Social housing as an asset class: Decarbonisation plans and potential
Joe Griffin, Credit Analyst at Just Group plc, explains the decarbonisation potential behind social housing as an asset class – as well as major risks.
Andrew Putwainposted on Wednesday, November 15, 2023
Andrew Putwain: What are the main risks associated with investing in the social housing sector? (For example, operating with financial management and governance departments in an industry that might lack sophistication in certain areas, etc.)
Joe Griffin: One of the key risks for us is the governance and management at the individual housing associations (HAs). Over the last 12 to 18 months in particular, we've seen a trend with more HAs being downgraded to non-compliant due to their governance with the regulator; they go from G2 to G3 or, in some cases, even from G2 to G4 [on the regulator’s governance scale, which has four levels from G1 to G4].
This happens for many reasons. We've seen some HAs overcharging tenants’ rent. There’s also been inadequate stock monitoring, which includes not knowing which units are compliant with fire safety standards – a concerning issue.
On the management side, there have been situations with poor reporting and poor treasury and debt management, particularly around governance, and cases of a lack of board oversight. There are sometimes weak controls around HAs and their development programmes, particularly the ones that are trying to ramp up too quickly.
"We don't want to be investing in HAs with poor management because that's
likely to lead to poor financial performance."
This concerns us for several reasons. Firstly, on the credit side, we don't want to be investing in HAs with poor management and governance because it's likely to lead to poor financial performance and rating downgrades.
Secondly, some of governance downgrades threaten tenant safety, which is not acceptable.
On the debt Treasury side, it's all quite standard. New primary issuances that we see are generally all benchmark size: 25 to 35 years. It would be nice for a few issuers to branch out to different sizes and tenors given our asset-liability matching business model. We have liabilities ranging from one year to 60 years, and it would be good to have some HA assets that aren't in that 25-to-35-year bracket.
Andrew: In terms of the issuance being too similar, would you like to see some variance? Are they missing a beat in terms of being able to create more yield?
Joe: It would be nice for us. I can see why they don't need to do it, though. Sterling HA issuances tend to be very oversubscribed. HAs know that if they want 25 years – which they do tend to want – they can issue at that range, and they'll get enough appetite.
Andrew: Polls are showing the potential election of a Labour government. They are known for housing being a big policy pillar. Is that something you’re considering with forward-looking projections or research?
Joe: I'm sure we'll see a shake-up in the housing sector, which will mean more to think about – and it ties back to the operating environment.
We're not sure how it might impact grant funding and rent setting. Work will need to be done there, and we'll speak to our external managers and rating agencies to get their views and see how that might impact our investing going forward.
Andrew: Does housing investment factor into Just Group’s decarbonisation plans – and, if so, how? Is this a constant across the industry?
Joe: We're committed to reducing our Scope 3 emissions by 50% by 2030 and we see the HA sector playing a key part in this reduction, in line with our broader objectives to further allocate towards positive social impact investments.
The current contribution of HA assets to the overall portfolio emissions intensity is lower when compared to other investments.
However, as a caveat, I would say the data we have access to is of varying quality. This includes the HA sector, where data availability can be limited. We find, for example, for private residential assets obtaining accurate reported emissions data can be difficult, which means in some cases our calculations require a proxy.
"We might look at a provider and see that 70% of their units are already at EPC C or above,
which is good compared to the sector average."
We continue to incorporate climate change and specifically emissions as part of our investment decision making process. We see emissions as one of many other key factors. We are actively engaging with issuers and our external managers to help improve the quality and availability of this data. When looking at an HA investment, we consider the EPC ratings of existing units. We might look at a provider and see that 70% of their units are already at EPC C or above, which is good compared to the sector average, at around 55% in 2021 in the social housing sector.
We look at the likely costs of what it's going to take to get those remaining units up to that EPC level. We consider the timeline and whether the HA is planning to front-load the work in the next couple of years or if costs are expected to be spread out over the period leading to 2030 and the potential effect on Capex and other relevant credit metrics.
This is mainly on the “E” side, but as mentioned earlier it is the “S” that is one of the biggest drivers of our assessment of HAs. We believe that by increasing affordable housing supply for low-income families, and by improving the safety of the tenants, our investments in this sector can have a positive impact on society.
This is part two of the conversation – to read part one, please click here.