Housing associations hoping £2.5bn in spending review will be used for amortised grant funding model

Housing association leaders are hoping that a £2.5bn funding pot announced in the spending review can be used on a proposed model aimed at easing a short-term balance sheet squeeze that is currently restricting development.

Rachel Reeves on Wednesday announced £2.5bn in “low-cost loans” for social housing providers and the government will set out details of how these will be used in the coming weeks.

Talks are continuing between the sector and government officials about a funding solution that could make development easier for housing associations, particularly in London, who are currently constrained in the amount of upfront debt they can take on to build.

The ‘amortised’ grant or ‘repayable subsidy’ model,  recommended by Housing Today and the G15, would see higher grant payments made upfront to housing associations which are then repaid at a later stage. It would reduce the amount of upfront borrowing the housing association needs to take on to fund development. The idea is this would help keep interest payments lower, meaning housing associations can widen their interest cover ratio, which measures debt to income and is restricted in lending covenants.

Ministers are also understood to be showing an interest in the model because the repayable nature of the subsidy means it could potentially be classed as an asset on the public balance sheet as opposed to straightforward expenditure.

>>See also: MHCLG officials to discuss funding model proposed by Housing Today and the G15

>>See also: The chancellor’s £39bn boost buys time for social housing – now innovative private finance models must help deliver at scale

The £39bn announced for the next Affordable Homes Programme on Wednesday is unlikely to help this specific short-term interest cover issue. It will be a while before the funding is allocated and it is unlikely the grant rate would be high enough per home to reduce the debt sufficiently.

The amortised grant idea was a central recommendation of Housing Today and G15’s inaugural State of the Capital report (see below) which was informed by a discussion at the Housing Today Live conference in Westminster last year.

The spending review saw the government announce equal access to building safety funding for social landlords, which was another recommendation of the report. The report also called for the reintroduction of rent convergence and Reeves announced a consultation on that also.

In a letter to social housing providers yesterday, housing minister Matthew Pennycook said: ”The spending review also sets out that there will be £2.5 billion in low-interest loans to support new development, to complement commercial lending.

”We will be working closely with the sector and with lenders to design this and will set out more detail in the coming weeks.”

Housing Today and G15’s State of the Capital report

Providing new social tenancies for the 323,800 households on London’s waiting lists would inject at least an additional £7.7bn a year into London and the UK’s economy.

However, while social housing providers and ministers are both aware of the need for more affordable housing, both housing associations and the government have balance sheets constraints.

This inaugural State of the Capital report, produced by Housing Today in partnership with G15, looks at several ideas that could be adopted to help the sector build much-needed affordable housing in London during these difficult times.

The report is written by Carl Brown of Housing Today, in collaboration with the G15.

DOWNLOAD THE FULL REPORT TODAY