Inside Housing – Comment – How we can look to the past for housing finance of the future
Unlike the vast majority of publicly listed or private equity-owned businesses, housing associations (HAs) have a much longer natural planning cycle and benefit from the investment of patient capital. The Housing Finance Corporation (THFC) was founded in 1987 to introduce private capital to the sector. I took the wheel of the organisation in 2002 and am about to hand over to my very capable successor: Priya Nair.
Armed with the corporate memory of the full 37 years, I am able to pass on a few lessons learned. First of all, I can observe a certain amount of symmetry in the time I have been in the business. Twenty-two years ago, interest rates were slightly higher than today, a marginally larger group of the banks were competing with each other, principally for large-scale voluntary transfer (LSVT) business, on terms that would prove unsustainable.
Back then, THFC went through a process of restructuring our old bonds and obtained what was then an A+ rating from Standard & Poor’s. This initially proved useful to us in expanding our relationship with the European Investment Bank (EIB).
Believe it or not, even as late as 2002, institutional investors could live without credit ratings (they had, after all, invested in our listed debentures on an unrated basis for the previous 15 years). But then 2007 and the dynamics of liquidity transformation risk (borrowing short term, lending long term) changed the balance of investment in the sector significantly.
Very long-term ‘mortgage-style’ lending by banks, funded by short-term professional inter-bank deposits, suddenly became an expensive loss leader for banks. In contrast, so-called ‘liability-matching’ by insurance companies and pension funds seemed to, once more, make sense (a fact being emphasised to this day in the prominent lobbying by institutional investors for Solvency UK).
It was already clear to THFC in 2007 that bank failures would lead to a rebalancing of lending/investment capacity to the capital markets (the prior near-end experiences of Midland Bank and Barclays Bank in the late 1980s, early 1990s – and THFC’s rapid growth in that period told us that).
That said, it is important to state that, since 2007, banks have mostly stayed the course, but in doing so, have restructured the terms of their loans to housing associations significantly, often at a price.
“It was already clear to THFC in 2007 that bank failures would lead to a rebalancing of lending/investment capacity to the capital markets”
From 2007, THFC regained significant traction and slowly expanded its client base. Thanks to its links with the sector regulator and the National Housing Federation, THFC was able to commentate on the sometimes alarming machinations of the markets and also to recommend to government innovative ways of furthering investment in the HA sector (HAs were by now far better credits than either the banks or volume housebuilding sectors).
In 2013, we were successful in launching the most cost-effective guaranteed funding in the sector’s history, using a combination of EIB money and very long-term bond finance. The vehicle we used, Affordable Housing Finance (AHF), distributed £3.2bn of low-cost, long-term bonds and the largest EIB investment the sector has ever seen.
With a total of £2.5bn invested across both AHF and THFC’s earlier EIB backed loans, THFC Group remains the largest conduit for EIB investment in housing regeneration in Europe, something we are very proud of.
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