Jumping through hoops - how social housing commercial loans came of age

Two years ago, when commenting on the funding landscape for Scottish Registered Social Landlords (RSLs), I noted the lack of longer-term funding from the main lenders to the sector, and the emergence of alternatives, such as private placements and other bond-linked funding, and the development of the HARIS initiative.

Money Monopoly Housing Funding Rsl Social Lawyer Scotland Solicitor Association

Since then, HARIS has come and gone, with one of the reasons given for discontinuing the project being that the funding market had eased and that HARIS members were experiencing fewer difficulties accessing funding. Is that the case?

Certainly, if a RSL is looking to borrow just now, it may well receive multiple lending proposals from funders, demonstrating a significant appetite among a broader spread of lenders, including not just the banks who have traditionally lent to the sector, but also other lenders who have been increasing their profile and loan book over the last two or three years, such as Triodos, CAF Bank, Unity Trust and GB Social Housing. The lending terms, however, may still only be for 10 or 15 years, which leaves the RSL and its board with the risk of having to refinance the loan when it falls due to be repaid.

Private placements – the trend continues

In 2015, Harper Macleod worked on the first private placements undertaken by Scottish RSLs, when we acted on behalf of Link Group and Hanover (Scotland) HA.

The trend for RSLs to look for longer-term investment from institutions other than the usual banks has continued in the intervening period, during which we have acted for Link Group again, as well as for Port of Leith HA and Albyn Housing Society, in arranging new loan facilities to assist those RSLs with their development programmes, coupled with long-term (30-year) private placement investment from London-based institutions.

Based upon discussions with other clients about their funding plans, this trend seems likely to continue, allowing RSLs to take advantage of the historically-low gilt prices in order to secure significant long-term funding on attractive terms.

The attraction for those institutions who have placed funds with Scottish RSLs is that the long-term fixed interest stream generated from the transactions can be matched with the commitments which those institutions – pension funds and insurance companies – have to their customers, and it represents an attractive rate of return in the current low-interest environment.

The stability of Scottish RSLs and the Scottish regulatory and grant-funding environments are also attractive to investors – often more so compared with the sector in England, given the intervention of the UK government on rent levels, tenancy duration and the promotion of the right to buy – although equally there are Scottish-specific factors which potential investors will weigh up, including of course the independence debate and the place of Scotland in a post-Brexit United Kingdom.

The private placement process

One of the workshops at our National Housing Conference this year focused on these issues, with presentations from Heather Kiteley of Port of Leith HA, who shared her experience of the private placement process, and from Port of Leith’s treasury adviser, David Rider of Capita, who provided his take on available funding options more generally, based upon experience on both sides of the Border.

For my part, there are key legal and commercial issues which have consistently emerged from these private placement transactions, and from the other lending transactions which we have acted in for other clients in recent months. 

There’s no such thing as easy money

The requirements of lenders grow ever-more specific and onerous in relation to the matters to be covered in the finance documents, certificates of title and in their reporting requirements, all of which have a knock-on impact for the borrower and its advisers, including in relation to levels of professional indemnity insurance cover, the availability of different valuation bases to assess security values, security trusts, and the specific terms of section 107 consents.

These requirements are perhaps reflective of an increasing tendency in the lending market generally to treat social housing loans in much the same way as any other commercial loan when it comes to due diligence, risk-control, documentation and security requirements. All of which can be hard to argue against, but equally it can mean that, while the prize of long-term competitively priced money awaits, there are many hoops to jump through first!

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