Housing associations turn to alternative charity finance

Back in July 2015, George Osborne delivered some budget shocks to the housing association sector: measures in his summer budget included an extension of the right-to-buy to housing association tenants; and successive 1% reductions in social housing rents in England, in each year from 2016 to 2019. 

Rent reductions are good news for existing tenants, but these changes have made it much harder for housing associations to continue to build new homes and invest in existing housing. The National Housing Federation estimated that these changes could mean 27,000 fewer homes would be built by housing associations over the following five years. If many tenants do exercise their right to buy, the need for more new social housing will become even more acute. 

"The bottom line is that to continue to build they [housing associations] need cash"

“Housing associations want to expand their building programmes,” says David Brown, client relationship manager for charities at CAF Bank, which is owned by Charities Aid Foundation and run purely for charitable purposes. “They may need to rethink income streams and find new ways of achieving efficiencies. Some have looked at mergers with other organisations. But the bottom line is that to continue to build they need cash.”

As sources of grant funding to support new developments and investment are getting harder to find, housing associations are turning to other potential sources of finance. There are a number of bond offerings available, including retail bonds, mini-bonds and social impact bonds, for example, and an increasing number of social lenders which are keen to see their money being used for positive purposes. The key is to find the income source that is appropriate and affordable for the housing association’s individual needs. 

Steve Prime, chief executive at the South Devon Rural Housing Association, says his organisation has been pursuing a strategy of diversifying income sources away from government and grant sources for some years. That included starting to arrange loan finance through CAF Bank.

Success stories have included the use of loan finance to support refurbishment of a care home and the creation of a welfare fund to subsidise residents unable to meet the increased fees it was then able to charge. Previously the care home was dependent on a local council paying fees; now it is self-sufficient. 

Another organisation, Pathways, has its origins in the almshouses charities set up, in some cases, several centuries ago. Its income is low, because its rents are very low. At present it is not affected by the right to buy legislation; and almshouse charities have been exempted for one year from the rent reduction. “We’re hoping that’s going to last, because we just don’t have the financial reserves that a housing association would,” says Pathways finance director Peter Thomas. 

Until 2012 the organisation had never borrowed money, although it was managing some loans inherited from organisations with which it had merged. But today it is using loan and mortgage finance to invest in new developments, with support from lenders including CAF Bank. 

One recent example is a £2.1m development of new flats in Ealing, west London, funded in 2014 in part through a mortgage provided by CAF Bank. Another project has extended and refurbished four flats in Tottenham, north London, with £425,000 invested thanks to loan finance from CAF Bank. 

Scottish housing associations, while not affected directly by the 2015 budget announcements, also face funding challenges. Dunbritton Housing Association is based in Dumbarton, west of Glasgow. Almost half of its properties are in the largely rural Argyll and Bute Council area.

The association has been able to continue to build new housing, despite the recession and the Scottish Government’s decision to cut grants for social housing in 2010. This is in part because of the actions of Argyll and Bute Council; and thanks to partnerships with developers and with CAF Bank. 

Argyll and Bute Council charges higher council tax on the large number of holiday and second homes in the area, then uses the proceeds to boost its strategic housing fund – thus helping organisations like Dunbritton.

The council also stipulates that any new housing development must contain a minimum of 40% of affordable properties, which has helped Dunbritton to develop good working relationships with private sector developers. It is currently working on a new project in partnership with a developer that has purchased land in Dumbarton to build over 100 houses for rent. 

“This will be the biggest project we’ll ever have done,” says Dunbritton director Morven Short. “Part of the reason the developer came to us is our excellent track record and sound financial performance.” The organisation always has a choice of possible lenders, but CAF Bank has become one of its preferred options. “The ethos of the bank is a primary reason,” she says, citing CAF Bank’s willingness to build long-term relationships with organisations like Dunbritton.

“Rather than just following the money, CAF were interested in us as an organisation,” says Steve Prime. “The terms of the CAF Bank offer are tailored to our organisation, while with larger banks it’s usually a case of ‘these are the terms and that’s it’.” His view of CAF Bank is echoed by many of the organisations that work with it: this is a different kind of lender, with a genuine understanding of this sector that is helping it to support housing associations during tough times.

If your housing association is planning to build a new development or renovate housing stock, find out more about CAF Bank’s loan finance options here.

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