A new credit union-backed initiative, with the capacity to provide as much as €1bn in funding for social housing, has launched in Ireland.
Donal Coghlan, one of the fund’s directors, explains that credit unions have been talking about financing social housing for the past 20 years, but regulations didn’t permit it, because it is effectively business lending, rather than lending to members.
In 2018 the regulation changed, allowing credit unions to invest in social housing, but only through a special-purpose, regulated vehicle: enter the Credit Union Approved Housing Body Fund (CU AHB Fund).
Coghlan was working for an investment firm at the time, and after looking at the options with a couple of credit unions, he explains, “it became apparent very quickly that if we were going to do this right, it should be a fund set up by credit unions for credit unions, rather than one set up by an investment firm for credit unions”.
Historically, credit unions have not always been well served by investment firms, says Coghlan. “Investment firms start with the premise, what’s in it for us? […] When we’re working with two not-for-profit sectors, credit unions on one side and Approved Housing Bodies on the other, we wanted to do something that was always in their best interest.”
Coghlan left his firm, and with the support of a small group of Irish credit unions, got the CU AHB authorised through Ireland’s Central Bank as a regulated fund.
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“In many ways, how we work is very similar to a credit union,” says Coghlan. “We take money in from credit unions, we lend it out [to Approved Housing Bodies], we get the money back with interest, cover our core costs and pay out back to the credit unions.
“It’s a model that they will be familiar with, working at a very high level, wrapped up in a regulated structure that has all the necessary requirements, service providers and regulated entities doing what they’re supposed to do to make it work.”
Once the CU AHB was established, it engaged with Irish credit unions, raising around €21m, before approaching AHBs for projects to fund. The CU AHB has so far lent to three AHBs. Circle Voluntary Housing Association received €8.2m from the CU AHB fund for a development in Adamstown, west Dublin, and projects have also been financed in Citywest with Tuath Housing and Galway with Co-operative Housing Ireland.
The CU AHB Fund focuses on financing turnkey homes, adds Coghlan. “We’re not lending for development. And the reasons we’re not doing that is: one, it’s a riskier loan, so it wouldn’t be matched to the risk appetite of the credit unions who are investing in the fund; two, if you lend for a completed home, you have an immediate impact on addressing housing needs because you you’re taking a family off the social housing waiting list; and three, the funding AHBs get for repaying the loans is from the local authorities here in Ireland.
“Effectively, we’re lending to an AHB, on the basis that there’s a lease in place with the local authority for the rent of that home for 25 years for social housing. And the local authority pays the rent. So it’s very secure lending.”
The CU AHB lends at an interest rate of 3.75%, matching the rate of the government’s Housing Finance Agency.
“We’re now an alternative lender to the government,” says Coghlan, “and we’re diversification for the Approved Housing Bodies so that they don’t always have to go to the same pool to get money. And this means that government money is freed up for other purposes.”
The scheme also strengthens relationships between credit unions and housing bodies, he adds.
“We lend money to the housing bodies, they provide houses, they have tenants living in those homes, who will then become members of the credit union. So it’s kind of a circular use of the money and recycling within communities, in a co-operative nature.”
To date, the CU AHB has 24 credit unions on board, with €36m raised. Coghlan outlines a number of benefits for credit unions to get involved in the fund.
“Credit unions haven’t been paying significant dividends over the last few years because of interest rates and other challenges,” he says. “So this is a positive return back to members to say, this is what we’re using your money for.
“This is a productive use of the members’ money, it’s delivering housing, it’s ESG, it’s providing a reasonable level of return for investors, and it’s a bit of a diversification on their investment portfolio.”
Despite these incentives, the process for a credit union to get involved in the CU AHB is not always a fast process.
“They have to understand it, then they have to go to the management of the credit union, then they meet with the investment committee, then they go to the board, who might come back with questions, so it could take a few months, and a couple of meetings [to get started], because it’s a new investment type. […] This is a 25 year investment. So anybody that’s making a decision probably won’t be working in the credit union when this thing matures.”
Coghlan describes the CU AHB as “a blue chip offering for credit unions … a highly regulated vehicle, subject to oversight.”
He adds: “We have the proper resources in place to do the necessary credit assessments. So we’re assessing loans for €10m or €15m. That’s a different loan to what a credit union typically does, so we have the proper credit analysis team in place to do all of that.”
With almost 200 credit unions in Ireland, the total market capacity for credit unions to contribute to the fund is over €1bn, says Coghlan. “Really, now what we’re trying to do is we’re trying to get more credit unions involved – there are about 180 active credit unions here in the country.
“We have proof of concept now with the initial investors to make it work. And now we’re going back out to the wider credit union movement to say right, get involved.”
Coghlan says the intention now is to be “an investment of choice” for credit unions.
“Credit unions are looking for ESG options, they are looking for ethical options to use their members’ funds.
“Most people would think they put their money in their credit union and it sits in the credit union, and it doesn’t. It’s not lent out, it’s put into a bank to earn some interest and because of regulations, a lot of the money here is going offshore. So a lot of the money coming into the Irish credit union movement ends up being invested in Italian banks or Spanish banks.”
Now established, the vehicle also has the potential to act as a platform for other initiatives, says Coghlan.
“Because we built this as an umbrella structure, we could maybe use a sub fund to develop a retrofit [scheme], helping to bring houses up to proper energy ratings. You could look at construction and development, which is a different risk profile.
“Also, credit unions are now getting into mortgages. … It’s a perfect fit here – credit unions are providing mortgages to their members, and for those members who can’t afford a mortgage, we have a fund that provides finance to social housing.
“So credit unions are covering a lot of what is really important in terms of people’s
financial needs.”
The CU AHB is the first non-bank entity to provide financing for social housing in Ireland, which Coghlan highlights as a “significant change”.
“There may be plenty of bond markets and other things that are issuing money, but those markets sooner or later may not be providing it.” says Coghlan, warning finance must be made available if Ireland is to meet demand for at least 33,000 new homes per year, adding that the new CU AHB Fund is “just a part of the picture.”
Main picture: Sean O’Connor (chair, Tuath Housing Association); Paddy Gray (CEO, Tuath Housing Association); Jennifer Carroll MacNeill (former finance minister with special responsibility for financial services, credit unions and insurance, current minister for European affairs); Brian Murphy (CU AHB Fund chair); Alan Edge (mayor of South Dublin); Shirley O’Hara (Fine Gael councillor)
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