Decarbonisation and lending – housing roundtable

Last month the NHF hosted a roundtable to discuss housing associations’ capacity to invest in decarbonising and improving the energy efficiency of their homes. At the roundtable were representatives from five NHF members, key government departments as well as the Regulator for Social Housing, UK Finance, and the wider lending and investing communities.

The conversation was centred on the interaction between housing associations’ decarbonisation costs and their lending covenants, specifically on the potential for the latter to delay the sector’s progress in achieving its net zero goals.

There was clear agreement from all parties representing various sectors that there is a shared ambition to reach net zero by 2050, as per government targets. There are some concerns that housing associations’ loan covenants may need to be renegotiated first and that a better grasp of the exact scale of costs is needed before serious progress can be made. However, there remains amongst lenders a high degree of confidence in housing associations to rise to the challenges that the drive to decarbonise the country’s social housing stock poses.

Housing associations are assessing their business plans for the next five to 10 years to establish the extent to which they are able to carry out necessary works on their stock. It is becoming clear that a barrier to achieving these goals in this time frame is the interest cover covenant used by some lenders: EBITDA MRI interest expense.

Our members will only be able to capitalise a small proportion of the major works on their homes as components and hold these assets on their balance sheets, in accordance with the accounting principles as set out by FRS102 and the Housing SORP. When housing associations report EBITDA MRI to lenders, these decarbonisation works will be added back to the revenue expenditure, reducing the earnings and by extension the reported interest cover calculation.

The impact of this could be noticeable. If housing associations’ business plans come within a set margin of breaching the EBITDA MRI interest covenant, boards will question the decisions that led to this outcome. Any negative outcome over the next five to 10 year period will be a consequence of both the speed our members choose to deliver decarbonisation and energy efficiency, and also the government guidance that is issued, for example on the need to reach EPC C. Significant investment would add value to the future salability and quality of the stock which all lenders already hold as security. The sector has a strong credit and is attractive to long-term funders. This stability is something that housing associations are striving to sustain and protect.

Housing associations’ investment in energy improvement will be key to mobilising the national supply chain and enabling the delivery of the government agenda on carbon reduction across all households in the UK.

We will continue conversations with key stakeholders about how to move forward on this issue, to support the decarbonisation of social housing while maintaining lender confidence. We will be convening a smaller sub group in the near future to pick up the discussions at our February meeting. This will involve some of the same participants, including the Regulator of Social Housing.