Charitable Bonds Programme: evaluation

Executive summary

Indigo House was commissioned by the Scottish Government to provide an evaluation of the Charitable Bonds Programme. Launched in 2014, the Charitable Bond is a policy instrument explicitly designed to deliver affordable social housing and to recycle interest into charitable donations to fund further affordable units. This report sets out our findings.

Since its launch, a total of £584.8M has been invested by the Scottish Government in the Charitable Bond Programme. Our analysis is set out in the body of the report. In summary we found the charitable bond programme is fully self-financing and is therefore, over the longer term, a zero-cost intervention for the Scottish Government. Rather, we found it generates a modest return over the life of the bonds. A total of £6.205M is expected on the current bonds issued, based on an average term of just over 10 years. This is an important finding and includes the costs of service delivery and annual monitoring fees. These costs are met by the borrowers and not by Scottish Government.

Our evaluation found the self-financing performance of the Charitable Bond programme is driven by three key factors. The three key factors are the recycling of the interest paid by the borrower into Charitable Donations, the unsecured nature of the lending to the borrowers and the effectively zero coupon and non-recourse nature of the bonds issued. Each factor is important, but it is the combined application which powers the financial leverage and therefore drives value.

Our evaluation also found that, to date, the Charitable bond programme has supported delivery of more than 5,000 new affordable social homes including more than 1,850through Charitable Donations and 3,150 through loans to RSLs. Our evaluation found that many of these new homes would not have been delivered either at all or in the same timescales had the Charitable Bond funding not been available. This includes the bonds issued in 2025-26. Examples of some of the wider community benefits achieved are also set out in the report.

Feeback from borrowers has been overwhelmingly positive. Borrowing on an unsecured basis at competitive rates has enabled new homes to be delivered across Scotland in both urban and rural housing markets. Barriers to housing delivery addressed by the Charitable Bond intervention include access to capital issues for some RSL borrowers and project viability issues on specific sites. Consequently, as well as bringing forward sites that may not otherwise have been completed, it has helped bring forward or re-introduce some RSLs back into development activity who may otherwise have had challenges in accessing capital from mainstream lenders for development. This has been particularly true for some of the smaller RSLs involved in uptake of the bond.

RSL borrowers also reported key benefits including simplified and faster documentation process for both loan approval and loan completion, cashflow benefits with the ability to roll up interest during the life of the loan (albeit there are some risks with this), significant savings in property legal fees and arrangement on an unsecured basis freeing up financial capacity to secure completed units for other funders and, so far, competitive pricing.

We evaluated the performance of the Charitable Bond against a do-nothing approach (in line with good practice), an equivalent investment in grant and a structured loan facility and this is set out in the report. We applied both the HM Treasury discount rate of 3.5% and the higher discount rate of 6% used by borrowers in appraising the viability of social housing investment.

In summary, we found:

• Key finding 1 – the self-financing nature of the programme shifts the intervention from a spend (cost) initiative to an investment (value add) intervention. This is an important strategic financial lever for Scottish Government to further consider and is potentially transformative for the long-term financing of Scotland’s ‘Public Housing’. The evaluation highlights it merits further consideration in the context of Scotland’s housing emergency.
• Key finding 2 – there is no displacement of existing mainstream sources of private capital. Existing mainstream debt providers require security from the landlords’ existing homes and equity investors require ownership rights. As a consequence, we could not identify any comparable or substitute product. Access to unsecured lending can be the deciding factor for some projects progressing or not and also for the pace of delivery.
• Key finding 3 – the unsecured nature of the lending also means the Charitable Bond sits complementary to mainstream lending freeing up, in some cases, further financial capacity to secure completed units for other funders and so providing leverage for further borrowing or re-capitalisation. This could also be a significant consideration in pump priming the capacity of the RSL sector for increased housing delivery.
• Key finding 4 – the limited recourse and the effective Zero-Coupon feature of the bond keeps it as simple as possible. This simplicity is a critical success factors alongside the standardised documentation which means funding can be deployed quickly and at scale (6 weeks). It means each bond funds a single fixed rated loan to a single RSL and so recourse is limited to that RSL only, meaning there is no cross-risk between borrowers across the programme. This is likely also a key reason that mainstream lenders are comfortable with it.

Whilst we found the evaluation to be overwhelmingly positive, we would suggest uptake across a broader range of charities and possibly with local authorities would be beneficial. Overall, the evaluation found the Charitable Bond to be an effective financing mechanism broadly applicable at the project, programme and potentially affordable housing industry level.