Deregulation: one year on

On 6 April 2017, a raft of deregulatory measures in the Housing and Planning Act 2016 (the "Act") took effect. One year on, we reflect on the impact of the measures so far.

'New age' landlords and asset management

The most significant of the deregulatory measures was the removal of the disposal consent regime.

This has required a change in mind-set; prior to the Act, the modus operandi (and certainly the message from the Regulator of Social Housing (the "Regulator")) was that the Board's role was to prevent the loss of social housing assets out of sector. However, it has become clear following the Act that Boards should now actively consider how they can utilise their asset 'freedoms' to achieve value for money, alongside achievement of their social purpose. This is reflected in the new Value for Money Standard and associated Code of Practice, the latter of which states that: "Where assets are not apparently achieving the optimum expected return, registered providers should be able to articulate the rationale for continued support of the asset."

As part of this (although perhaps also a hangover from the lull following the rent cut announcement back in 2015), strategic disposal programmes have increased. In the last year we have seen an increase in the number of stock rationalisation exercises as groups look to consolidate their portfolio, disposals of properties that are costly to maintain and the identification and disposal of high-value stock which can be sold to fund the development of homes in areas where there is a severe lack of affordable housing.

We have also seen associations setting up new landlord subsidiaries (or joint ventures, in some cases) that are not registered with the Regulator. Such vehicles are attractive because they offer housing associations the opportunity to continue to deliver social purpose in a flexible way through:

• the formulation of a tailored offer for customers, allowing rent to be increased or decreased according to their changing circumstances
• offering security of tenure based on criteria set by the landlord, which can be applied according to the needs of the community and the type of property
• donation of 'starter capital' to enable the entity to establish its own portfolio
• donation of void stock (if the subsidiary is charitable) to enable the entity to raise its own finance and ultimately become self-sufficient
• establish a 'legacy' vehicle as part of a joint venture (the Trafford Housing Trust / L&Q model)

Other consequences have been slower to surface: the interpretation of the Act has led to some confusion about the circumstances in which the Regulator is still required to give consent. For example, it is clear that consent is still required for a housing association to convert social housing to market rent where there is no associated disposal. Guidance has recently been published regarding the Regulator's approach in this regard, which makes it clear that there is still a relatively high bar to obtain such consent despite the de-regulatory measures.

The rise of the Community Benefit Society

Another consequence of the removal of the disposal consent regime is that housing associations established as companies and registered charities must comply with the disposal and execution requirements set out in the Charities Act 2011. Although this has been subject to much discussion over the last year, it continues to result in delays in the completion of transactions (while consent is obtained or the appropriate formalities are complied with) and delayed registration if HMLR is not satisfied that the appropriate certificates have been given in the disposal documentation. Although the Charity Commission is proposing changes to alleviate the cost implications for housing associations, this will not reduce the severe delays experienced where consent is required.

As a result of this many registered charity housing associations have converted to become exempt charities and community benefit societies ("CBSs") registered under the Co-operative and Community Benefit Societies Act 2014. CBSs do not need to comply with the disposal and execution requirements set out in the Charities Act 2011, because this type of exempt charity is not directly regulated by the Charity Commission.

Prior to the Act, the use of the conversion process was relatively uncommon, largely being utilised by organisations consolidating their group structures or legally merging with a third party (rather than forming a group structure; conversion opens up the opportunity to use the amalgamation and transfer of engagements processes, largely recognised as the 'cleanest' way to achieve a legal merger). Over the last year the conversion process has become quicker and more streamlined, with documentation largely in a standard form agreed with funders. If your organisation has been waiting to pursue conversion, you will certainly benefit from the efficiencies gained in the process over the last year.

'Golden Share' Regulations

The Act also includes a power for the Secretary of State to make regulations to reduce the influence of local authorities in housing associations. The Regulation of Social Housing (Influence of Local Authorities) (England) Regulations 2017 (the "Golden Share Regulations") came in on 16 November 2017, and this has prompted many organisations to review their board structures, continuing the general move away from constituent groups, whilst reviewing how they ensure customers still have a direct link to the board following the Grenfell tragedy.

Since the introduction of the Golden Share Regulations, we have seen many large-scale voluntary transfer associations merge and/or convert to become a CBS, where they would previously have struggled to obtain consent from their Council shareholder.

If you have not had the opportunity to alter your constitutional arrangements to reflect the Golden Share Regulations, you should be aware that they formally took effect on 16 May 2018 and now override your constitution. It is important to note that the Regulator has indicated that it expects all affected housing associations to amend their constitution appropriately in line with their duty to comply with "all relevant law" under the Governance and Financial Viability Standard.

Unlocking capacity

One question that remains unanswered is how the removal of the disposal consent regime impacts the value of social / affordable housing stock.

It is widely accepted that the current measure of EUV-SH is no longer appropriate following de-regulation, but the future valuation basis is the subject of ongoing discussion. Although associations may pursue valuation on the basis of market vale subject to tenancies (MV-T), this has been resisted due to the reality that most social housing stock will form part of wider estates and that, on the open market, the properties are likely to only be attractive to other housing associations. In addition, in the event of insolvency, the new housing administration regime due to come in this summer will result in delays in the ability of lenders to exercise their security, and one of housing administrator's objectives is to keep social housing in the regulated sector. The current proposal is therefore that a new method for valuing stock, market value – social housing or 'MV-SH', will be introduced to reflect this.

We are aware that organisations are taking initial soundings as to the potential benefit of MV-SH. However, most funding agreements restrict the ability of housing associations to change the measure used to value their stock and therefore to unlock additional capacity if this is introduced. If you are considering or undertaking a refinancing exercise you may wish to negotiate flexibility in your loan documentation to enable you to benefit if and when the new measure is finalised (although unsurprisingly there is some resistance to this amongst funders, given the current uncertainty). 

If you would like to discuss how these changes may benefit your organisation, please contact Sarah Greenhalgh.