The second quarter of this year saw BNP Paribas agree two transactions for UK housing associations, marking the launch of one of the key pillars of its UK growth plan revealed last year, which includes expanding its UK client base and increasing sustainable lending.
Sector proves fertile for bank's UK expansion plan and socially responsible lending strategy
Last month, the bank's coverage and sustainable finance divisions worked in partnership with L&Q, a regulated charitable housing association to help issue a new credit facility of £100m. Where this transaction deviates from traditional lending is in the potential for L&Q to reduce its margin repayments if it meets certain social impact targets. L&Q's core tenure is social rented housing. On average, its residents living in these homes pay less than 50% of market rents, making them more affordable for people on lower incomes. As a charitable organisation, it sees its role as going beyond providing homes and housing services, aiming to build aspiration, opportunity and confidence in its communities through its £250 million L&Q Foundation and skills academy.
One of the three pillars of its foundation is its Independent Lives programme, through which it works with residents and others in the wider community to develop their employability skills and find appropriate and sustainable jobs. It also supports its most vulnerable residents to resolve challenges that may compromise their ability to sustain their tenancy and develop other projects in support of these goals, such as financial and digital inclusion. If L&Q's foundation succeeds in placing at least 600 residents back into work in the first year, rising by an additional 25 in every subsequent year, it will benefit from lower borrowing costs.
This loan, which is fully customised to match L&Q's social impact objectives, demonstrates that banks and other providers of capital are in a strong position to create powerful incentives for organisations across both public and private sectors, to tackle real social and societal challenges. Although unemployment has fallen steadily in recent years, the UK has suffered from a well-documented lack of affordable housing which has pushed up rental prices – particularly in London and the South East. This has led to increased homelessness and higher levels of rent poverty across the UK. Interventions such as L&Q's Independent Lives programme address these issues directly and help residents to live more economically independent lives.
In the future, such loans could even incentivise developers to build more eco-efficient buildings and attain higher standards of sustainability in the construction of new homes. Around 13% of the UK's carbon emissions come from private homes and the UK government has ambitious targets to upgrade all fuel-poor homes by 2020. Private-sector lenders aligning themselves behind these initiatives can have a powerful, multiplier effect.
Addressing the Shortfall in FinancingUK housing associations are also coming under the increasing twin pressures of a shortfall in bank financing and the potential for cuts in UK government grant funding. Although an additional £2bn in government grants for social and affordable housing was announced last year, according to ratings agency S&P, "the English regime is unlikely to change from the current low-subsidy operating model." The agency also forecasts that housing associations will need to borrow up to £12bn extra, representing growth of 5% a year, in order to build 50,000 new homes annually over the next three years in England and Northern Ireland.
For BNP Paribas, addressing this shortfall represents a good opportunity and in May, it extended a loan to A2Dominion, another charitable housing association to support it with its core business of building high quality homes in the UK. The bank's rationale for lending to the housing association sector is primarily driven by its socially responsible lending strategy as part of its UK growth plan.
Last year, BNP Paribas set out a new corporate social responsibility policy designed to create a positive impact in society, in line with the UN's Sustainable Development Goals. Extending loans to support the building of affordable homes directly contributes to Sustainable development Goal #11: to support sustainable cities and communities. And by introducing novel incentive mechanisms that can help to reduce financing costs, it can align its clients' interests such that they also contribute to Goals #1 and #8, no poverty, and decent work and economic growth, respectively.
"As well as being an excellent fit for our sustainable lending strategy, we feel that we have a suite of products that is well matched to the requirements of housing associations," said David Reynolds, senior banker at BNP Paribas in London. "Housing associations do extremely important work in the community and we believe that banks have a vital role to play in terms of channelling capital towards sustainable causes. Last year we celebrated our 150th anniversary of operating in the UK and we want to help support the causes that will enable the UK to transition to a more sustainable economy for the next 150 years – and beyond."