Funding options in social housing

Written by Bethan Gladwyn, Partner and Head of the Housing Management team, and Harriet Morgan, Partner in our Commercial Property department.

This article aims to provide an overview of the various avenues of funding currently available in the social housing sector and the advantages and disadvantages of each kind of funding.

Debt

Most social housing finance is generally provided either as debt under a facility agreement from a bank, building society or other specialist lender, or under a capital markets-based structure involving a private placement or bond issue.

Loans

Banks, building societies and other specialist lenders have been the traditional funding options for social housing projects, whether for investment in existing housing stock or development of new housing. Loan facilities are either term loans or revolving credit facilities and are generally governed by an LMA-based facility agreement, with repayment either amortised or bullet. Security usually takes the form of a legal charge, floating charges are rare. Security is often held by an independent security trustee appointed for this purpose under a security trust deed.

The social housing sector as a whole is still able to borrow the money it needs as part of its business model at relatively favourable terms. This has been attributed to the sector being strongly regulated, the fact that no housing association has defaulted on loans (to date), the “long-term, high-quality nature of the cashflows that are derived from the rent” and the fact that investors assume the sector is ultimately backed by the UK Government.

Green and sustainable finance continue to be increasing priorities for funders and social housing finance lends itself well to green and sustainable finance. Earlier this year, Lloyds Bank agreed its first sustainability-linked loan within the social housing sector, with an interest rate reduction associated with improving the energy efficiency and decarbonisation of its existing housing stock.

The main advantages of bank funding for social housing finance are:

• flexibility through revolving credit facilities – it is possible to withdraw money, use it to fund development, repay the loan, and to then withdraw it again when needed and
• can be relatively cost effective.

The main drawbacks are:

• it is difficult to get bank funding for long-term projects and on fixed interest rates which can lead to interest rate risks.
• bank funding also comes with a wide range of covenants and other restrictions.

Bonds

Public bonds

Own-name public bonds are issued directly by RSLs, rather than through a special purpose vehicle.

The main features of bonds are:

• No or limited financial covenants.
• No or limited restrictions on the likes of mergers, providing more flexibility.
• Lowest cost of any long-term debt options for social housing organisations.
• But conversely – high fixed costs involved in issuing the bond.
• more suited when the funding raised for large debt sums (£100M +).

Privately placed bonds

Private placements are governed by a note purchase agreement under which loan notes are issued to private investors. The social housing providers issue loan notes to an investor or group of investors selected for this purpose, commonly pension funds or similar, and so are distinct from a public offering.

The main features of these privately placed securities are:

• can offer flexibility on term of debt
• it is flexible in terms and allows the provider to tailor their requirements for specific needs
• however, it may have less flexibility and need extra terms, conditions and covenants compared to public bonds
• these are also more expensive to issue than public bonds.

Sustainability bonds

Similar to what we see happening in the loan market, sustainable and green bonds are also increasing in popularity. We see several landlords have issued ‘sustainability bonds’. Sustainability bonds require the finance to be used exclusively for green or social projects. These deals pave the way for more bond issues to follow across the social housing sector. PA Housing (an RSL operating in the Midlands, London and the South East) has recently issued a £400m sustainability bond to support its development ambitions for the next decade.

DIBs

Recently governments and charities have raised funds by issuing ‘bonds’ of various types likes SIBs (Social Impact Bonds) and DIBs (Development Impact Bonds). Although described as ‘bonds’ the term is misleading when used to describe SIB/ DIB transactions since these are performance-based contractual arrangements rather than capital market ‘securities’ in the traditional sense.

For the purpose of social housing, DIBs are especially well suited. DIBs are a results-based investment instrument used to raise funds to finance specific development programmes with targeted outcomes. The investors are private investors, donors or the UK Government which provides funding to development programmes created based on shared development goals. Investors with ESG (Environmental, Social, and Governance) mandates would find investment in DIBs especially useful. The eventual financial returns are linked to verifiable, pre-agreed target outcomes. If the target outcomes are met, the outcome funders make payment to the initial finance providers based upon on an agreed payment criteria.

The advantage of impact investing through DIBs is that these investments are not reliant on performance of global capital markets. The return is based only on the underlying contract entered into by the investors. As is the case in most investment instruments, pricing of the return on investment is often aligned with the level of risk the investors wish to take on, including other factors such as the experience and track record of the intermediary and service providers in delivering on the targeted intervention and/or whether the SIB/DIB is backed by well-known sponsors or governments.

Previously, RSLs would be funded by government grants (covered in section 2.1 below) and long-term bank loans (covered in section 1.1 above). However, in recent years, there has been a growth of ‘bond’ issues by UK based RSLs to fund social housing. This has been due to the fact of the UK Government reducing grant funding and a reluctance of banks to agree to long-term lending on fixed interest rates, coupled with housing shortage and the pressure on housing associations to build more homes. In response, RSLs have made some significant attempts to raise financing via the capital markets, which highlights the pressure on government-funded organisations to diversify their sources of credit in light of government cuts to budgets. Bonds issued by these programmes appeal to long-term investors, such as pension funds and insurers. This is because of the relative stability of rental income from social housing, secured by large portfolios of properties and underpinned by government benefits, make this sector a particularly attractive and lower risk investment.

Government funding

 Grants

Grants are allocated to RSLs and local authorities to develop new social housing projects. The UK Government recently announced a £64 billion funding package for social housing, which includes a £4 billion allocation to help local councils provide adequate accommodation. It is hoped this funding can also stimulate growth and development in the social housing sector. The funding package will also likely include substantial investment in renovating and upgrading existing social housing stock. This could involve improvements to energy efficiency, accessibility, and overall living conditions, which benefit current residents and enhance these assets’ long-term value and sustainability.

Grant funding would also be required for the decarbonisation and retrofitting project. Since energy efficiency improvements do not return savings or profits to social housing providers or private investors, there is little scope for borrowing to fund decarbonisation.

The main cons of grant funding are:

• that there is, of course, never enough and
• since it comes with a number of strings attached in the form of covenant and targets, it has less flexibility.

Schemes and programmes

The recent autumn budget announced by the UK chancellor (“Budget”) has provided £233 million of additional funding for homelessness prevention in 2025-26, but we are still waiting for further details on this funding. Further, two cost of living benefit schemes, the Household Support Fund and Discretionary Housing Payments, have been extended until the end of March 2025.

Affordable homes guarantee scheme

The scheme provides loans to private Registered Providers of Social Housing to support their delivery of additional new-build affordable housing within their development pipelines and may also support borrowers’ programmes to decarbonise and improve the quality of their existing affordable housing stock. Loans are funded by a capital markets bond programme which will have the benefit of a guarantee from the Department of Levelling up, Housing and Communities and are secured against existing affordable housing assets.

The main benefit is this is the lowest-cost funding option of those available although the application process can be time-consuming. The funding also comes with covenants and other terms and conditions, including specifying development schemes. This means that, to access money, an RSL has to submit a list of the development projects that the money will be used to fund, regularly report progress on those projects, and have “shovels in the ground” within three years of the money being lent which does create some onerous conditions and reduces flexibility for the recipient.

Warm homes: Social housing fund, previously the social housing decarbonisation fund

Government schemes also include funding for retrofitting like the Social Housing Decarbonisation Fund (SHDF). Through this fund, the UK Government has committed to making funding available awarded to 17 local authorities for 19 projects in England. The fund had dispersed £1.25 billion of the promised £3.8 billion as of May 2024.

The SHDF demonstrator project is an initial investment to learn lessons and catalyse innovation in retrofitting for the SHDF. The project will demonstrate innovative approaches to retrofitting social housing at scale to bring the homes up to ‘Energy Performance Certificate (EPC)’ band C or higher.

The Budget confirmed an initial £3.4 billion over the next three years towards decarbonisation, which is to improve 350,000 homes. This includes £1.8 billion for fuel poverty schemes, helping 225,000 households reduce their energy bills. Some of the new cash will be used to increase the Boiler Upgrade Scheme, which subsidises heat pumps, for this year and the next. The funding will also be used to grow the heat pump manufacturing supply chain. We are still waiting for details to understand how this new funding interfaces with the Social Housing Fund.

Supported living funding

There are various funding programmes, which deliver new or improved supported and specialist housing. Many different supported and specialist housing types can be funded, for a wide range of client groups, either through the Affordable Homes Programme or other specialist programmes like Domestic Abuse Safe Accommodation Homes Programme, which provides safe accommodation for domestic abuse survivors and their children across London or the Single Homelessness Accommodation Programme, which provides homes for Londoners sleeping rough as well as young Londoners at the risk of homelessness.

For the Domestic Abuse Homes Safe Accommodation Programme, capital funding is available for accommodation starting on site by March 2026. Up to three years of revenue funding for support is also available, until March 2030. Bids for the funding need to demonstrate how revenue support funding aligns with capital delivery. Capital funding is available under the Single Homelessness Accommodation Programme from April 2023 – March 2025. Up to three years of revenue funding is also available to fund support to Londoners moving into these homes.

The affordable homes programme (AHP)

Under this programme, the UK Government provides direct payments to fund the construction of new social homes. A principal source of this is the Affordable Homes Programme which, outside of London, is delivered by Homes England with £7.39 bn of funding expected to be made available between 2021 and 2026. The Budget also allocates a further £500 million to the AHP to keep development going until 2026. A further £50 million has been allocated into the planning departments to help recruit 300 new planners.

One major disadvantage is this is currently not sufficient to meet the needs of the sector and has been decreasing steadily over recent decades. For instance, even with the new allocations under the Budget, it will only translate into 500 new affordable homes which is only 0.3% of the target to build 1.5 million new homes in five years.

Welsh government social housing grant scheme

Social Housing Grant (SHG) is currently the main capital programme supporting the delivery of high-quality affordable housing in Wales by local authorities and Registered Social Landlords (RSLs). The purpose of the scheme is to support the provision of affordable housing which includes:

• Social Housing (at Social Rent),
• Social Housing (not at Social Rent),
• Intermediate Rent and
• Shared Ownership.

SHG is a rolling programme with funding agreed by successive governments. SHG provides grant funding to local authorities and RSLS i.e. Social Landlords to bring forward high quality warm secure and energy-efficient homes for social rent, intermediate rent and shared ownership for people who need them most.

Guarantee support

Under the Budget, £3 billion worth of support to boost the supply of homes and support small builders has been provided. This is to go to small medium enterprises and the build-to-rent sector in the form of ‘housing guarantee schemes to support the private housing market’.

Policies and regulation

Government policies shape the operational standards and financial management of housing providers. These standards for housing associations ensure responsible operation and high-quality services, reducing investors’ operational obligations and increasing stability and quality in the sector. This not only provides a safety net for investors but also gives them confidence that they are purchasing an investment property of the highest standard.

In November 2020, the National Housing Federation issued the Code of Governance 2020 (the Code) for social housing providers and its members.

• The Code embeds the concept of sustainability and requires signatories to consider value for money, financial sustainability, carbon neutrality, environmental sustainability, and social sustainability in strategic planning. This recognises the increasing importance placed on ESG factors across the sector.

In the same month, The Sustainability Reporting Standard for Social Housing (the Sustainability Standard) was published by The Good Economy.

• The Sustainability Standard is designed to create a consistent, comparable, and transparent approach to assessing the ESG performance of Registered Providers. Although voluntary, there has been significant uptake across the sector.
• The Sustainability Standard is key to enabling lenders and investors to assess the ESG performance of Registered Providers, identify ESG risks and pursue opportunities to create positive outcomes.
• The recent creation of the Social and Affordable Housing Sustainability Reporting Standards Board also aims to ensure that the Sustainability Standards continue to be owned and managed by practitioners from the sector in the interests of all stakeholders.

One of housing providers’ primary sources of income is the rents charged for social housing, which underpin the financial health of the sector. One of the main reason social housing providers’ income has reduced is because rents have not increased in line with high inflation. The maximum amount social housing tenants pay in rent is set by the government. Social housing providers make business plans and attract investment based on their anticipated rental income, but in recent years the UK Government has repeatedly reduced expected limits on rent levels at short notice. The current rules on how much rent social housing providers can charge were set to expire in 2025, but have now been extended to 2026. Unfortunately, rent increases on social housing tenants is not feasible since social housing tenants are some of the most financially vulnerable people in society. A significant percentage of rent in the social housing sector is ultimately borne by the Department for Work and Pensions through benefits. As a result, rent increases could end up transferring costs onto UK Government finances.

Private investments

Private investment, including for-profit registered providers, present an opportunity to fill the gap in social housing development.

Institutional investors

Pension funds, insurance companies, and other large-scale investors provide capital for social housing projects. These investors are attracted by the stable, long-term returns that social housing can offer, which align well with their investment strategies and obligations.

Individual investors

Through certain investment platforms private individuals can invest in social housing properties without becoming registered housing providers. This opens up opportunities for investors to diversify their portfolios and potentially earn steady returns while contributing to social good.

Private investors are able to fund the building of more social homes, it is imperative that these investors are properly regulated and committed to long-term investment in the sector.

For profit registered providers (FPRPs)

New financing models have emerged in the social housing sector through equity investment. Within the context of social housing, this means an investor owning or funding the development of the underlying assets, typically the properties themselves. They would then work with a housing association or local authority to manage the properties. This can involve organisations establishing and financing their own FPRPs.

FPRPs are currently a very small part of the sector, making up only 0.7% of total social housing stock in 2021/22. As of March 2022, there were 69 FPRPs with a combined stock holding of 21,000 properties and total combined equity and debt investment of £3.2bn. However, FPRPs are growing at a significantly faster rate than not for-profit housing providers: for-profit providers made up only 4% of the register but 22% of new registrations and 124 million properties valued at £173bn as on March 2022.

Alternative funding options

Some of the alternative funding options have already been discussed above but with macroeconomic uncertainty and increased regulatory scrutiny, traditional funding models may no longer, on their own, be sufficient for all. Some alternative funding options are briefly mentioned below.

• “recouponing” of existing capital market deals to release embedded value,
• retrofit funding options which include carbon credits, or securing income streams on expected energy savings,
• entry of new funders like National Wealth Fund (NWF) (previously the UK Infrastructure Bank or UKIB earlier): The NWF, Barclays UK Corporate Bank and Lloyds Banking Group have recently announced new funding to support social housing providers to retrofit social homes. The funding will support housing associations to provide warmer, more energy efficient homes to their residents, reducing their carbon footprint in the process. Barclays UK Corporate Bank and Lloyds Banking Group will each deliver £500 million of lending to the market that has been enabled by financial guarantees of up to £750m provided by the NWF. The guarantees will support both shorter duration loans to be provided by Lloyds Banking Group and mid-to-long duration loans to be provided by Barclays UK Corporate Bank, ensuring that financing will cater to every aspect of the social housing market.
• unsecured funding, using unencumbered asset covenants,
• borrowing from local authorities.

We can provide support across the full range of legal services in relation to social housing. Our banking and finance team advises a broad spectrum of clients on their debt finance arrangements with their lenders including social housing providers and charities.

We also provide expert practical legal advice to RSLs and local authorities with housing stock in England and Wales. This can cover aspects of tenancy enforcement and dealing with issues of nuisance behaviour and/or criminal activity within their estates and communities. We have a specific team dedicated to defending disrepair claims and are able to handle volume claims for you. We are also able to provide specialist advice and assistance in relation to all aspects of housing management, homelessness and allocations and issues and queries arising from The Renting Homes (Wales) Act 2016.

We provide non-contentious advice on a range of matters including drafting of tenancy agreements/ occupation contracts, reviewing policies and procedures and providing one-off advice on specific topics.