilibrium while pursuing ambitious career goals?

Maria highlights the importance of planning and organisation, noting, “Planning ahead is crucial for me. Mobile devices and post-COVID hybrid work models have made it a lot more manageable to keep on top of things.” 

Laura emphasises the significance of structure and self-awareness, stating, “Maintaining a structured schedule is key. As I’ve grown older, I’ve learned to recognise my peak productivity times and allocate time accordingly. For other women aiming for equilibrium in work and family life, building a true partnership at home is vital – I couldn’t have my career and be the mother, wife, daughter, sister, friend and colleague I want to be without that. Strive to work with others who are also aiming for equilibrium, then we can all achieve true balance and understanding while having the career we love.” 

Myrto also advocates for “setting boundaries, practicing self-compassion and prioritising personal well-being” as essential strategies for maintaining equilibrium in the face of a demanding career.

Maria Goroh, Managing Director – Centrus

Maria Goroh brings 15 years of capital markets experience to her role as Managing Director at Centrus. Her background includes roles at firms such as Nomura, Citigroup, and TradeRisks. She has worked with leading UK, European and US insurers, pension funds and asset managers on transactions backed by housing, student accommodation, social infrastructure and local authorities.

Laura Thomas, Director – Centrus

Laura has over twenty years of experience in the Energy, Infrastructure, and Renewables sectors, spanning Wind, Solar, EfW, Biomass, and CCGT projects. Prior to joining Centrus, she served as Investment Director and CFO at Miller Turner, a renewables infrastructure investment company. Before that, she spent fourteen years at ESB, where she led the acquisition, funding, and finance operations of over 2.0GWs of energy projects across Ireland and the UK. 

Myrto Charamis, Director – Centrus

Myrto has a wealth of experience in London listed investment companies investing in infrastructure assets including renewables, battery storage and energy efficiency. With over 25 years of experience, her career has encompassed roles in leading investment banks in the UK and pivotal corporate finance positions in the US and Europe.



At Centrus, we are committed to fostering a culture of diversity, inclusion, and excellence in the finance industry. If you’d like to find out more about working at Centrus, please contact recruitment@centrusadvisors.com 

UK Affordable Housing Market Update | February 2024

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.

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.

Key lessons learnt from The Hydrogen Allocation Round (HAR) 1

Congratulations to all those developers successful in the inaugural Hydrogen Allocation Round (HAR) 1  announced last week by The Department for Energy Security and Net Zero, with 11 projects totalling 125MW awarded. Excitingly, this is backed up by the simultaneous launch of the second HAR 2, supporting the UK Government’s ambition of having up to 1GW of electrolytic hydrogen in construction or operation by the end of 2025.

The starting pistol has been fired on what will be a marathon strategy for the UK’s energy security, with a long-term focus on greening transport and other energy intensive industries, providing deep storage and increasing energy security through our own renewable resources. Centrus has been proud to support a number of hydrogen projects (with clients such as DBE Energy and NGN/CKI) and we will continue to support our clients and new investors over the coming years.


Key lessons learnt for future projects from the HAR 1 include:

  1. Ensure contracts/partnerships are in place for selling hydrogen to specific companies 
  2. Place solar/wind farms either within the facilities or nearby 
  3. Take advantage of existing infrastructure that can be repurposed
  4. Have a local economy and industry cluster preservation perspective
  5. Future price-based competitive allocation regimes will likely need to beat the weighted-average HAR 1 price of £241/MWh (£175/MWh in 2012 prices)

Terence Amako and David Craig would be delighted to discuss where we can help with the delivery and funding of future projects.

Mergers amid the perfect storm – should associations combine and conquer?

As the dust settles on two recent Centrus-advised mergers between Abri and Silva, and Sovereign and Network Homes, Centrus considers the role mergers have historically played in the affordable housing sector, and why, particularly given ongoing economic and political volatility, the theme of consolidation is likely to remain in focus into the future. 


Navigating the perfect storm – why might housing associations wish to merge?

As Winston Churchill opined, “the further backward you can look, the farther forward you are likely to see”. Indeed, the practice of UK housing associations merging appears not novel, but cyclical, with each burst of activity more pronounced, with ever greater calls on finite financial resources.

Understandably, during significant uncertainty, such as that caused by the pandemic or the 2008 financial crisis, housing associations had very little time to peruse the sector for potential partners, instead focusing on the immediate concern of getting their own houses (pardon the pun) in order.


Furthermore, while we don’t possess a crystal ball, consolidation looks set to continue, with the total number of UK housing associations decreasing nine per cent in the past decade alone, according to statistics from the Regulator of Social Housing.

For an increasing number of housing associations, this landscape has forced at least consideration of mergers and the appeal of ‘combining and conquering’.

Partnering with an organisation with complimentary geographies and ambitions is an attractive prospect for some, particularly where resources may be stretched thin. The benefits of a merger will vary and be specific to the organisations involved. However, as a general rule, the key advantages of undertaking such an exercise include:


1. Economies of scale, efficiencies and bargaining power

Often the primary driver behind any merger, and the most obvious benefit, is the resulting pooling of resources to achieve economies of scale. The newly merged organisations will benefit from sharing administrative and operational platforms, reducing duplication, eliminating costs and improving efficiency.

Furthermore, the newly formed, larger, housing association may have greater negotiating power via balance sheet strength and an enhanced credit profile, offering improved outcomes with investors, rating agencies, suppliers and local authorities.

There is a risk of diseconomies of scale. When considering a merger, entities must carefully evaluate how the combined organisation will operate and the pathway to that outcome.


2. Financial stability and improved risk management

Combining the financial resources of two or more housing associations can result in greater financial stability, providing a more secure foundation for delivering housing services and investing in property development and maintenance.

Additionally, there is a reasonable expectation of risk diversification across a larger number of properties, potentially reducing exposure to specific challenges or risks in a single geographic area or property type, such as flood risk.

Again, careful due diligence on the asset base of each partner is required to ensure the resulting portfolio of homes achieves the aspirational profile.


3. Improved service delivery and development capacity

Mergers can enable housing associations both to increase their development capacity and to provide and invest more into a broader range of community services for tenants.

The combination of cost savings and enhanced bargaining power achieved via merging may unlock additional building capacity for the merged entities to deliver new affordable housing units.

However, in a larger organisation, the distance between the tenant and the board may increase; careful consideration of operational structure is needed to ensure due focus remains on delivery for tenants.


Challenges

Overall, the case for mergers appears strong.

The saying about laws being like sausages (best not to see how they are made), applies to mergers as well. Mergers are complex, representing a substantial undertaking for all stakeholders and are not to be undertaken lightly.

While mergers can offer excellent benefits, this requires careful planning and execution.

Achieving the merger may require lender consent solicitation initially, while unlocking maximum capacity may need financial covenants and corporate controls to be reshaped.

Both can engender potentially complex and expensive negotiations with lenders. These can result in treasury costs, and ensuring they are outweighed by savings is a critical test of a business case.

Cultures will need to be harmonised, tenant concerns surveyed and allayed, while employee stakeholders will see significant disruption, but potentially a broader range of career development opportunities.  

The resulting, larger entity will naturally be more complex, and it is reasonable to expect some short-term administrative challenges to ensure all parties are comfortable, from governance and risk management perspectives.

However, it is important to ensure that this is transient; any long-term drag on decision-making speed can result in poor responsiveness, worse outcomes for tenants, and undermine any business case.

Mergers also have the potential to result in overextension during execution, where the level of effort required to deliver the process is too big for the existing personnel to achieve effectively.

This is where the selection of experienced advisors can be critical to ensure that lender negotiations are successful, and the loss to EV (with EV representing the present value of existing borrowing versus a like-for-like replacement at current market rates) is minimised.


Key success factors


1. Choose the right partner

Easier said than done, but the success of any merger depends first and foremost on selecting the right merger partner. A shared vision, culture and geographic focus are key to reducing the risk of integration issues.


2. Evaluate the business case early

Careful planning, effective communication and a clear understanding of the objectives of any merger are vital. A key step in merger execution is constructing an outline business case which should define the ‘merger ambition’ and assess to what extent the merger may deliver this.

It’s also important to ensure that the interests and needs of tenants and communities are at the forefront of the merger process. Ongoing tenant engagement is paramount (often formally required) throughout the process to ensure they feel their needs are heard and any dissatisfaction avoided.


3. Get the right support

Depending on the entities involved and the legal mechanism opted for, the transaction can take between six and 18 months to complete. During this period, there is likely to be an operational drag on day-to-day business, with deal-fatigue a real risk.

Mergers are not insignificant in terms of cost and will require specialist support from financial, legal and operational advisors to execute effectively. Selecting the right professional partners is important.

Creating resilient businesses

Mergers are not a universal cure for operating pressures. They have, however, been used successfully to create more resilient businesses that are greater than the sums of their parts.

Organisations should be prepared not only to proactively consider mergers, but also how to respond if approached, as many neighbouring entities will be pondering the same conundrum of how best to navigate their current challenges.

This article was originally published in Social Housing Magazine on 31st October 2023.