Charitable Bonds Programme: evaluation

3. Evaluation of the Charitable Bond Programme

3.1 Introduction

In line with the brief, we considered value for money offered by the Charitable Bond programme. We conducted the VFM assessment using the net present value (NPV) methodology at a real discount factor of 3.5% which is in line with UK’s HM Treasury Green Book appraisal and at 6% which has been the discount rate applied to affordable housing investments for many years. We also considered displacement effects and additionality and considered the charitable bond approach compared to a do-nothing approach (in line with good practices) and other interventions, traditional non-repayable grant and structured loans funds for example.

We have summarised here the key findings. The MS Excel file provided under separate cover provides detailed assessment and allows further analysis to be undertaken.

3.2 Feedback from borrowers

We interviewed 4 RSL borrowers considered representative of the wider sector and providing a range of perspectives for example in urban and rural areas, in large and small RSLs. Feedback was 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, which would either not have been delivered, or they would not have been delivered within the same timescale achieved. These findings are also consistent with our understanding of RSL development finance drawn from over 30 years engagement with RSLs across the sector.

The 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 RSLs back into housing development activity who may otherwise have had challenges in accessing capital from mainstream lenders. This has been particularly true for some of the smaller RSLs involved in uptake of the bond.

RSL borrowers also reported key benefits including flexibility, a simplified and faster documentation process for both loan approval and loan completion relative to mainstream lenders, cashflow benefits with the ability to roll up interest during the life of the loan (albeit the RSLs interviewed noted the risks with this, particularly the longer term governance, financial planning and control required) and more recently the terms of lending have allowed for a pre-agreed repayment basis, including annual payments of accrued interest), significant savings in legal fees due mainly to a streamlined process and standardised documentation and importantly arrangement on an unsecured basis freeing up financial capacity to secure completed units for other funders and, so far, competitive pricing.

Areas for possible improvement identified by borrowers include widening the eligibility criteria beyond new housing supply. Energy efficiency and re-financing of existing loans were both highlighted in the interviews although it was noted that these would not meet the investment criteria of the programme which is targeted on new affordable social housing supply.

The unsecured nature of the lending means we found 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. We did not identify any substitute product.

3.3 Bonds Issued

A summary of the bonds issued, and the charitable donations generated by year is provided below.

This details a total of 51 bonds involving a total investment of £584.8M. This has facilitated RSL borrowing of £405.8M and has generated a charitable donation fund of £178.9M. Whilst the number of new homes supported is not routinely recorded with the bond issue, an exercise by Allia during 2024-25 confirmed a total of 3870 new homes supported by bond investment of £322.4M at that point. This suggests over 5,000 new homes in total, supported by the £584.8M invested to date. It would be helpful if going forward the number of new homes funded was routinely recorded. This could not be validated further as part of the evaluation.

Of the donation fund of £178.9M generated to date, a total of £153.9M has been allocated to projects supporting delivery of a further 1595 new homes as part of the Affordable Housing Supply Programme (including an estimated 20 units in the pilot bond issue with Castle Rock). A balance of £25.032M is currently yet to be allocated. We have estimated that this will support an estimated further 259 new homes, bringing the total new homes supported from charitable donations to an estimated 1,854. A summary is provided below.

Overall, therefore our analysis found the Charitable Bond programme supporting delivery of an estimated 5,000 new homes across Scotland – around 3,146 from RSL borrowing and 1,854 from the charitable donations. It should be noted that the charitable donations are reported through the Scottish Government HARP grant system and so these units may also be reported there.

Our analysis also found a broad range of RSLs participating in the programme including specialist providers like Blackwood Homes and Care, rural housing providers like Angus and Lochalsh and Sky Housing Association, RSLs recognized as systemically important by the housing regulator in terms of scale like Wheatley Housing Group, Link and Kingdom and also much smaller RSLs like North View which operates in a single community area in Glasgow.

Appendix 1 provides further analysis of the donations made by Local Authority area and the supporting MSExcel file provides details of the bond issued by RSL. The bonds ranged in value from £0.475M to Hjatland Housing Association in 2017 to £61.8M to Wheatley Housing Group in 2023. A total of 24 RSLs participated in the Charitable Bond programme meaning repeat use of the bond programme.

3.4 Wider range of community benefits achieved

Our analysis found a wider range of benefits delivered at both the programme level via Allia and at the individual project level via RSLs. For example, the current contract includes the requirement for community benefit and Allia have provided grant funding of £225,000 in total to 11 organisations. This includes:

• A total of £75,000 has been awarded to four Scottish social enterprises whose work supports the Scottish Government’s priority of Growing the Economy. The grants, ranging from £5,000 to £25,000, help fund initiatives that expand access to employment, nurture untapped talent and create more inclusive opportunities across the country.
• A total of £150,000 to support high impact projects across the country supporting Scottish Government’s goals of working towards eradicating child poverty, preventing homelessness, growing the economy, tackling climate change and improving public services.

Each of 4 projects sharing in the £75,000 grant include:

• Braw Talent – Mentoring young people facing barriers, helping them develop creative skills and access opportunities in Scotland’s creative industries.
• Eildon Housing Association and Cyrenians – Expansion of the FareShare Employability Project into the Borders, tackling food poverty and creating routes into sustainable jobs.
• Blackwood Homes and Care and Career Ready – Offering internships that inspire young people to build meaningful careers in social care and housing.
• Invisible Cities – Launching a new Galashiels town tour led by people with lived experience of homelessness, offering visitors a unique perspective while empowering local guides through training and employment.

The seven organisations receiving a share of the £150,000 are:

• Albyn Housing Society – Empowering households in the Scottish Highlands, whose living conditions suffered during the pressures and changes brought by the covid pandemic, to make a fresh start.
• EPIC Think Learn – Providing free online support to parents of undiagnosed neurodivergent children in the Scottish Borders, so they can flourish despite 3 year waiting lists for assessments.
• Govan Home Team – Creating a Bee Highway, through training and whole-community involvement, in one of the least biodiverse areas of Glasgow.
• Govan Housing Association – Lowering the cost of living for Govan's more vulnerable tenants; by getting the best from their new home insulation and restoring their home conditions.
• Simon Community Scotland – Boosting the development of, and services in, the new city center Connect Hub. The Hub can now open more frequently to increase its support to women experiencing, or at risk of, homelessness in Glasgow.
• The Tannahill Centre – Tackling food insecurity and child poverty in Ferguslie Park, Paisley. The afterschool clubs, parents and older people have healthy meals during the expensive school holiday period, plus easy access to counselling.
• The Wheatley Foundation – Refurbishing and getting supplies for a third Glasgow Food Larder, in partnership with Good Food Scotland; this time for residents in the east end, in Bridgeton. Larders make food more affordable, provide choice, reduce isolation, enable volunteering and reduce antisocial behavior.

Examples of the wider benefits delivered at project level via the RSLs include contractors are obliged to pay a rate per unit in Community Benefits through the construction programmes. Wheatley Housing Group for example, has a well-defined community benefit policy for contractors and requires £775 per unit contribution to the Wheatley Foundation. This has provided an additional £1.03m to deliver projects across the communities that Wheatley operate in, including employment, apprenticeships, training and educational programmes. Larger sites (>£2m) create an obligation on contractors for additional Community Benefits including local work placement opportunities, apprenticeships, mentoring, jobs and training places.

The quality standard being delivered is also worth noting including several new homes built to Housing for Varying Needs standards, with wheelchair access, ducting infrastructure installed for electric vehicle charge points, electric vehicle charge points installed, several units with ZDEH (zero direct emissions heating) and development projects with Solar panels.

3.5 Value for money assessment

In line with good practice, we considered the performance of the Charitable Bond against alternative investments (or interventions). We considered the do-nothing option but rejected this on the basis that funding intervention is required to address long running and continuing housing market failure in Scotland regarding insufficient supply of affordable homes. A do-nothing approach would therefore undermine delivery of the Government’s 110,000 new affordable homes by 2032.

A simple comparison therefore of the Charitable Bond Programme to traditional grant funding and a structured loan facility is summarised below.

Overall, our analysis found the Charitable Bond provides a range of value adding benefits for the Scottish Government and for the borrowers. Over the longer term the Charitable Bond programme is fully self-financing. The bond investment is fully repaid to the Scottish Government and is expected to generate a modest return of £6.205M over the life of the current bonds (which on average is just over 10 years) with an estimate £412M then available for further re-investment in affordable housing or to meet other spending pressures. The costs of service delivery including the ongoing monitoring fees are met by the RSL borrowers and not by Scottish Government. Further recycling potential within the bond programme means it is a zero long term cost intervention for the Scottish Government. These are important findings.

As summarised in the table above, our evaluation also found:

• The Charitable Bond has been evaluated as having a negative valuation (NPV) of £107M at the HM Treasury discount factor of 3.5% reflecting the time value of money and that whilst the cash invested by the Scottish Government is fully repaid by the borrowers it is collected over the longer term and £1 tomorrow has less purchasing power than £1 today. The interest element repaid by the borrowers of which funds the Charitable donations (longer term) and the loan element plus simple interest are then, other things remaining equal, also available for re-investment. At the higher discount factor of 6%, which is the rate commonly applied by RSL borrowers in appraising social housing investment, the NPV is negative at an estimated £141.1M.
• the provision of grant by comparison is evaluated as having a negative NPV of between £530.5M and £336.9M. The negative valuation reflects, in this case, that the capital invested is available on a single investment basis only i.e it is not generally repaid by the grantee to the Scottish Government (except in some cases on future disposal of the home by the grantee). It also reflects that whilst the Charitable Bond has an estimated £412M available for reinvestment in a second investment cycle (over and above the donations made), the grant does not so a second investment cycle of grant has to be met from new sources of Scottish Government budgets.
• the structured loan facility alternative is estimated to have a positive valuation of £178M at the treasury discount rate of 3.5% and negative £70M at 6%. This illustrates the gap between how Scottish Government might view an investment and how, in practice the borrowers might view it. It also highlights in this case that the higher cost of finance involved £203.2M (total to repay in the structured loan facility is £794.2M compared to £591M in the Charitable Bond) would be non-viable for many borrowers.

Our analysis is based on a single investment cycle as this is a more cautious approach and avoids overstating the housing output and relative value delivered. Using a single investment cycle assumes that the Bond Issue is equivalent to the amount invested (except for some timing differences). However, it is important to note that the amount invested may in practice may be lower than the sum of the bonds issued if the Scottish Government are already recycling the loan element of the bond (i.e the capital element). We understand that this may, in fact be the case. However, it has not been possible to isolate and quantify this across the full programme. We have therefore erred on this side of caution, using a single investment cycle only for comparison purposes.

It is also worth noting that our further testing suggests the VFM continues to improve over each re-cycle as more new homes are effectively financed from more effective use of the same cash. It is not quite rinse and repeat but is a very effective long term intermediate financing tool to scale and accelerate affordable housing supply. This is potentially an important strategic financial lever for Scottish Government to further consider.

It is also worth noting that whilst we have evaluated the Charitable Bond against traditional grant and the comparison demonstrates the key benefits of the Charitable Bond relative to grant, it is important to acknowledge that grant funding has a very necessary role to play in supporting the delivery of new housing supply as individual projects would be rendered non-viable and therefore non deliverable without it. The Charitable Bond is a value-adding intermediate financing tool in that context. It helps bring forward additional projects at nil long term cost to the Scottish Government and fills a gap in the structure of the housing finance market that mainstream private finance providers cannot.

Each source of capital has an important and distinct role to play, and they are not mutually exclusive. Achieving the optimum blend of capital funding is driven by amongst other things gross development costs, housing mix proposed and rent levels. These are key drivers of viability in project financing considerations.

These are important findings.

3.6 Interest Rate Mechanism

The contract stipulates that “interest rate on loans should be determined and set before the Bonds are issued in order that the donation and loan amounts are known. In setting the interest rate on each bond, we expect the Contractor (Allia) to undertake due diligence on the borrower’s accounts, balance sheet, and treasury management capability and provide a report on each borrower that will allow SG to take an investment decision based on its own risk assessment. We also expect the Contractor (Allia) to take market conditions and the agreements and laws comprised in the UK Subsidy Control Regime into account, including going forward, the Subsidy Control Act”.

Allia therefore credit risk assesses each borrower and set the interest rate according to their assessment and with reference to government gilts. They examine the credit spread and swap rates in the market to ensure an appropriate interest rate is set. When gilt yields rise, bond rates almost always rise too. Higher gilt yields signal that it has become more expensive for the UK government to borrow, and this pushes up borrowing costs across the entire economy, including corporate bonds, housing association bonds, and even mortgages. If the government must pay more, everyone else must pay even more. Gilts are the UK’s “risk‑free” reference point. When gilt yields rise, every other borrower must offer higher yields to attract investors, because they are riskier than the government.

The interest rate mechanism of the Charitable Bond means that as interest rates rise, the charitable donation funds generated increases and as interest rates go down the charitable donation drops. Furthermore, the longer the term of the loan the more interest will accrue and accordingly the more donation funds will be generated. Our analysis found charitable donations therefore ranging from 17% to 83% of RSL sum borrowed reflecting both a range of borrowing terms spanning 5 to 15 years and fixed rates. Interestingly though, our evaluation found the interest rate mechanism also has the potential wider application and could be explored further as a stabilising policy instrument at the fund level across the housing delivery pipeline in the context of the current housing emergency.

3.7 Private sector leverage from public investment

Three key features of the Charitable Bond can strengthen the balance sheet of the borrower/ donation recipient in several ways. These include the donation element, the unsecured nature of lending and the competitive interest rate. These all work to reduce the net cost of providing new homes for the RSL both in the short term (the initial capital outlay involved) and in the long term (in terms of debt servicing/cost of finance). The unsecured nature of the loan also frees up assets for security with other mainstream lenders. All of which can provide headroom for further borrowing for more new housing supply projects, particularly when also combined with grant.

However, it is also important to note that it may not increase borrowing capacity if the organisation is currently in a very weak financial capacity position or if their Board does not have the risk appetite to support further borrowing. Even if covenants allow for more borrowing, the RSL Board may not.

It is also perhaps worth noting here again that the Charitable Donations are treated as capital grant on the RSLs balance sheet. This is in line with the Accounting Statement of Recommended Practice (SORP) which requires that any donation or grant used to fund the construction or acquisition of housing properties must be treated as a capital grant. This means it is recorded as Deferred Capital Grant (liability) on the balance sheet and amortised (recognised as income) over the life of the asset (usually 50 years +). It is categorized as Other Income or Other Operating Income depending on the form of the RSLs financial statements. The donation is not recognised immediately, because it funds a long‑term asset. This accounting treatment applies regardless of whether the donor is a government body, a trust fund or foundation, another charity or a private individual.

3.8 Conclusions

For these reasons, overall, our analysis has found the value of the Charitable Bond programme to the public purse is potentially transformative enabling considerably more new homes at lower cost. Over the longer term it is entirely self-financing and therefore potentially transformative in the context of the housing emergency.

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 Zero-Coupon feature of the bonds 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 also likely also a key reason that mainstream lenders are comfortable with it.

Whilst we found the evaluation to be overwhelming 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.