Could IOUs help the sector deliver more affordable homes?

The latter is less easy than usual. With squeezed capacity, elevated build costs and rising interest rates, the sector must mitigate cost and manage risk more effectively than ever.

This sector endeavour could arguably benefit from the teachings of ancient artefacts dating back to AD 57. In 2014, contractors building Bloomberg’s new London office discovered a promissory note (PN) – crudely, an IOU – carved on a wooden tablet. Could its cursive Latin be an unexpected boon to the health of the sector’s development appraisals?

Rewind to 1763. In Laval, a French town 190 miles from Paris, Le Nicolais and Company were charged with transferring a heavy sum of money to the capital through the crime-ridden Bois de Boulogne. Without safe and speedy transport, Le Nicolais turned to a time-worn solution – they wrote a financial instrument authorising payment of the sum of money to the bearer of the note. The note was accepted and verified by a bank or merchant on whom the note was drawn, vouching for the creditworthiness of Le Nicolais.

Fast-forward to today. Let us suppose a housing provider was buying a piece of land for £10m. Having borrowed the money to pay for it, after paying the vendor in full on day one the landlord would pay interest on the loan immediately. Let’s assume interest was payable at an all-in rate of 4%.

In a parallel universe, the same provider buys the same land from the same vendor for £10m. This time the payment is deferred 12 months from purchase. The association issues a promissory note to the vendor, having paid a bank to avalise (guarantee) the note in 12 months’ time. It could expect to pay the bank around 0.7% for this service.

If the landlord does not pay the vendor the future instalment, the vendor has comfort that the bank will step in to settle the obligation. The vendor can also seek early settlement, for a price, with the bank.

In practice, an element would ordinarily be settled upon purchase, with the residual value paid in a future instalment or instalments. These dates could coincide with returns or milestones achieved by the site. Vendors are incentivised to accept such payment terms because they are commonly used in private sector land deals and therefore are familiar.

From a housing provider perspective, the implications of having a land creditor on your balance sheet rather than the equivalent marginal debt financing for the upfront payment approach are, I would hazard, not detrimental in most cases.

It is not unheard of for housing providers to use PNs to buy land on a deferred payment basis, but it is perhaps not as prevalent as it could be. As the sector strives to continue to do more with less, it might be worth reviewing whether we have extracted maximum learning from history’s teachings.

Anup Dholakia, director of corporate finance, Network Homes