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Direct pension funding of social housing

Last week we carried a piece by Graham Martin called Funding affordable rented homes – are Insurance Companies the answer?  about the interest being shown by Insurance Companies in getting into the affordable housing market, and the innovative ways of structuring loans that might make investment a realistic proposition.  Here Peter McCormack, the Chief Executive of Derwent Living, explains how they blazed this trail. 
Derwent Living, a registered housing provider based in Derby, was the first organisation to get direct pension funding of social housing. In September 2011, Aviva’s own staff pension fund invested £45m to enable us to purchase 850 tenanted social rented homes from the Home Group. This was part of a larger portfolio of 1150 homes which we bought.
The funding mechanism is based on a sale and leaseback over 50 years. Derwent pays an annual lease premium to Aviva and this rises at RPI each year. The starting cost of funds is 3.9% and if RPI averages 2.5% over the 50 years the cost of funds is circa 5%. The properties revert to Derwent as freehold at the end of the period. Tenants are fully secure as assured tenants of Derwent Living. Aviva is not interested in day to day management and only requires that the total size of the portfolio is maintained leaving us to substitute properties and manage assets as necessary. Aviva have launched a £1 billion fund.
At a time when conventional borrowing is expensive and comes with onerous conditions this is a valuable new source of funding. It does not require asset cover and for Derwent gives us a more balanced loan portfolio where we already have £300m of loans with conventional funding.
Derwent was able to make this breakthrough because of our longer term relationship with Norwich Union then Aviva where we used sale and leaseback for market rented housing and invested in a Jersey based Unit Trust run by Aviva to provide student accommodation. These successful enterprises gave Aviva the confidence to work with us on social housing.
We do plan to try and use more Aviva funding for new affordable housing. Unfortunately the HCA only awarded us funds for a 123 unit programme, however we will use our commercial profits of circa £2m a year to cross subsidise and provide a further 500 homes without public funding.
Derwent may be a model for the future where 40% of our turnover is ‘commercial’ enabling us to work without public money!
Peter McCormack

0 replies on “Direct pension funding of social housing”

Sorry Peter but you aren’t the first. Touchstone Housing (now a part of Midland Heart) did exactly the same sort of deal in the early nineties, selling and leasing back a block of shared ownership properties, with Scottish Amicable. It does work ,the main risk being around the inflation linked rent when who knows what the rent formula is likely to be post 2015.

Touchstone were very innovative in the 1990s particularly in shared ownership. Derwent got funding for social rented housing which I believe is a first but we won’t trade for accolades!
I don’t see inflation linking as a problem. Rents are broadly inflation linked whether it be CPI or RPI and our view is that as long as you are not over exposed on index linking it is not a problem. The current problem is access to long term fixed funding from banks and Building Societies. The best you’ll get is 5 years.

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