UK Affordable Housing Market Update | April 2024

Market update

• March CPI of 3.2% was higher than the expected 3.1%, however despite this swap rates did not increase by the end of the day of the announcement.
• CPI is expected to get close to the 2% target for April driven by the energy price cap reduction, although the increase in national minimum wages could reduce its effect.
• Inflation has proved to be stickier than markets were expecting until relatively recently; the US Federal Reserve has acknowledged interest rates will stay higher for longer.
• Given this, markets now only expect one BoE 0.25% rate cut this year in November (at the beginning of 2024 markets were pricing in 6 or 7 rate cuts).
• Hence, the swap curve is 15 to 20 bps higher than a month ago.
• House prices indices are now showing month-on-month falls, although a material fall in nominal prices seems unlikely.

Implications for clients

• The SONIA curve remains flat, now at 4.0% from 7 years through to 30, meaning clients can hedge over a tenor that suits their loan portfolio; this can reduce short-term interest rates and negate the need for risk buffers on hedged funding.
• Investor demand for HA paper is still strong and spreads remain attractive, which creates opportunity for long term covenant light funding from the DCM market; there has been a notable uptick in activity in this space over the last month.
• Even though interest rate projections and swap rates have risen over the last month, all in funding costs are still attractive at current levels and delaying fundraising in the hope of market rate falls is a risky strategy (particularly as any increase in margins/spreads could offset any fall in gilt/SONIA rates). 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.

Recent client activity

1. Bond issuances and retained bond sales: Several new bond issues and retained bond sales have recently completed, with HAs seeking to spread maturities through medium and long-term notes with tight pricing achieved.
2. Strategic asset disposals and acquisition strategies: Centrus is advising HAs on strategic asset disposals and acquisition strategies, highlighting the sophisticated approach some HAs are exploring to unlock capacity.
3. Corporate finance and treasury strategy advice for mergers: We’re providing comprehensive corporate finance and treasury advice for ongoing mergers in the social housing sector. Our expertise ensures that these mergers are executed smoothly and strategically.
4. Hedging strategies and interest rate risk management: Centrus continues to assist clients with hedging strategies and interest rate risk management. Our tailored solutions help HAs navigate market uncertainties and protect against potential risks.
5. Banking transactions: We anticipate announcing successful completion of several banking transactions, including revolving credit facilities (RCF) and term facilities, shortly. These transactions offer competitive pricing and attractive terms, further strengthening our clients’ financial positions.

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

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

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