Rebuilding Ireland – the Government’s program for social housing support - has been in place for the last five years. A key pillar of the program, Approved Housing Bodies (AHBs), are tasked with and play a vital role in the provision and management of affordable rented housing for people who are unable to afford to buy their own homes or pay private sector rents (generally or in specific sectors).
Traditional Funding schemes
Recognising the importance of AHBs, the statutory framework in Section 6 of the Housing (Miscellaneous Provisions) Act, 1992 enables housing authorities to assist AHBs in the provision of housing. Traditional state/government supported funding options for AHBs made available can be broadly broken down into two categories:
- Capital financing schemes - financing schemes aimed at enabling an AHB to meet the cost of constructing or acquiring units of accommodation suitable for tenants supported by the relevant AHB.
- Lease/On-Lease schemes - schemes intended to give AHBs financial support to allow them to enter into long-term lease arrangements for the provision of units of accommodation. These include arrangements with the private sector or financing leases of properties separately acquired/constructed by the AHB using a capital financing scheme.
Capital Assistance Scheme (CAS)
- Under the CAS, capital funding of up to 100% of project costs may be advanced by local authorities to AHBs to provide housing for specific categories of housing need (including for older people, people with a disability and people who are homeless).
- Funding is made available through application to a relevant local authority which is itself reimbursed by the Department of Housing, Local Government and Heritage. The funding is constituted by way of secured long-term loan (in respect of the specific project property) but is non-repayable and with the AHB taking title to the relevant property at the end of the term on release of the security.
Capital Advance Leasing Facility (CALF)
- Now the most common form of support, CALF constitutes a capital assistance scheme under which a local authority may provide (by way of long-term loan) up to 30% of the capital cost of the relevant development/acquisition with the remainder being required to be sourced by the AHB, from own sources, from a commercial lender or through Housing Finance Agency (HFA) funding.
- A CALF scheme requires the relevant AHB to make the financed property available to the relevant local authority under a payment and availability agreement. Repayment of the up to 30% capital contribution is not required during the lifetime of the payment and availability agreement but it remains outstanding at the termination of those arrangements.
- Established as a state-owned company with the purpose, amongst other things, of advancing loan finance to local authorities and the voluntary housing sector, the HFA will lend up to 100% of a project cost subject to satisfaction of its financial criteria and approval of the relevant AHB. HFA funding is also a key element of support of the other state funding arrangements.
- The HFA’s approval of the relevant AHB as eligible for HFA financing generally requires that the AHB is established and as such has been operating projects successfully under Local Authority capital loan and subsidy schemes for at least three years.
To obtain finance from the HFA the relevant AHB will generally be required to enter into specific loan and security documentation (the form and conditions of which will depend on the nature of the AHB as well as the specific development/acquisition scheme) and which would usually include a loan agreement, transaction/development specific security and appropriate tenancy/lease agreements (including payment and availability and continuation agreements with the local authority for the purpose of assurance of rental payments and accordingly interest and repayment of the HFA loan).
Cost Rental Equity Loan Facility (CRELF) – a new state scheme
- Announced in the 2021 budget, the new Cost Rental Equity Loan Facility (CRELF) is intended to allow AHBs to borrow up to 30% of the cost of Cost Rental homes from the State to facilitate the delivery of homes at significantly below market rents. The intention is that rents are a minimum of 25% less than open market value covering the cost of delivering, managing and maintaining the homes only.
- A call for proposals was issued by the Minister on 14 December with funding of up to €35 million being made available under Budget 2021. With 30% of the development or acquisition cost being fundable, it is expected that the remainder will be met by long-term loans from the HFA (which has indicated it will make a €100 million funding stream available for this scheme) or other commercial lenders.
- It is expected that to reduce the financing costs of delivering cost rental homes, the CRELF loans making up 30% of the AHB’s financing stream will be long-term (40 years), low-interest, and will use simple rather than compound interest with repayments not being required until the end of the loan term.
- The call for proposals indicated that applications for schemes (which are being managed by the Housing Agency) should be made in early January 2021 with successful projects being confirmed by the end of January 2021. However, although the Affordable Housing Bill 2020 was approved for priority drafting at the end of 2020 (click here) the “Cost Rental” tenure has not yet been enshrined in law and it remains to be seen how swiftly these schemes can be put in place.
- As with all of the capital funding schemes it is likely that rental/lease financing support under the SCHEP (referred to below) will be paired with these facilities.
- Leasing schemes are generally arrangements between local authorities and an AHB under which a payment and availability agreement provides for the AHB to make accommodation available to tenants identified by the relevant local authority. In return the local authority sets and pays a rent for the unit with the AHB responsible for collecting a set differential portion of rent.
- Although the rent level may be discounted the level set is intended to cover the AHB’s financing and management costs. Provided the AHB continues to make the property available and comply with its obligations to the local authority, the AHB will continue to be paid rent even if the property is empty.
- AHBs can use the leasing schemes (payment and availability agreements) to enter into long-term back-to-back leases with superior landlords in the knowledge they have a secure rental stream. This will support capital financing arrangements or the separate mortgage to rent scheme where an AHB enters into a form of sale and lease-back of a property where its owners are not able to meet mortgage payments or clear arrears.
Recent Funding approaches - Private sector funding
In a low return or negative interest environment, interest from private sector funding in social housing in Ireland has grown significantly:
- As payment and availability arrangements are generally entered into on a long term and indexed basis giving a stable, inflation linked income stream these become appealing to investors (for example pension funds) looking for long term income yields.
- Given the nature of (i) the partial state capital contribution, (ii) the state backed rental stream and (iii) the health of the Irish rental market generally, returns on a discounted but certain rental stream may model better than other products.
- There remains substantial demand for social housing and hence continuing demand for financing the development of appropriate housing schemes.
- Notwithstanding COVID-19 (click here), house price inflation continues to rise with high demand for fewer available properties; the rental market continues to perform strongly and there are high residual values in properties.
- Improving housing stock with newer more energy efficient properties reflects the investment and lending priorities of an increasing number of lenders and investors to improve both environmental and social credentials.
Commercial Debt Finance
Banks and alternative funders have traditionally provided funding at the construction/development stage to developers who may then sell-on some or all of the units at a development to an AHB.
Although indirectly supporting the development of social housing such loans were shorter term and differently structured than funding to AHBs.
In response to the housing crisis, Bank of Ireland, AIB and Ulster Bank are highly active in the PRS and social housing funding spaces. Recent examples of this commitment in the AHB space include, AIB launching a €300 million fund for social housing projects and Bank of Ireland increasing amounts allocated to residential development including social housing. Bank of Ireland have also publicly confirmed involvement with the Co-Operative Housing Ireland AHB’s development in Rathnew, Co. Wicklow (at the time Ireland’s largest social housing scheme of 144 units). These significant commitments indicate growth of commercial debt finance in an area previously reliant on state funding.
It should therefore be expected that AHBs will now be in position to seek and obtain funding to satisfy the 70% funding requirement not met by CALF funding (or in the future CRELF funding) from not only the HFA for commercial based lending but also increasingly, third party commercial lenders. While the price and term clearly need to be right for the commercial bank lenders, there may even be competition for this business with potential savings for AHBs and therefore ultimately tenants (and the taxpayer).
As well as direct private sector finance and state funding schemes, the National Development Finance Agency was tasked, following Budget 2015, with establishing a public-private partnership programme to invest in the development of up to 1,500 housing units. To date, three bundles of projects (each of which comprises multiple developments of 50 or more units across Ireland totalling about 450-550 properties) have been commenced, with the first and second in construction phases (click here).
By adopting a PPP model with a regular availability payment to the appointed PPP consortium by the state (set at a negotiated level to fund both development and management of the relevant properties over the 25-year term of the programme) the state can leverage the ability of private companies and AHBs that form consortia to undertake the developments to obtain independent third-party financing rather than using the above-mentioned state supported capital programmes. For example, the Torc Housing Partnership consortium appointed on the second PPP bundle (developing properties in Roscommon, Clonakilty, Waterford City, Galway City, Shannon, Skibbereen, Macroom and Clane) has obtained debt finance from WestLB which it is understood will be used to finance the development of properties forming part of that bundle with a secure repayment stream coming from a portion of the 25-year availability payment.
Although it is not currently clear whether future developments will follow a PPP model (with the PPP concept possibly less favourably considered than pre-crash from an economic perspective), AHBs able to join a consortium forming part of a PPP project will find themselves in a position of being able to access third party debt in circumstances that might not otherwise be open to them.
For a number of the reasons referred to above, the diversification of AHB funding sources to include international institutional investors is (in the right circumstances) also a funding source in relation to which interest has been growing.
The recent investment of €54 million by LGIM Real Assets (Legal & General) by way of long-term financing to Clúid represents the first investment of this nature in the social housing sector in Ireland. Intended to be used by Clúid to fund up to 200 new social homes across Ireland whilst having a long-term maturity matching extended liabilities in the Legal & General portfolio, this may be a template for future funding provision on a long-term basis.
It is positive, in these challenging times and as we enter a new post-Brexit environment, to see continued development in this area. The evolution of funding options is assisting AHBs to achieve their objectives of satisfying the demand for social housing and solving the housing crisis. We hope the foregoing gives you a brief sense of these different stages and the direction of travel in this essential sector.
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About the Authors
Michael is Head of the Banking and Financial Services team at Hayes solicitors. He advises on a broad range of domestic and cross border finance transactions. His primary focus is acting for lending institutions and borrowers on leveraged/acquisition, commercial property, construction/development and SME finance transactions.
Tim is an Associate in the Banking and Financial Services team at Hayes solicitors. Tim has extensive experience advising both borrowers and lenders across a wide range of financing transactions including corporate debt facilities, complex cross-border financings, export-credit backed lending and leveraged/acquisition finance.