1. Background paper Looking Back, Looking Forward: Finance for Social Housing ( from Guarantee to Guarantee ) Christine Whitehead and Peter Williams LSE London Private Finance Seminar 15 September 2014, LSE

2. Initial Objectives To reduce public sector borrowing To gain greater control over subsidy streams by up-front grant rather than open ended revenue subsidy To recycle past subsidy and capital gains To improve incentives to greater efficiency To expand the role of private finance – both equity and debt – in the provision of housing of all types Fundamentally to lever in private funds from smaller and smaller amounts of subsidy to enable additional housing to be provided at lower cost to the public purse.

3. Pre 1988 1974 Housing and Planning Act Private initiatives (HAs; individuals) to fund against existing housing association assets Growing interest in government/local authority guarantees National Home Loans Corporation 1985 North Housing Association initiative using HAG 1986 Government challenge fund 1985 Act introducing the possibility of LSVTs The Housing Finance Corporation set up Increasing interest from financial institutions

4. The Housing Act 1988 Cash limited capital grants covering 75% of projected costs ( expected to decline to 50% Development risks to lie with HAs Private finance for residual Lenders to have first charge – but no guarantee Rents to be set by HA in order to at least break even Housing benefit to continue on rents up to market levels Improved LSVT framework

5. Initial Developments Immediate interest quite limited Lack of understanding of the nature of HAs Only small number of interested banks and even fewer building societies By 1991, £2bn mixed funding; £1bn LSVT but margins high at over 200 bp above LIBOR Government sponsored initiatives: Housing Corporation Private Finance Unit; THFC; Housing Market Package etc Market developments: range of products; bond market interest By 1996, £10bn from a full range of lenders; average grant rate 47%; margins 70 bp falling to under 50bp

6. The Changing Environment Declining/volatile government funding Regulatory regime – initial co-location of investment and regulation/move to light touch regulation and separation of inspection Rent controls – RPI+1% then ½% plus rent restructuring Perceived threats to housing benefit Industry initiatives - mergers and group structures

7. 2008 and immediately thereafter Separation of regulation and investment –and bringing together English Partnerships and Investment element of HC into HCA Initial impact of credit crunch limited BUT by 2009 more significant Lenders less willing to lend; renegotiation of existing commitments; rapidly rising margins back to 200bp +? Extra collateral for stand alone swaps Negative impact of LCHO unsold stock/reduced capacity to cross subsidise/ reductions in S106 contributions

8. At the time of the 2009 seminar Structural decline in numbers of lenders: few knowledgeable institutions with appetite HAs seen as more risky; lenders acting more unilaterally; fundamental shortage of funds But government were looking to use affordable housing to kick start developments: increasing grant rates and targeting stalled sites Growing interest in raising bond finance Potential for equity investment Need to cut back public expenditure as soon as some sign of improvement

9. The Coalition’s approach Regulation brought within HCA Affordable rents regime – 170,000 contracted by HCA to 2015 Welfare reform including ‘bedroom tax’ - first time social rent commitment limited Shifting away from grant to guarantees Affordable Housing Guarantee Scheme organised through subsidiary of THFC Build to rent fund for private renting

10. Scale of Lending 2008/9 – 2012/13 England 2008/9 £5,887m; down to £1,491m in 2012/13 Scotland £356m in 2009/10; £144.9m in 2012/13 Wales £123.7m in 2008/9 down to £60m in 2012/13 GB £6,367m in 2009/10 down to £1709m in 2012/13 So major contraction of market and withdrawal of lenders

11. Current Borrowing Facilities £72.7 bn, 77% in form of bank loans Around £60bn is currently drawn down Cash held in sector around £4.2bn Capital market funding accounted for over 60% of new funding in latest quarter 48 providers make use of free standing derivatives - some £9bn Total debt is expected to increase but refinancing requirements limited over next 2 years

12. Private finance – a successful story? HAs raised £70 bn (£20 bn for LSVTs) Terms and conditions improved consistently for twenty years but massive changes since 2008 Well organised adjustments in the face of individual HA problems – only a tiny number of insolvencies and minimal losses Remains a fundamentally low risk product even though over 50% of HA revenue comes from DWP

13. Private finance –a successful story? Still over-reliance on debt providers? Bonds have been the answer over last few years – but will this continue long term? Moody’s – 75 investors/£1.7bn Rise of private placements & retail bonds HA capital base/reserves increasing but partly the low interest rate environment - govt wants to recycle more effectively? Costs likely to be higher in the future.

14. Private finance –a successful story? Belatedly reworking moratorium arrangements? Valuation issues – reliance on EUV-SH; exploit MV-ST New FRS and fair value On/off balance sheet exposures and diversification Widening range of suppliers – equity? A qualified success?