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IPE special report May 2018

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Pension Insurance Corporation buys social housing debt

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UK - The Pension Insurance Corporation (PIC) has acquired a £50m (€62.4m) bond issued by AA2-rated UK housing association Raglan as part of a move into long-lease real estate and infrastructure debt.

Mark Gull, co-head of asset and liability management at PIC, cited as reasons for the investment the fact that the bond is secured against strong portfolio of assets, a stable regulatory framework and implicit government support for social housing.

Gull described housing associations as "a natural fit" for pension fund liabilities, citing the opportunity to lend at volumes smaller than typical £150m-250m benchmark bond issues.

"Our book has grown to a size where these deals work for us, too," he said. "This is a sector where we do not currently have a large exposure and we believe it will help diversify our credit exposure from other areas such as financial, corporate and utilities."
PIC, which is mainly invested in bonds and cash, said the bond structure is equally suitable for housing associations seeking long-dated finance.

"Loans or bank funding [would be] the alternative but banks are pulling out," said Gull. "We believe the sector is now fully aware of this shift and Raglan were very keen to issue in bond format because they wanted to know that funding is available to them."


Although demand for social housing in the UK is estimated to have increased 80% over the past decade, and rents are forecast to grow significantly as a result of changes to the rent model, Gull acknowledged that changes to the distribution of housing-related welfare payments could lead to an increase in rent arrears. "Our view is that the sector will be able to adjust to cope with this," he said.

A recent Barclays sector report suggested that continued private-sector funding for social housing could result in its gradual migration to something more akin to the wider residential rental market.

The UK government has increasingly shown a preference for private sector financing for social housing, which it has recast as ‘affordable housing'. Housing minister Mark Prisk announced in June that £4.5bn government commitment to lower-cost housing had attracted £15bn in private funding.

A spokesman for Raglan said the housing association would offer PIC a second £50m bond "along with any other investor that would like to take the opportunity".

The retention of a second bond of equivalent value would make future fundraising easier, he said. The only other potential source of funding currently targeted by the housing association is a £10bn government guarantee scheme.

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