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Can lenders continue to fund social housing?


Published: 27 July 2011 | Author: Bernard Clarke

Lenders continue to help fund housing in all tenures, including the social sector. But now lenders are having to adjust to government reforms in the provision of affordable housing – and in welfare – as the coalition seeks to take policy in a new direction.

The government has ambitious plans to increase the provision of affordable housing, partly by enabling landlords to raise rents to 80% of the market rate. It hopes that improving the income stream for social landlords will stimulate greater provision of housing in the sector.

Additionally, the government wants to implement radical welfare reform, reducing benefit dependency but also empowering those who receive benefits by encouraging them to take greater responsibility for managing their financial affairs.

Both initiatives have significant implications for the funding of social housing by lenders. We are therefore engaged in detailed discussions with the government over its plans for reform, and the implications for lenders and the funding of social housing.

Welfare reform

While we understand the government’s desire to reform welfare, uncertainty about how housing benefit will be replaced in the new system of universal credit is a major source of concern to lenders contributing to the funding of social housing.

So far, more than £60 billion of private finance has been lent to the social rented sector. A fundamental pillar supporting the provision of this funding has been the direct payment to social landlords by the government of most of their rental income through housing benefit. The certainty of this guaranteed stream of income has helped produce advantageous lending terms, thought to benefit the social housing sector by at least £500 million a year.

The proposal to remove direct payments of housing benefit will have a substantial impact on the cash flow of registered providers of social housing, pushing up rent arrears and increasing the administrative costs of processing rental payments. It is estimated that unless there are measures to keep rent arrears in check, the amount owed in unpaid rent could more than double, putting a considerable strain on cash flows and further restricting growth of the sector. How the markets react could also lead to a substantial rise in funding costs.

This all comes at a time when registered providers of social housing have to fund a greater share of the cost of housing produced under the affordable homes programme. This will increase their borrowing and stretch their financial gearing.

Working with the government

In July, we met the welfare reform minister, Lord Freud, along with some of the largest providers of funding for social housing. Discussions were productive, and Lord Freud was keen to assure firms that he was fully aware of the importance of protecting the flow of income for social housing providers and retaining lender confidence.

The minister agreed that direct payments of rent should continue for the elderly and other vulnerable groups, although there is still no clear definition of exactly who is vulnerable. He also set out his views on some of the options for alternative payments that could protect income streams. He said he remained committed to working with lenders to find solutions which would sustain the industry’s confidence in funding the sector. Options discussed with the minister included:

  • how direct payments would be triggered by a tenant falling into arrears;
  • how the Department for Works and Pensions would contribute to repaying debt arising from arrears;
  • the creation of ‘jam-jar’ accounts for benefit recipients, with money going into allotted ‘silos’ in which there would be prioritised direct debits;
  • greater provision of debt advice, perhaps by Citizens Advice or other housing debt advisers; and
  • the need for a clear definition of those deemed to be vulnerable, for whom direct payment of rent from the government to the housing provider would continue.

We have agreed to take part in further discussions, and to contribute to financial modelling to test how effective these ideas could be in helping to guarantee reliable streams of income. Discussions will also involve the Tenant Services Authority (TSA) and some of the largest lenders that are funding social housing. The minister agreed with our suggestion that any new system should be pilot-tested before being fully implemented.

We have urged the minister to give assurances on these issues as quickly as possible. We have also re-iterated our concern that removing direct payments of rent – one of the basic pillars supporting private finance of social housing – will result in higher funding costs. Bond market investors already showing signs of reduced confidence.

The CML's view

Although we will continue to discuss, and consider, alternative payment arrangements, we believe that direct payments of rent should remain as an option for any tenant who wants this arrangement.

Continuing to offer this option for tenants is even more important given that affordable rents will be higher, increasing the likelihood of arrears for those households unable to manage their finances effectively. Our views on this are strongly supported by the National Housing Federation, the Tenant Participation Advisory Service, and the Tenants and Residents Organisation of England. 

We believe that rent should be the highest priority payment to be made from benefit entitlement, and that direct payments of rent should be enforced for tenants who fall into more than four weeks of arrears.

There are substantial risks in introducing the government’s plans for universal credit and, while we welcome the minister’s assurances that he will work with us to find acceptable solutions, we are sceptical that they will be cost-effective. If our fears are confirmed, we believe existing arrangements should be maintained, so lenders and investors do not lose confidence in funding social housing.

The affordable housing programme

The Homes and Communities Agency has recently announced details of its 2011-15 affordable homes programme, setting out how it will use £1.8 billion of investment to deliver 80,000 new homes.

Given the number of offers made by housing providers, this programme will help the government exceed its ambition to deliver 150,000 new affordable homes during the 2011-15 spending period. It is now anticipated that as many as 170,000 new homes could be delivered over the next four years. It has been claimed that this estimate has been boosted by housing providers including schemes where little or no government funding will be required.

Some 146 organisations have succeeding in receiving allocations under the affordable homes programme and it is estimated that housing associations will deliver around 90% of the programme, with some support from private developers and local authorities. Although bidders could increase rents to up to 80% of market levels, it is clear that many have tried to keep to lower levels and it is estimated that bids will produce average rents of around 73% of market level.

Set against a background of an estimated five million people on the waiting list for social housing, the additional homes are to be welcomed. But there are concerns that this programme has only a limited life span and that many providers would not be able to stretch their balance sheets much further in future rounds of bidding. On this issue, the chief executive of the Chartered Institute of Housing, Sarah Webb, has said: "It is testament to the hard work of organisations that they have been able to stretch the limited public funding available to this extent.  

"There do, however, remain serious ongoing concerns about the impact of the new investment model on businesses’ future investment prospects. We also know that while the 170,000 homes is good news, the consensus is that the number actually required to make a dent in a growing housing crisis is vastly higher."

Despite the TSA giving assurances that successful bidders have had their proposals ‘stress tested,’ there remain concerns that the development programmes of individual housing associations will have to anticipate greater potential risks arising from different forms of tenure, higher rents and an increase in gearing.


There is much to support in the government’s plans for reforming welfare and the provision of social housing. At the same time, it is crucial that the government does not introduce measures that unnecessarily undermine the confidence of lenders to continue to fund the sector. That could defeat what the government is trying to achieve through its reforms.

We will continue to work with the government to try to ensure that lenders’ concerns are addressed, and that reform does not unwittingly remove the appetite for firms to continue to fund social housing – and deliver a welcome and much-needed expansion in the provision of homes.