How Westminster City Council used private funding to reduce the cost of temporary accommodation

In 2024, WCC found itself facing a rent review across a portfolio of properties it was renting from A2Dominion. The increase requested was significant, not to mention that money was needed to perform works on a number of flats to bring them up to a suitable environmental standard. Added to this, the demand for temporary housing was increasing, and so the council’s budget was under even more pressure.

An arranger negotiated with A2Dominion to enable WCC to acquire the portfolio, but where would it find the funds? Insurer Phoenix Life was contacted, as it was known in the market to be able to provide funding at highly competitive rates, and had closed a similarly structured funding arrangement with another local authority previously.

What is the Phoenix model? It is referred to as a “credit tenant lease”, which is akin to a covered bond.

In short, rent is payable under the lease come what may, and the local authority is obliged to pay such rent. The rent is made sufficient to repay the lender’s loan on an amortising basis.

The tenant is then able to underlet the properties with relative freedom, subject to the terms of the loan and the lease. To achieve this, careful tax planning is required (there have been reports occasionally where this has not happened and the consequences have been enormous).

Why, when many lenders were using income strip funding, did WCC use the Phoenix model?

The answer would appear to be that the structure could, due to WCC’s strong credit rating and Phoenix’s low cost of capital, generate a better net present value compared to the more conventional Public Works Loan Board (PWLB) route. It also permitted greater flexibility in repayment compared to PWLB, as it better matched the underlying asset cashflow to the loan repayment profile.

Better still, despite its complexities, the model enabled WCC to take immediate ownership of the properties, to have flexibility as to the assets within the security net and to enjoy relatively light obligations with regards to the properties (this is because the covenant strength of the borrower is taken into account in addition to the assets themselves).

The outcome was that the council was lent sufficient capital to not only acquire the portfolio from A2Dominion, but also budget £33.5m to enhance the Energy Performance Certificate (EPC) rating of flats below EPC Band C.

How is Phoenix able to provide monies at this rate compared to others? Because it is using a rated loan, it is not operating in the real estate lending market, which is comparatively small, but instead in the bond world. This is a far larger market, and hence the competition is that much greater amongst lenders, so rates are lower.

Bond-like pricing is possible as the loan amount and value are based on the discounted value of the cash flows from the lease rather than the value of the underlying property. Further, they are relative value investors (compared to gilts or corporate bonds), which shapes their funding margins.

Phoenix employed Macquarie as its investment manager to oversee the transaction and model the numbers, and had lawyers who were able to minimise tax leakage, thus making the loan as efficient as possible while satisfying Phoenix’s ESG aims.

The good news for the UK economy is that this structure enables British pensioners to have exposure to long-term, safe, fixed-income investments. Other lenders will be looking to enter the market, but this deal enabled a domestic solution to be realised.

Why is it that other local authorities have not pursued this source of funding? We are advised that a number of authorities are in discussions, but as yet only a small number are actually progressing projects. What stops them?

The structure is clearly complicated, due to the nature of structured finance, the tax complexities of achieving the most efficient cashflow, the necessary steps to follow when acquiring social housing and the potential requirements of the Building Safety Act. Local authorities run tight ships, and so expecting existing workers to implement such a project whilst juggling existing commitments can be a tough ask.

WCC had hired an individual who had previously worked on this type of deal. By having someone with the right skills and public service background, the council set itself up to succeed. Further, by employing Trowers & Hamlins, it had lawyers who could deal with the acquisition of a social housing portfolio, and were trusted to explain the loan and its implications to the council.

Local authorities will need both internal champions and external expertise to implement this model, but in a temporary accommodation funding crisis the results are definitely worth pursuing.

Richard Lampert, real estate partner, Eversheds Sutherland