Category: Market Insight

Back in 2014, Centrus worked with Cross Key Homes to secure the first Housing Association issued ‘Green Bond’. Since then, we have been pleasantly surprised at the rapid adoption of Environmental, Social and Governance (ESG) accredited and labelled financing in the market. Between early 2020 and mid 2021, the housing sector moved from nearly 100% non-labelled issuance to 100% ESG labelled issuance.

While it is not yet a prerequisite for funding, ESG has become increasingly baked into the ecosystem, both for issuers building this into their reporting standards, as well as on the lender and investor side of the equation where it’s becoming fundamental to the credit process.

At this year’s NHF Housing Finance Conference Centrus Co-founder, Phil Jenkins and Director Lawrence Gill addressed the impact of ESG on the funding landscape. Centrus were joined by Anne Costain, Executive Director of Finance at Stonewater, Brenden Sarsfield Chief Executive Office at Sustainability for Housing and Imran Mubeen, Head of Treasury at Bromford Housing Group.

Here are three key takeaways from their discussion:

1. The Rise of ESG Reporting

The most immediate trend has been the rapid adoption of the Sustainability Reporting Standard (SRS). Launched in 2020, the SRS is a voluntary reporting framework, covering 48 criteria across ESG considerations such as zero carbon targets, affordability, safety and resident voice. With over 100 organisations signed up already, the sector has made a great start in adopting ESG reporting, which many believe will become mandatory in the future.

The SRS allows housing providers to report their ESG performance in a transparent, clear and comparable way. Not only does this differentiate the issuer from their competitors, but makes it easier for lenders and investors to assess ESG performance, risks and pursue opportunities.

Beyond the SRS, the next step could be to consider impact reports from an accredited third party. This will allow HAs to quantify how much benefit their actions bring and demonstrate with more clarity how they are generating positive change for otherwise underserved stakeholders.

2. The move towards Sustainability-Linked Bonds in the Housing Sector

While a Sustainability Bond, otherwise known as a ‘use of proceeds bond’, involves proceeds being allocated to projects which further the UN’s Sustainability Development Goals (SDGs), a Sustainability-Linked Bond (SLB) has Key Performance Indicators (KPIs) embedded within it. These are specific social and environmental targets aligned both to your sustainability strategy and the SDGs.

Earlier this year, L&Q successfully completed the first Sustainability-Linked Bond in the housing sector. The £300m issue directly linked to the housing association achieving a set of targets around reducing operational carbon emissions, improving the energy efficiency of residents’ homes, and delivering new affordable homes.

As Housing Associations are in intrinsically tied to ESG due to their responsibilities within communities in which they work, this is a clear next step for the sector.

3. More ambitious KPIs and goals

As the use of ESG labelled finance and SLBs become more widely adopted, and the sector inevitably opens itself up to criticism and accusations of greenwashing, the next challenge will be to ensure that these KPIs are set appropriately, transparently and that targets are sufficiently ambitious.

Targets should be about additionality – delivering benefits over and above the borrower’s business-as-usual strategy.

Under The International Capital Market Association’s (ICMA) Sustainability Link-Bond Principles, KPIs should be:

• Relevant to the issuer’s overall business, and of high strategic significance to the issuer’s current and/or future operations
• Measurable or quantifiable on a consistent methodological basis
• Externally Verifiable, and
• Able to be benchmarked, as much as possible using an external reference or definitions to facilitate the assessment of the organisation’s level of ambition.

Please get in touch with a member of our team for more information.

Join us for the launch of the Sustainability Reporting Standard for Social Housing, an important development in unlocking the significant new private investment needed by the social housing sector.

The launch is the culmination of a 12 month process, initiated by the 17 sponsors and members of the ESG Social Housing Working Group and a consultation which has taken in the views of 250 organisations from across the social housing and financial sectors. We expect more than 60 housing associations, lenders and investors to commit being early adopters of the new Standard.

We’ve lined up some great speakers, including Bob Kerslake (Peabody), Harvey McGrath (Impact Investing Institute and Big Society Capital), Sarah Forster (The Good Economy), Phil Jenkins (Centrus), Paul Hackett (Optivo), Clare Miller (Clarion), Simon Century (LGIM), Natalie Elphicke (UK Parliament), and moderated by Merryn Somerset Webb (Moneyweek).

Please join us for what promises to be a lively and engaging discussion on the benefits of the new Standard.

REGISTER: Tuesday 10th November 2020 – 10.00am-11.00am GMT 

Our Panelists:

To learn more about how and why this initiative was started, visit www.ESGsocialhousing.co.uk.

Watch the webinar

Registered Providers are under huge pressure to increase spend on fire safety measures and de-carbonisation, whilst simultaneously struggling to support vulnerable tenants, rent arrears and deliver new housing supply. Leading you through this veritable minefield, will be Julian Ashby and Simon Dow, Previous and Interim Chairs of The Social Housing Regulator, expertly held in line by Phil Jenkins, MD of Centrus.

This webinar covered:

• What to do in a time of recession; sacrifice development with uncertainty about the cross subsidy model, or land bank?
• Should you fill your boots with cheap fixed interest debt or worry about negative inflation and an unsustainable rent formula?
• Are money in the bank and development opportunities a winning formula for attracting merger partners or is low debt per unit the honey trap?
• Walking the tightrope between delivery and staying on the right side of the Regulator and the Credit Rating Agencies?

“Covid adds new dynamics to stress testing; but it has also illustrated new ways of doing business and new ways of engaging with residents.”

Julian Ashby, Chair – AssetCore

Click here for the AssetCore website

Shared Ownership or Right to Buy?

The passing of the Conservative leadership baton (or rather the poisoned Brexit chalice) from Theresa May to Boris Johnson has perhaps brought with it a shift in emphasis back towards the traditional ideological safe ground of support for home ownership over rent. This was evident at the recent Conservative Party Conference, when the latest Housing Minister, Robert Jenrick, announced that housing association tenants will be given the right to buy 10% of their homes – on an automatic basis for new homes and under voluntary arrangements in relation to existing housing stock, the so called “Shared Ownership Right to Buy”.

The announcement unleashed the sort of response usually reserved for somewhat “on the hoof” policy statements which one can’t help but imagine must be dreamed up late one evening before the conference by special advisors writing ministerial speeches and seeking a punchy headline. It is also worth noting that the voluntary right-to-buy scheme explored by the Cameron administration has not really gained traction.

Commentators have highlighted the demand-side weaknesses of the idea, including:

1) Why would rational people voluntarily take on full repair and other leaseholder obligations for the upside of a 10% share in house price appreciation (see recent cases of leaseholder exposures to fire retrofitting costs)?

2) The cost of servicing the 10% mortgage – along with the rent on a shared ownership basis (2.75% on value?) – could easily exceed the 10% saving the resident would make on their (sub-market) rent – how many people is this likely to be relevant to?

3) The market for shared-ownership mortgages is already relatively thin – why would lenders bother for just 10% shares vs the usual minimum of 25% (although they could come under political pressure to support a Government Initiative)?

4) For people who can access and service a shared ownership property, why wouldn’t they just do so in the market?

Putting to one side the question of whether this presents an attractive proposition to housing association residents, it throws up complexities in relation to the debt funding model traditionally utilised by HAs. These include:

a. Lenders have, to varying degrees, pushed back on the inclusion of material amounts of shared ownership within security portfolios, partly because of uncertainty over underlying security value and the process of realisation under a default and partly as a result of the administrative burden associated with monitoring and removing from charge as staircasing increases.

b. The typical approach taken by bank lenders has been to cap the amount of shared ownership that borrowers can include within a security portfolio for a given loan. Institutional investors have been somewhat more relaxed but have still often sought to limit levels.

c. Again, ignoring the question of uptake, which we consider would be limited, in the event of this policy being implemented, all new build property would be subject to Shared Ownership Right to Buy which lenders would see as being an inherently less stable form of security than traditional social or affordable rented. This would likely lead to greater scrutiny of forecasts and stress tests around different stair-casing scenarios (as lenders seek to quantify a new business risk for HAs) as well as changing the way in which HAs might manage interest rate and refinancing risk. If borrowers considered there to be an inherent risk of higher stair-casing then this would likely reduce their appetite for large volumes of long-term fixed rate debt with expensive spens/modified spens type breakage costs, which appears potentially a move towards a riskier funding profile.

d. In return for more leeway on the inclusion of property exposed to stair-casing, banks may look to tighten up interest cover covenants and raise asset cover thresholds, particularly where shared ownership stock exceeds certain levels, or to shorten tenors on new funding even further.

e. Where HAs sought to enter into voluntary arrangements in respect of existing stock, which was already charged under previously arranged loan agreements, it is possible that this would trigger renegotiation of these loan agreements. Depending upon the commercial terms of these agreements, HAs may be exposed to a worsening of economic terms as well as covenants.

In summary, the proposed policy, which we believe to be limited in its appeal to HA residents, would create a number of uncertainties in relation to the existing debt financing model for HAs.

While we don’t believe it to be material in terms of the market’s willingness to extend credit to the housing sector, we do believe that it has the potential to increase actual and perceived risk on the part of lenders and therefore to increase pricing and tighten security and financial covenants, the combination of which could lead to reduced borrowing capacity and output. This does not mean that there is no merit to any form of the policy, but it does mean that it should be considered carefully and in a way, which is sensitive to the range of existing funding bases out there in the market.

Visit the Residential & Real Estate page to find out the wide range of services that Centrus provides to Housing Associations across the UK and Ireland.

For other perspectives on this same policy, visit other articles such as: Shared ownership Right to Buy: a gimmick that will not help tenants or landlords

This article was originally published by the Social Housing Magazine on the 16/10/2019.