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.

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