Lending game to change as institutional investors eye social housing market

As well as marking a shift away from the traditional relationship between banks and housing associations, greater use of the capital markets would also mean that housing stock would have to be used as security on so many investments.

Nick Preston, director of public finance at ratings company Standard & Poor's, said one advantage of institutional lenders was that they based their decisions on credit ratings. "If this scenario goes ahead, it will make housing associations' lives a lot easier," he said.

A number of investment houses such as Credit Suisse Asset Management and Prudential already have relatively small interests in housing associations, but more are understood to have been keeping a close watch on developments in the sector of late. Phil Jenkins, manager of fixed income at the Royal Bank of Canada, said: "There's a lot of appetite from the institutional investment market for well-structured social housing deals."

Funding from institutions forms roughly one-fifth of the total lending to housing associations at the moment. But, to date, mainstream banks such as the Nationwide and Royal Bank of Scotland have dominated the market.

Jenkins said the two forms of finance were complementary, with the institutions of the capital markets generally more suited to providing long-term funding and the banks to providing short-term debt. He said: "The social housing market is unusual in that banks have been keen to lend to housing associations longer than the 10 to 15 years that would be considered the threshold in other sectors.

"This willingness to hang on to 25 and 30-year debt has, to date, restricted the natural role of the capital markets."

Paul Reynolds of the corporate finance arm of investment bank Cazenove said a key point was how to encourage associations to switch their business away from established banks in order to take advantage of the better rates available from capital market deals.

"What is possible is that the banking sector won't support lending to the housing association sector as it currently is," he said.

"Circumstance will continue to push more housing associations into the capital markets as the number of banks lending to the sector falls and prices increase."

Meanwhile, Standard & Poor's Preston warned that housing associations faced an increasing credit risk.

His company launched its latest appraisal of the social housing sector last week.

The report says the sector is, overall, financially healthy, but factors such as rent restructuring and updating properties to meet the decent homes target in 2010 would reduce RSLs' financial flexibility.