Social Housing – Financing and Investment Trends

Traditional Funding Arrangements

Ireland’s social housing sector has traditionally been financed by local authority receipts, government grants and exchequer funding. Debt financing for the purposes of constructing or acquiring social housing is a relatively recent trend with the Housing Finance Agency (HFA), being the primary lender. The typical chain of lending is as follows:

1. The HFA borrows money from the National Treasury Management Agency, the European Investment Bank (EIB) and the Council of Europe Development Bank.
2. The HFA on-lends these funds to local authorities and Approved Housing Bodies (AHBs) for housing purposes. The HFA offers these loans on 25 or 30 year terms at low fixed rates.
3. The Local Authority or AHB uses the loan proceeds to acquire or develop property to be delivered as social housing stock.

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Private sector investment

More recently, the Irish social housing market has been generating interest from private sector participants. Factors contributing towards increased investor appetite include:

1. The state backed nature of the investment means that it is considered secure and stable.
2. The government and stakeholders have developed and promoted new long-term leasing mechanisms which offer a 25 year income stream and inflation-linked rent increases. These features would appeal particularly to pension fund investors who are in the market for a long term yield. Please see here for our article setting out other key features of the Enhanced Long Term Social Housing Leasing Scheme.
3. The income stream is  not as susceptible to economic fluctuations or geographic risk as other real estate investments.
4. Ireland continues to see significant demand in the social housing sector and that is set to increase on account of the on-going shortage in overall housing stock, the rising birth rate, low death rate and high levels of immigration.
5. AHBs are keen to diversify their funding base.
6. There is huge political appetite for investment in this area. The announcement of Budget 2021 last week saw the government’s commitment to spending €500m next year on social housing construction projects. The Land Development Agency intends to leverage state land for the construction of 150,000 houses (including social and affordable homes) over the next 20 years using public funds and by obtaining third party finance.
7. Social housing projects offer scope for social impact investing and investors are increasingly focusing on ESG projects.

Institutional investors

While there has been a surge of interest, there has been little actual investment by institutional investors in funding or purchasing social housing developments to date. Scalability is important for investors in this area due to the high fixed costs involved and that may present a challenge in the Irish market. Certain economies of scale are required in order to generate adequate returns. Regulatory certainty is also a key consideration for investors when entering a new market. In Ireland, housing has required regulatory intervention in recent years particularly for residential tenancies. The development of new investment structures may bring increased activity. This might include the introduction of an aggregator for the purpose of securitising social housing loans across housing associations, which model has been effective in the United Kingdom.

Debt finance

In the meantime, the HFA is facing increased competition from private sector lenders to provide long term debt financing in this sector. In particular, AIB and Bank of Ireland have both funded a number of social housing developments. AIB recently launched a €300 million fund for social housing projects and this follows the full allocation of its previous €100 million fund on developments across the country. In addition, ‘alternative’ lenders are providing finance  directly to developers (often backed by private equity and international financial institutions),

One of the primary mechanisms for the acquisition or development of social housing units by AHBs is through the Capital Advanced Leasing Facility (CALF). Through this structure the government will provide a capital advance to the AHB of up to 30% of the total capital cost and the remaining 70% will be a loan from the HFA or a commercial lender.

Key features of a financing transaction between a housing association and the HFA or a third party lender through the CALF scheme include:

1. Long term loans: these loans may be for a term of 25 years.
2. Security package: this will be ring – fenced to the project assets and will include security over:

• The property and the transaction documents
• Tenancy agreements
• Relevant bank accounts
• Insurances over the property

1. Higher loan-to-equity levels: Loan-to-value ratios are in the region of 80–85% rather than 60-65 % for private developments.
2. Key transaction documents include:

• Capital Advance Agreement which this documents the capital advance (loan) from the local authority the ABH.
• Payment and Availability Agreement which this documents the long term lease arrangement between the AHB and the local authority.
• Continuation Agreement which documentsthe agreed terms between the lender, the local authority and the AHB.

Public Private Partnership

A PPP model has also been launched to boost social housing development in the form of the Social Housing Public Private Partnership Programme. Using EIB funding, the National Development Finance Authority has entered into partnerships with private companies to deliver homes. Under this “availability-based” model, the private sector partner is responsible for the delivery and maintenance of the units for 25 years. The state provides the relevant site to the developer by way of a lease or licence. The local authority is responsible for allocating tenants.  The state remains the owner and the property is delivered back to the state after the expiry of the lease / licence. Under the PPP agreement, the private partner will receive a monthly payment from the state and these payments will cover the cost of the delivery and servicing of units.

Studies comparing the funding and delivery of social housing in Ireland to other European countries show that Ireland has significantly higher levels of state funding. Private investment in this sector is trending upwards and there is appetite across market stakeholders for continued diversity of the investment base. The evolution of appropriate investment structures will generate further interest, particularly for institutional investors who are motivated by the long term returns.

Source: Mason Hayes & Curran