Housing associations have never been reliant purely on public capital, having historically borrowed heavily from banks. As these rein in their balance sheets to meet regulatory needs, the loans are being refinanced with corporate bonds. Institutional investors have been more than happy to lend to organisations that benefit not just from strong asset backing, but also from implicit government backing - Moody's gives 24 of the 26 UK housing associations it covers a double-A credit rating.
Private investors have benefited, too. Places for People, one of the largest housing associations, has issued two retail bonds, both of which have proved popular. The first is now trading at 107p, the second, a 10-year index-linker, at 104p.
But sourcing equity is another matter. Housing associations used to rely on government grants to build more homes, but the 2011 review of the Affordable Homes Programme cut funding by some 85 per cent. That's where the stock market comes in. Picking up an idea first aired in the 2004 Barker Review of Housing Supply, the government and some housing association executives hope Reits can step at least some way into the breach.
One model is being proposed by Phil Shanks under the banner Houses4Homes. He wants to build new properties on behalf of housing associations, which would agree to lease and manage them; top-up grants from the government would make the developments commercially viable. A similar plan has been drawn up by law firm Winckworth Sherwood for a consortium of smaller housing associations. Alternatively, Places for People is looking to transfer 4,000-5,000 units of its existing portfolio into a new for-profit entity that would then be floated.
But, despite much talk - Mr Shanks even rashly committed to a 2012 flotation - no vehicle has yet been launched. One problem, predictably, has been making the returns add up. The government has helped by allowing housing associations to raise 'affordable' rents to 80 per cent of the open-market level. Using this definition, Chris Jones, head of tax and treasury at Places for People, says his team has managed to come up with a return target of 7 per cent, including some capital appreciation. Mr Shanks, meanwhile, talks of returns of 6.4-7 per cent.
A further option is to boost returns by including market-rented properties. Housing associations typically build mixed developments, with homes for affordable rent, market rent and sale all jumbled together. "It's about developing communities these days," says Mr Jones, lamenting that most investors cannot get away from the image of high-rise estates. One housing association - Genesis - sold a £125m portfolio of market-rented properties to M&G, the investment arm of the Prudential, this month. The 401 east London apartments have been leased back to Genesis for 35 years on an inflation-indexed rent, reported to start at about £7m.
This portfolio would also have appealed to the public market. But add affordable homes back into the mix and the investment case becomes more complicated. On the one hand, investors may be prepared to accept a lower return because of the implicit state guarantee, and because social housing waiting lists are so long. On the other, they may be reluctant to invest in a sector that is still dependent on the troubled public purse - particularly in light of the recent inflammatory rhetoric against benefit claimants.
Indeed, it was announced to much fanfare last month that increases in Local Housing Allowance will, with some exemptions, be capped at 1 per cent from 2014. Mr Shanks says that should not affect the rental grant paid directly to housing associations, which is inflation-linked until 2015. But the political environment is hardly favourable, and the system is due further reform with the launch of 'universal credit'. If future subsidies are paid to housing associations through tenants, rather than directly through councils, it would increase the sector's risk profile.
Indeed, the government's attitude towards social housing Reits - which it once saw as part of the solution to the nation's housing crisis - seems to have cooled. It launched a consultation into breaking down barriers to their creation in last year's Budget, only to conclude in December that there were no barriers. Perhaps that's because they are eyeing up a new source of equity - housing associations' own profits (or surpluses, in the language of charities). Thanks to strong RPI-linked rental growth, low interest costs and limited development, these are currently at record levels - making the sector an easy target for the Treasury axe.
Housing associations could appeal to private investors, combining utility-like cash flows and inflation protection with a strong social purpose. But any social housing Reit that does succeed in listing this year will face a barrage of questions about the long-term viability of the grant-dependent business model. It may pay to stay away - at least until the dust settles on the new benefit system.
