Aviva Investors has returned to the UK social housing sector for its second long-dated financing deal in two months, thereby demonstrating the appeal of the sector to insurance company lenders as they seek to offset long-term liabilities.
The London-based insurer announced on 24 August that it had issued a £75 million (€84 million), 30-year private placement – on behalf of the Aviva UK Life annuity business – to UK housing association Settle. The financing will help the group meet its target of delivering at least 1,500 homes across the English counties of Bedfordshire and Hertfordshire by 2024.
In July, Aviva closed a £60 million, 30-year debt facility to another UK housing association, Coastal Housing Group, which manages 6,000 homes across South Wales.
Barry Fowler, managing director, alternative income at Aviva Investors, cited the long-term tenor of the latest transaction – as well as the defensive nature and the environmental, social and governance credentials of affordable housing – as among the reasons for doing the deal.
“Affordable housing is a very defensive, anti-cyclical sector,” Fowler told Real Estate Capital. “It is also a highly regulated sector. The regulator has got a history of being able to step in and sort out problems, such that no losses have occurred.”
The long-term tenor is a good match for the long-term liabilities of Aviva’s investors, he added.
“It’s not particularly easy to find 30-year transactions out there,” said Fowler. “Since the global financial crisis, it has become increasingly difficult for banks to provide those longer-dated facilities as they typically fund themselves on a shorter-dated basis with short-term deposits. Institutional investors, therefore, have stepped into the breach either through bonds or private placements.”
The facility will also help Settle advance in its ESG agenda, which includes the commitment for all properties to meet an energy performance certificate rating of C (with A being the optimum and G the lowest) or higher by 2025.
“Lending to not-for-profit organisations, which provide housing to part of the community that could not otherwise access it, is a strong reason to do the transaction in its own right,” said Fowler. “There is also a clear opportunity for some of these housing associations to target delivery of low-carbon, environmentally friendly homes.”
Fowler added that the private placement was priced at a margin over gilt yields. “On this occasion, we found there to be a nice tie-up between pricing that was very attractive to the borrower and the issuer, and that also works for our investors,” he said.
The facility includes two deferred funding tranches at 12 and 24 months, allowing Settle to draw down capital when required. Fowler added: “It’s attractive to borrowers if we can stagger the drawdown of the loans to suit their cashflows.”
Legal & General Investment Management is also among the UK insurance company lenders that have provided finance to the housing association providers of social and affordable residential stock in the country.
In June, LGIM’s real assets division provided a £100 million, 40-year loan to Bromford Housing Group to support its delivery of affordable homes in southern England.
“Social and affordable housing is a good asset for our pension funds,” Steve Bolton, LGIM’s head of private corporate debt for Europe, told Real Estate Capital at the time. “It is long-term and delivers real social value.”
In March, the UK government announced its Planning for the Future proposal to deliver 300,000 new homes each year in England by the mid-2020s. However, real estate consultancy Savills warned in a report published on 29 June that this target was at risk due to covid-19’s impact on the economy and on the practicality of building new homes.
“Whether this target is reached will depend on the support for private new build sales, the level of affordable housing delivery and the growth in the build-to-rent sector,” said Lucy Greenwood, director, residential research and consultancy, at Savills.