The changing role of guarantees in housing

From cost of debt to system leverage

The Affordable Homes Guarantee Scheme demonstrates how sovereign-backed guarantees could materially change the economics of housing finance. Providers that accessed the scheme reduced borrowing costs, typically 20 to 50 basis points versus unguaranteed capital markets issuance, extended tenor and improved execution certainty. 

In our experience of working with borrowers through that period, the benefit was not purely financial; it gave boards the confidence to commit to longer-term funding strategies at a point when bank markets were constrained and capital markets execution was uncertain.

The more important legacy, however, has been proof of concept. Guarantee schemes demonstrated:

• Guarantees can be structured to sit outside traditional grant frameworks
  
  
• They can be applied flexibly across tenure, delivery structure and counterparty
  
  
• They are effective at crowding in institutional capital rather than replacing private finance

This has provided the foundation for a broader rethink about how guarantees can be used not just to accelerate delivery, but to reshape housing markets and balance sheets more fundamentally.

Guarantees as a tool for housing associations

For much of their history, guarantees have been seen primarily as a mechanism to reduce the cost of debt. Uptake under the original AHGS was more limited than initially anticipated due to scheme limitations, but recent revisions have made the scheme more attractive.

The scheme is now being used by borrowers to:

• Reduce borrowing costs, depending on market conditions and provider credit quality
  
  
• Extend weighted average debt maturity and access longer tenors without locking into inflexible structures
  
  
• Improve liquidity headroom and create development capacity while protecting credit metrics
  
  
• Ringfence risk by matching long-dated liabilities to core social assets

Guaranteed funding has also shifted the internal treasury conversation. Rather than framing the choice as ‘bank or bond’, boards are increasingly treating guaranteed facilities as a strategic anchor around which more flexible bank lines or shorter-dated issuance can sit. That structural shift in thinking is, in our view, as significant as any individual cost saving.

This has been particularly valuable in periods of market volatility, where execution certainty and downside protection have been at a premium.

From funding support to delivery enablement

Against a backdrop of historically low delivery of new housing, the conversation with our clients has moved well beyond funding costs. Guarantees are increasingly being explored as delivery tools to unlock schemes that would not otherwise proceed. The emerging models we are working with include acquisition guarantees and vehicle-level support designed to:

• Enable the acquisition of existing stock (including unpurchased Section 106 homes and homes that could relieve the crisis in temporary accommodation)
  
  
• Support new ownership and operating vehicles
  
  
• De-risk early-stage or counter-cyclical delivery
  
  
• Bridge viability gaps without distorting operating cashflows

This reflects a recognition that many of the constraints on housing delivery are structural rather than financial: planning risk, timing mismatches, covenant capacity or the inability of individual balance sheets to absorb scale quickly.

While this article focuses on financial guarantees, there is also a role for off-take mechanisms that provide developers the assurance needed to underwrite a scheme and start on site.

This is the first instalment in a two-part series. In the next, we will explore how we expect the guarantee landscape to evolve.

Gows Shugumaran, director, Newbridge Advisors