UK Affordable Housing Market Update | May 2024

Market Insight
Jonathan Spearing, Director - Centrus

Market update

  • We had farcical scenes at 10 Downing St this week as Rishi Sunak’s election announcement was drowned out by the pouring rain and a protester blasting out D:Ream Things Can Only Get Better!
  • The Government has solved inflation, masterful, I wonder if Brian Cox could write us a song about that…
  • Paul Krugman, a distinguished Professor and Nobel Prize winner said, “On interest rates, I am actually fanatically confused”. He commented on the long period of low interest rates that we thought was grounded on fundamentals, and now a period of high interest rates with the economy remarkably robust. Has the long-term sustainable interest rate gone up?
  • Within the April 2.3% CPI result (2.1% was expected) is notably higher service inflation (5.9%) and core inflation (3.9%) than a Reuters poll forecast (5.5% and 3.6% respectively).
  • The UK economy, largely services driven, is proving resilient to higher interest rates, and the April inflation results sparked a rally in sterling and revised projections of rate cuts, with the chance of a June cut now below 20%.

Implications for clients

Expectations on timing of the elusive first cut have bounced around in recent months and the 3-month forward SONIA curve for 2025/26 is c. 15bps higher than it was a month ago. But looking out 2 or 3 years, the curve hasn’t really moved so variable base rate assumptions in prudent financial plans are unlikely to need knee jerk review.   

Longer term rates remain stable and are beginning to look stubbornly static at c.4% on the 10-year swap and c.4.6-4.7% on the 30-year gilt. Our recent development assumptions survey showed clients using an average 5.3% discount rate, having crept up from sub 5%. Expectation that the cost of long-term capital will fall materially appears to be waning.     

The relatively insatiable investor demand and falling HA bond spreads has helped offset gilts, and issuances from Clarion, Platform and Paradigm in the 5.3% to 5.4% coupon range is cause for optimism. Bookrunners are suggesting modest premium on sub benchmark issuance for good credit, highlighting the variety of DCM funding options currently available to HAs, and an unusually low cost of carry thanks to high short-term rates is another factor to consider.     

Recent client activity

1. Tai Tarian refinance: Tai Tarian completed a £95m full re-finance. This involved two new bank funders and a PP investor, all on terms reflective of Tai Tarian’s high credit quality. The refinance will drive a substantial £6m NPV benefit, significantly reducing WACC, optimising financial covenants and corporate controls, and enhancing debt capacity and operational flexibility. Despite current rates, this transaction highlights opportunities to refinance debt and deliver a positive impact.

2. Strategic advisory: We continue to advise on strategic asset disposals and acquisition strategies, highlighting the sophisticated approaches some HAs are exploring to unlock capacity.

3. Risk management: Hedging strategies and interest rate risk management continue to be areas in which we are helping clients.

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

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