Is funding hindering development plans?
An Inside Housing survey, in association with Octopus Real Estate, looked to find out how financial pressure is impacting housebuilding among social landlords
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Over the past 50 years, housebuilding has halved in the UK. According to charity Shelter, in the 2010s, 1.3 million homes were built, compared with three million in the 1960s.
Social housebuilding in England, meanwhile, is at its lowest rate in decades, with an average annual net loss of 24,000 homes since 1991.
While the barriers to delivery are wide ranging, an exclusive survey, launched by Inside Housing in partnership with real estate investment company Octopus Real Estate, shows the extent to which funding and finance are impacting social landlords’ development plans, as inflation, interest rates and construction costs continue to bite.
More than 100 respondents took part, of which 64% worked for housing associations, with around 60% in development or finance roles. Asked for the top three financial pressures on their organisation today, 67% of respondents flagged inflation as a top concern. This was followed by 60% who pointed to construction costs, then 43% who said interest rates/costs of funds.
Cost pressures
Linked to the inflationary pressure expressed by respondents, the cost of labour (30%) was also listed as a financial concern, as was the cost of retrofitting existing homes (24%) and the sector’s rent cap (25%).
In terms of how these pressures are impacting development, one financial consultant said the sector had been “severely hit by inflation and cost pressures over the past two years”, while a development director at one housing association said: “We would like to have increased our development programme, however the higher cost of future borrowing in 2025 and limitation of [rental] income [is] impact[ing] our interest cover position [due] to our covenant position.”
Digging deeper into these pressures, 34% said they were seeing between an 11% and 25% funding shortfall on schemes on average, while a smaller 4% of respondents said they were seeing between 51% and 75%. Thirteen per cent of participants said they were seeing a funding shortfall of between 26% and 50%.
Asked what lenders and investors could do to help organisations deliver more homes, 59% of respondents pointed to greater flexibility in loan covenants. Similar levels of respondents pointed to the removal of EBITDA-MRI (37%), which measures the level of surplus generated compared to interest payable, as well as covenant-lite lending (35%), which has fewer restrictions on borrowers and fewer protections on lenders and ESG finance with discounts linked to KPIs.
Peter Merchant, investment director at Octopus Real Estate, says some lenders have already started to respond to this. “There’s been some evidence of this [variation]. Anecdotally, I’m hearing there have been a few registered providers going back to their lenders and asking for variations of those covenants. Most organisations will be taking efficiency and cash-raising measures to ease their position as there is only so far you can go with covenant variations.”
He adds: “There will come a point when lenders are going to be concerned about that and it does depend on what [respondents] mean about the movement of covenants, because you can’t go too far.”
Elsewhere, the survey asked respondents how far their interest cover ratios had fallen in the past 12 months. Interest cover ratios are used to determine how easily an organisation can pay interest on its outstanding debt. A declining ratio can indicate that a company’s liquidity is decreasing, which can negatively impact on their ability to meet their financial obligations.
While 52% said they would “prefer not to say”, a fifth said they had decreased between 1% and 10%. Similar levels of respondents (around 10%) said they had fallen between 11-20% and 21-50%.
The survey also sought to gauge how landlords were working with alternative delivery partners to deliver their objectives, such as for-profits or equity partners.
Developers/construction firms were the most preferred delivery partner among respondents, followed by partnerships with other housing associations.
Asked what they saw as the main role of for-profits and equity partners, 36% said to “take on development risk”, while 28% said to “forward-fund schemes”. For those who have entered into partnerships with new delivery partners, the importance of having aligned values came through.
In numbers
67%
Respondents who flagged inflation as one of their top three concerns
59%
Respondents who said lenders/investors could offer greater flexibility in loan covenants to help deliver more homes
36%
Proportion who said main role of for-profits was to take on more development risk
35%
Respondents considering off-balance sheet structures to deliver objectives
Delivery partner
This included Nathan Mallows, director of finance at Coastline, who took part in the survey. He explains how Coastline partnered with Legal & General (L&G) Affordable Homes in 2019, where Coastline acted as delivery partner with a development management agreement and 10-year management contract with L&G.
Mr Mallows says: “The partnership has enabled us to continue to support existing development through Section 106, while enabling us to focus on land-led grant funding. We have completed three rounds of grant-funded delivery with Cornwall Council, where we mixed the development with Section 106, which resulted in a blended rate for new development.”
Key to this deal was an alignment of values, Mr Mallows adds, which was to build more homes: “Right from day one, the challenge was put to us: ‘what is our shared goal?’ And by supporting us with developing what was already being delivered, it has meant we’ve been able to do more grant-funded delivery and, for me, that’s got to be the model going forward.”
A further 35% of respondents said they were considering using off-balance sheet structures to deliver their objectives, while nearly 40% said they were currently undecided – something which Mr Merchant, whose company delivers specialist lending and investment, described as a “rapidly changing dynamic”.
He says: “In the past couple of years, we’ve gone from a position where some of the well-capitalised, not-for-profit associations, who wouldn’t really have considered a conversation with us, are now phoning and coming to us, so I think that dynamic is changing quite rapidly.”
Asked for further thoughts on the sector’s financial and development capacity, Tim Wade, group development director at EMH, who took part in the survey, noted: “Often, developers will seek to reduce the burden of affordable housing provision on new residential sites, citing feasibility or viability issues.
“I would suggest that the first thing to be reduced is the land value if the scheme cannot afford the provision of affordable housing. The land value should be set at what the scheme can afford to pay when the correct provision of affordable housing is supplied.”
An investment director at another provider noted “the importance of managing ratings agency perspectives”, while the chief finance officer of another landlord said “grant funding for retrofit will need to be introduced, [otherwise] the sector will not be able to afford this”.
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