UK housing providers face a dual challenge of working towards government targets to ensure all social housing achieves at least one measure of EPC rating of C or above by 2030 and a second measure by 2039 while managing higher costs of borrowing and construction. An unstable geopolitical climate and conflict in Europe and the Middle East has led to higher energy, transportation and labour market costs at a time when retrofit obligations are building and the window in which they can be completed is closing.
Investment in retrofit is already happening at a strong pace with the number of social homes with an EPC rating of C or above increasing from 68% in 2023 to 75% in 2025. We’re seeing governmental support to encourage a push for investment ahead of the 2030 deadline including exemptions for homes that require works of more than £10,000 and an agreement that homes considered EPC C compliant by 2030 will continue to be compliant under the new rating criteria. These incentivise improving existing stock early on to avoid compliance risk and duplicated retrofit works under the new energy efficiency ratings system.
Despite reports that as many as 320 homes a day were being upgraded to meet the required standard, estimates suggest that the housing stock won’t reach the target without accelerating this pace even further and that there is still between £5bn - £10bn of expenditure required to decarbonise the remaining properties. Even with the government assisting the sector in reaching environmental goals through grants and exemptions to targets, there is still a shortfall that will require a range of funding options to fill.
The National Wealth Fund (NWF) has partnered with major UK banks such as Barclays, Lloyds, and NatWest to partially guarantee loans for retrofit purposes and has supported more than £1.6bn to the sector to date. To qualify for the loan facilities the proceeds need to be put towards one of the qualifying criteria under the Sustainable Finance Framework which means improving EPC relevant criteria such as insulation, windows and doors, energy efficient lighting, or more efficient heating systems. The structure and term of the loans vary on a case by case basis with Barclays offering between £10m - £50m and Lloyds agreeing a facility of up to £100m. The structures of the loans can be tailored to the individual needs of the organisation but generally range between 10 to 15 years with unsecured options or longer terms with part security.
For smaller RPs or for funding focused on a particular project, there are other banking providers who can arrange funding in smaller tranches such as Unity Bank who have a similar retrofit focused imitative offering loans of up to £3m per customer. The partnership between banks and the housing sector to facilitate these types of funding facilities offers benefits to both the public and private sector in working together to achieve sustainability related goals. Banks are able to meet their green funding targets and take some of the risk off the table through guarantees while RPs benefit from a wider range of funding options at slightly preferential levels but are subject to limited use of proceeds.
These use of proceeds facilities differ from funding in the form of Sustainability-linked Loans (SLLs) which are focused on sustainability KPIs instead of mandating a certain outcome for the proceeds. If a RP needs general funding for a range of projects rather than funding tied to retrofit purposes, this provides a more flexible option. Codi Group, one of the largest Welsh Housing Associations, recently negotiated a sustainability linked RCF with relationship bank Handelsbanken to provide up to £130m in funding tied to a range of sustainability KPIs. Once the targets are met by Codi, the loan margin will decrease. While an SLL in this structure is less restrictive in terms of the use of proceeds, the cost of ongoing monitoring and reporting of KPIs needs to be considered as these will be key to getting maximum value out of the facility and not breaching any of the requirements set out by the lender.
This same philosophy can also be applied to long-term bond issuance with some larger RPs like L&Q issuing large tranches of debt priced over SONIA or Gilts with funding tied to the achievement of ambitious sustainability targets. Due to the higher upfront costs of issuing bonds such as drafting prospectuses and acquiring a credit rating, this isn’t an easily accessible option for organisations of all sizes and activity has been limited in recent years due to higher interest rates limiting appeal of long-term debt.
Ultimately, a diverse range of funding from multiple lenders across various maturities is key in managing interest rate and counterparty risk for any sized organisation. Sustainability linked funding offers a way for RPs to fund retrofit projects at preferential rates but must be supported by broader sources of funding not tied to sustainability goals to support liquidity and minimise cashflow issues. Funding has to be aligned to clear treasury policy and tied in with monitoring and reporting of KPIs to ensure compliance with covenants and any reporting requirements linked to debt facilities.
Arlingclose can support registered providers with assessing funding options, reviewing treasury strategy, and assessing the impact of borrowing on liquidity, covenants and refinancing risk. With interest costs at restrictive levels and a range of specialised funding options available, treasurers will need to ensure that borrowing is not only cost-effective but also compliant with lender requirements and aligned to strategy and business plans. For support with developing strategy or assessing funding options please contact jscottsoane@arlingclose.com.
