Why banks are no longer the ‘flexible friends’ of Scottish housing associations

The size and scale of Scotland’s social housing providers are a financial drawback as they plan for their long-term future, by Susan Torrance

Columnist Polly Toynbee is right to recognise the crisis faced by public housing providers in England, trying to meet overwhelming demand for good-quality housing for rent against a background of funding cuts. In Scotland, we face a different problem.

Housing is a matter devolved to Holyrood, where the Scottish government has set ambitious targets to build new homes to tackle the 335,000-strong housing waiting list, and is funding that commitment.

Compared with the level of public funding available to English housing associations, a capital grant of around £40,000 per home may seem quite generous and workable. However, our latest report shows how Scottish housing providers are far from comfortable.

The report set out to analyse how housing associations could borrow private finance to complement public grant to ensure that rent charges set for tenants remain affordable. This is doubly important when the changes to universal credit, enforced by the UK government, will directly impact on tenants’ ability to pay.

“Affordable rent” does have a different meaning in Scotland; individual housing associations set their own rent policies, which take into account factors such as Local Housing Allowance levels for housing benefit and local income levels.

High street banks, which until now have provided Scottish housing associations with approximately £3bn in private finance, are no longer flexible friends. Market conditions have meant that lending for the long term – a new rented house is likely to be owned by a housing association for at least 60 years – is not possible. The uncertainty of five-year loans, which need to be refinanced at the end of this short period, increase the cost of borrowing. In addition, the imposition of complex conditions has set housing associations the difficult task of looking elsewhere for finance that will offer them and their tenants long-term certainty.

The report looks at two other sources of finance: money raised through bonds on the market, and leaseback schemes. While English associations have been able to raise bond money by going to private and public investors and offering a long-term return of approximately 5% depending on each issue and timing, there are fundamental differences in Scotland that make our housing providers less able to borrow in this way.

One difference is scale. Scotland accounts for just 10% of the UK population, and some of its most remote communities. The building of six houses in the Western Isles, or even 20 houses in some of the most deprived regeneration areas in the central belt, is a major effort with maximum impact for local people. However, with most bond finance starting at well over £10m as a minimum, this source of finance is not practical for the majority of Scottish providers.

Leaseback schemes, where houses are sold to an investor and then leased back to the local authority or housing association, suffer from the same problem, in terms of transaction size. The sale may also prompt a tenant ballot on the transfer under Scottish legislation, despite the fact that instantaneous leaseback means there will be no change or interruption in either the service provided or the tenure of the property.

There is another practical matter. We assessed whether the rents charged on social homes in Scotland could grant investors the return they require, when combined with the public funding still available. The answer is a resounding no, across the majority of areas.

So we have to go back to the drawing board. Scottish housing associations provide substantial local businesses, making big investments in their communities. They are not, however, of the size and scale of their English counterparts. The ability to cross-subsidise with housing for sale and market-rented properties is limited and the risks too great for voluntary committees, even if they could access private finance.

Without a realistic financial model, we face a generation of lost homes in Scotland at a time when housing need couldn’t be greater.

Susan Torrance is policy manager at the Scottish Federation of Housing Associations