Inside Housing – News – Cost of bonds doubles as inflation and war in Ukraine hit debt markets

The cost of debt for housing associations has risen sharply this year as financial markets factor in the cost of inflation and the fallout from war in Ukraine.

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Homeowners advised to ‘lock in’ current interest rates as market uncertainty increases #UKhousing costs


Talk to Inside the housinga number of financial professionals have revealed how investors are going through a period of greater risk aversion, in part due to rising gilt yields and a sharp rise in spreads that began with the invasion of Ukraine in February.

A bond aggregator said it is finding housing associations interested in borrowing smaller amounts quickly as markets fluctuate, and landlords are advised to “lock in” current rates by entering into deferred financing agreements .

Henrietta Podd, director of Chatham Financial, said: “A year ago housing associations were borrowing long-term (15 to 40 years) finance in the bond markets at margins of between around 0.75% and 1 % and all had interest rates below 2%.

“As clouds loomed on the horizon at the end of 2021, the rise in gilt yields and a sharp rise in spreads began with the invasion of Ukraine in February 2022.”

Ms Podd explained that as investors have lost money from their portfolios, they have become more risk averse and need compensation for any additional losses.

“As a result, HA [housing associations] are now facing yields of 4% to 4.5% with new issue spreads around 1.5%+ in the public markets and closer to 2% in the private placement market,” he said. she adds.

Major London association Sanctuary issued a £150million tap of a 30-year bond last week, but described the blended yield of 2.9% across the bond as “a good value for money”.

Piers Williamson, chief executive of The Housing Finance Corporation (THFC), attributed the sharp rise in the cost of debt to political uncertainty and other competing pressures on business plans.

He said: “As associations pause and consolidate, they will also need to consider the likelihood of this new rate environment persisting.

“Therefore, taking early action to lock in current rates can, given the further forecast of inflationary pressure, result in significant cost savings for HAs with a clear and certain need for funding.”

THFC loaned £27.5m to three associations in April despite ‘extreme market volatility‘.

Andrew Morton, deputy managing director and chief financial officer of MORhomes, said yields had bottomed out over the past summer.

He added: “They rose by about a third before the invasion of Ukraine, mainly due to an increase in gilt yields reflecting an anticipation of future base rate increases by the Bank of England for fight against inflation.

“Since the invasion, we have seen further significant increases in gilt returns, combined with a significant widening of spreads, to yield another approximately 50% increase in returns that HAs have to pay.

“This means that many issuers have now seen the yield they have to pay more than double from their lows of last summer.”

Mr Morton explained that MORhomes is now finding borrowers interested in lending smaller amounts quickly in fluctuating markets to avoid over-committing themselves at once.

Julian Barker, partner at Devonshires, said: “While housing associations are of the view that the costs of issuing new bonds are likely to continue to rise and they need access to new funding over the medium term , they may want to consider locking in current rates by entering into deferred financing arrangements.

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