Summary and implications
The appetite of institutional investors for the housing sector is finally growing, attracted by innovative new models and assurance in steady inflation-linked returns. Over the past year, a growing number of schemes have secured investment, some of which are listed below, injecting some much needed confidence into this sector.
Housing associations
In January 2013, Genesis Housing Association sold a 400-home, private-rented portfolio to M&G Investments (M&G) on a sale and leaseback basis for £125m in a deal which has widely been seen as the turning point in the involvement of institutional investors in this market. Under the sale and leaseback arrangements, Genesis will manage the properties for the 35-year leaseback period and will make inflation-linked payments to M&G. At the end of the leaseback period, the properties are retained by M&G, which has secured a 160-year lease. Genesis will use the £125m to provide up to 3,000 new homes including affordable and shared ownership homes.
Legal and General (L&G) recently made a debt facility available to two of Hyde Group's subsidiaries (£61m to Hyde Southbank Homes and £41m to Hillside Housing Trust) – its first deal in the housing sector. The loans have been made on a non-recourse basis at a fixed rate for the 15-year term. L&G has been vocal over recent months in its desire to provide long-term bespoke funding solutions for the housing association sector and is adopting a "tell us what you want to achieve and we'll see how far we can help you" approach, which is refreshing.
Local authorities
An increasing number of councils are using cheap borrowing from the Public Works Loan Board and subsequently lending to housing associations for development. In March 2013 Hastings Council lent £2.4m to Amicus Horizon for a regeneration scheme in the town. These loans are usually made on a long-term basis.
Local governments are also sourcing capital through other avenues. The Greater Manchester Pension Fund will directly fund housing developments on sites provided by Manchester City Council and the Homes and Communities Agency and the London Borough of Islington has invested £20m of its £800m pension fund into the Hearthstones Investments residential property fund which primarily invests in the private-rented and corporate-let sectors in London and the south east.
Increased investment
However, the investment is not just being seen on a local basis. For example, the European Investment Bank (EIB) is intended to provide a £500m loan to the Housing Finance Corporation, who will distribute the funds to landlords with plans to build affordable rent homes. By using EIB finance, the housing sector is protected from any future sovereign downgrade of the UK Government by ratings agencies.
In addition to this, flexibility has been introduced into the investment rules for local government pension schemes to allow funds to invest up to 30 per cent of their total assets in partnership vehicles. Previously the limit was 15 per cent. This change is intended to encourage local authorities to invest and will potentially free up £45bn to invest in house building, regeneration and other infrastructure schemes.
Although this type of investment has yet to achieve the landed "holy grail" status given to it by Boris Johnson last year, we are seeing positive signs of growing optimism which should give a much needed boost to the housing market in the coming years.
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