Asbestos, Bailouts and a Half-Built Mall Show UK Crisis in Cheap Rentals

Neil Callanan
·4 min read
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(Bloomberg) -- About 40 minutes from the City of London financial district, a sign in the town of Laindon once promised that “Something amazing is taking place.” Behind it lies the part-completed carcass of a shopping mall and housing project, where construction has stalled for two years.

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Work initially stopped to allow the developer, Swan Housing Association, seek new planning approvals. Further delays followed when the firm, which issued £250 million of bonds, ran into financial difficulties after writedowns on projects and breaches to asbestos and fire safety requirements at some of its properties.

The troubled project highlights the dangers facing housing associations, non-profit groups that provide affordable homes, after cutbacks in government funding in the wake of the financial crisis. That pushed some into risky private property development funded by bond sales and bank loans.

Like many others, they’re now getting squeezed between higher construction costs and rising interest rates on one side and falling sales and pressure on asset values on the other.

It’s a story playing out across the property market, from office blocks to retail sites to residential properties, but in this case it’s affecting those most hurt by the cost-of-living crisis.

Many housing associations “tried to become quasi private developers acquiring land and large development opportunities, some of this at the top of the market cycle and now not viable,” said Mark Farmer, chief executive at construction consultancy Cast. To him, it’s reminiscent of the last economic cycle, when “over zealous development plans” led to balance sheet problems for some.

For associations, the squeeze has left them with both more debt and less ability to cover the cost of their borrowings. Their interest cover — a metric that shows how easily a company can pay its interest bill — was 87% in June compared with 150% five years ago. In the same period, the companies’ total agreed borrowing facilities rose 45% to a record £123 billion.

The financial damage is having broader effects too, limiting associations’ ability to provide so-called social housing as the inflation squeeze pushes up demand.

It’s part of a wider legacy of the austerity program pursued by the Conservative Party and Liberal Democrats when they came into government after the 2010 election, which has also left the National Health Service struggling.

With housing now a major election issue, Minister Michael Gove has said he wants the government to build far more of these cheaper rentals — 30,000 a year — to tackle a crisis that’s left one million people on waiting lists. In the 2021-2022 fiscal year, only about 7,650 were built in England.

“It won’t happen this year, but it will happen in future,” Gove said Monday.

“We’ve got an £11.5 billion affordable homes program,” he said. “We will work with housing associations and indeed the private sector when they’re developing and delivering new homes in order to make sure that we have affordable homes.”

His comments come as providers warn they will probably have to cut back on building low-cost rentals because of the funding shortfall.

Some are even weighing stopping construction of social housing completely, according to a person with knowledge of the matter, because the changes in their business model mean they’re less insulated from the wider property downturn now underway than before.

Adding to the pain for these landlords, below-inflation rent rises mandated by the government limit funding for repairs and safety improvements.

The providers, including local government ones, have faced criticism for poor standards in some homes, especially following the death of two-year-old Awaab Ishak from a respiratory condition caused by exposure to untreated mold.

Impairment charges are also rising, and may hit about £330 million in the current fiscal year, up 350% from five years ago. The majority of it is likely to be related to development, a survey found. Longer term, the associations warn they face a £35 billion gap in preparing for net zero.

“Impairment charges recognized by individual providers have the potential to result in breaches of loan covenants,” the social housing regulator wrote in a filing last month.

Distressed Debt

And the financial pressures are so great that they will likely lead to a need for more takeovers, the person with knowledge of the matter said.

Bonds issued by Swan, rescued earlier this year by competitor Sanctuary, were being quoted at 73 pence on the pound on Tuesday, a level more typically associated with distressed debt.

Sanctuary, which didn’t immediately comment, plans to develop the Laindon site and is holding consultations with residents this month to seek their input.

“Housing associations are currently operating in a challenging financial environment,” said Alistair Smyth, director of policy and research at the National Housing Federation. “What we need is a nationally coordinated” long-term plan “to build the homes and infrastructure we need in the places we need them.”

--With assistance from Joe Mayes.

(Updates with additional comments from Gove. An earlier version of this story corrected the length of construction delay in first paragraph.)

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