L&Q leads charge into PRS guarantees funding as Venn lines up £700m pipeline

As reported by Social Housing on Thursday last week (17 November 2016), PRS Finance, a funding aggregator and subsidiary of Venn, issued its debut £265m bond, with £90m retained for later sale, at a coupon of 1.75 per cent.

The Department for Communities and Local Government’s (DCLG) £3.5bn PRS guarantee scheme (PRSGS), which enables landlords of new rented homes to use a government guarantee to secure long-term financing, forms part of a £10bn guarantees programme announced in 2013 and is intended to stimulate the building of new homes for the private rented sector across the UK.

The long-awaited 10-year issuance came at a spread of 46 basis points over the gilt and all-in cost of 1.85 per cent.

L&Q is understood to have taken around £160m of the initial tranche. It comes as a number of housing associations look to move further into build to rent to contribute to supply and amid continued reductions in central grant funding and policy pressures such as the four-year, 1 per cent annual reduction to social and affordable rents.

Venn would not comment on individual borrowers, but said it has received some £1.7bn worth of applications and has credit approved and allocated £700m of projects. However, under the rules of the programme, it has to wait until the schemes are built, when the funding can be used to refinance. It said it has seen over 300 PRS operators. Operators have until December 2017 to apply for funding.

L&Q revealed plans in May 2015 to launch a new private rented sector subsidiary and brand, which it has called ‘L&Q PRS’. The subsidiary company was created off-balance sheet of L&Q Housing Trust, which meant transferring £250m of PRS assets into the new entity.

It then said in February 2016 that it planned to invest around £1bn in PRS across London. However, this has been ramped up again as L&Q looks to build 100,000 homes over 10 years, of which 50 per cent will be for market rent and sale. Its overall plan now includes branching out beyond London and the South East to Manchester and other parts of the country.

Other associations have gone down alternative funding routes, such as Thames Valley Housing and its Fizzy company, which has attracted equity, and A2Dominion, which has sourced unsecured funding.

The PRS Finance bonds - guaranteed by DCLG, resulting in a cheaper rate - were priced over the UK Treasury 1.5% 2026 gilt. They mature in November 2026 and were rated Aa1 by Moody’s. Bookrunners were RBS and HSBC and roadshows took place a fortnight ago.

Moody’s affirmed the Aa1 rating to the £3.5bn PRS programme, ‘based solely upon the unconditional and irrevocable guarantee of scheduled principal and interest on the bonds secured under the programme to be provided by the Secretary of State for Communities and Local Government (DCLG)’.

Eligibility

PRS Finance expects to become a regular issuer of bonds with varying maturities, of typically between 10 and 30 years, over the coming years. Any UK-based project aimed to be held as PRS in the long-term is eligible, with a minimum aggregate value of £10m per application through one or several schemes.

Projects should have started building on site from June 2013 onwards. An application to obtain funding under the scheme can be submitted at any time post receipt of planning permission.

The £90m of retained funding is for applications currently being processed and expected to fund in the coming months.

The funding scheme accompanies the £3.5bn Affordable Homes Guarantee Programme (AHGP), which is managed by aggregator Affordable Housing Finance (AHF), the subsidiary of The Housing Finance Corporation, and has issued debt at record-low rates.

AHF’s issued its second bond, with an average maturity of 28 years, shortly after the July 2015 budget at 40bps over gilts, which it has since tapped on several occasions.

Venn said buyers of the PRS Finance bonds, which carry the UK government’s credit rating, have been largely institutional investors, which it said were attracted to the long-term nature of these bonds, their liability-matching features and the premium the bond pays over ordinary government bonds.

Bonds will be issued and loans granted by Venn’s financing company, PRS Finance, and on-lent to approved borrowers against private rented sector assets. PRS Operations is the beneficiary of the government licence to manage the PRSGS and will originate and underwrite the loans to borrowers and make credit decisions.

‘Bigger, better PRS sector’

Gavin Barwell, housing and planning minister, said: ‘This government is committed to supporting a bigger, better private rented sector and is providing up to £10bn government-backed guarantees to build more quality rental homes. This bond is an important step in strengthening the sector and increasing supply so that it meets the need of tenants well into the future.’

Paul House, head of real estate and managing partner at Venn Partners, said they have been encouraged by the strong response from PRS operators keen to access the government’s backed PRS funding.

He said: ‘We have met with over 300 PRS operators over the last year, representing over £3bn worth of PRS schemes, and have great confidence on the breadth, depth and long term potential of this market.’

Richard Green, head of PRS operations and partner at Venn Partners, said: ‘We expect investor appetite for the PRS Finance’s government-guaranteed bonds to remain very high, as the present low interest rate environment continues to pose challenges for investors looking to fund long-term liabilities.

‘The availability of attractively-priced funding should assist PRS operators to come to market and supply housing units into this much needed, quality, long-term rental sector.’

David Mackay, director in the debt capital markets team at RBS, added: ‘Overall it’s a great result given the gilt volatility since the US election and fragile capital markets backdrop.

‘We had a good set of investor meetings but paused from announcing until the market volatility had subsided. We took the decision to launch this debut deal and we were rewarded with a well-received transaction.’