A Guide to Optimal Property Charging

Part 1: Rolling Charging – taking a strategic approach

The most recent Sector Risk Profile published by the Regulator of Social Housing in November 2020 forecast an unprecedented reliance on debt to fund housing association development programmes in addition to tackling the rising cost of decarbonisation targets and building safety; it is estimated that £41 billion pounds of new debt facilities will be required over the next 5 years. The Regulator’s quarterly review ending December 2020 confirmed strong financial performance with new finance of £3 billion being secured, including £1.9 billion from capital markets and £0.8 billion from banks.

In light of converging financial pressures in the market, there is a critical need for associations to have sufficient liquid assets to deploy into the delivery of their business plans to meet market, statutory and regulatory demands.  At the same time, housing associations are excellently placed to attract new sources of investment from ESG investors who share the same socially responsible and sustainable development ethos.  There is no better time for housing associations to have access to flexible and clean property security to take advantage of new investment opportunities at historically low borrowing rates.  As a solution to this, an increasing number of housing associations are establishing ongoing or 'rolling charging' programmes and are reaping the advantages of a forward thinking strategic approach when it comes to funding projects. 

In this article, Partner Jessica Church, examines the process and the multi-faceted benefits of a rolling charging programme for housing associations.

Rolling Charging – Planning Ahead

The fundamental aim of rolling charging is to minimise the risks in transactional funding projects in terms of cost savings and time delays; increasing funding capacity is paramount for associations.  Advance preparation can eliminate stumbling blocks in the charging process, resulting in the smooth negotiation of security documentation and avoiding loss of stock or securing at an undervalue. 

The approach to rolling charging can be flexible.  Some housing associations will require a preliminary “health check” exercise in order to ascertain a high level valuation estimate and to assist with structuring funding requirements and business planning.  For other associations where there is less surplus security to play with, a comprehensive “red amber green” traffic light analysis may be appropriate to flush out any barriers to chargeability and to securing maximum valuation. A stage further is to carry out a programme of rectification work in order to produce a clean portfolio in advance of a live transaction.  The objective for some associations is to achieve a target value of clean or “on the shelf” security on a quarterly or half yearly basis which can be used for internal liquidity reporting and managing risk. Other associations place the security into a security trust as unallocated stock . Depending on requirements, we can review portfolios that are currently uncharged or carry out due diligence in respect of new development schemes as they are completed.  The approach taken is tailored to the requirements of the individual housing association

The rolling charging process itself involves varying stages of due diligence, depending on requirements. Title and planning reviews are carried out at the earliest stage possible; we can also verify your stock list which avoids eating into transactional timescales. We can carry out a limited number of searches to enable a comprehensive health check of the security; where defects are revealed, this avoids incurring the cost of full searches before achieving certainty that such security can be charged.  Depending on the specific issues revealed by preliminary due diligence, it may be necessary to negotiate with third parties to resolve title, planning and environmental issues. 

Data exchange and reporting is available via our flexible data room facilities; we can work with you to ensure efficient exchange of information and reporting in a way that best serves your organisation. Our systems are adaptive and user friendly. Our aim is to work collaboratively with your finance, treasury, development and asset management teams to facilitate cost effective transactional outcomes.

Timing is everything

An average housing funding transaction typically completes within two to four months from provision of a substantially correct property list and a comprehensive suite of property documentation. The age and nature of the stock are material considerations in terms of cost and timescales, with newer developments requiring more granular due diligence.  As Bevan Brittan work with the majority of funders in the sector, we have a comprehensive understanding of funders’ requirements and an insight into the advantages of a strategic approach to property charging. Putting it simply, an effective rolling charging strategy means that issues which we know will present a funding or valuation risk will be identified and resolved before a live transaction commences, an approach which has a significant positive impact on timescale – and costs.

In order to perfect security, reliance is frequently placed on third parties. Working with busy local authorities and developers can inevitably impact on project timescales. Time delays particularly need to be avoided for capital markets bond issues where there is limited or no flexibility on completion timescales.  The consequential effect of not preparing your portfolio in advance is that complex schemes may have to be withdrawn or are secured at a reduced valuation, which can be approximately 40% lower than maximum valuation levels depending on location; funding capacity is unnecessarily lost. Viewing security as an afterthought can lead to inaccuracies in valuation estimates and business planning. In the worst case scenario, an association could find itself with insufficient security for the loan.  When negotiating funding transactions with capital markets and investors, last minute surprises and gaps in security can have a negative reputational impact. 

The benefits

• Efficient funding transactions – with approximately 70% of the security due diligence having been completed at pre transactional stage, negotiation of the security funding transaction with the funder’s lawyers is considerably smoother. The result is enhanced certainty on liquidity and valuation as there is less property leakage and minimal valuation reduction. Having a strategic approach to perfecting large portfolios of security for capital markets transactions can help streamline the approach to unsecured funding which may be better utilised for smaller, shorter term borrowings; this means less carving up of security for different loans.
• Cost and time control – a strategic forward thinking approach to due diligence means the majority of security barriers are removed at pre-transaction stage. This approach minimises the cost of unanticipated expensive indemnity insurance policies being negotiated with the funder in the closing stages of a deal and reduces risks to strict completion timeframes for capital market transactions. The cost of full searches is eliminated if extensive rectification work is required before a property can be charged by which time the searches may have expired.
• Reputational benefits - advance preparation avoids grey areas or holes in security in certificates of title, therefore increasing investor confidence and resulting in reputational gain at valuation and investor presentation stage.
• Increased recovery of complex schemes – the luxury of time enables associations to perfect security which historically has been un-chargeable, consequently maximising funding capacity.
• Good governance and risk management – a rolling charging programme can be an important aspect of a strategic approach to managing risk; achieving certainty on access to clean security at maximum valuation can be part of a well-developed risk mitigation strategy. This is paramount given the uncertainty in the sector and the wider economy and also the Regulator’s clear directive to associations on risk management and successful delivery of strategic objectives. A rolling charging programme is also key to holding good data and plays a fundamental part in accurate and meaningful business planning.
• New sources of investment – given that housing associations are perfectly placed to attract new and alternative sources of investment in the ESG sphere, there is no better time to have a portfolio of clean security ready to take advantage of the new opportunities in the market. The more data and knowledge held by associations in relation to their stock, the more effectively associations can illustrate their strong ESG credentials and compliance with metrics.

If you would like to discuss setting up a rolling charging programme or have any questions about the benefits of advance due diligence in the current market, please do get in touch with Jessica Church or Louise Leaver who will be delighted to discuss this with you.

This article is the first in a series on the theme of Optimal Charging and subsequent editions will cover the mechanics of setting up a rolling charging programme, how developments teams can assist in the process, trouble shooting and maximising valuation.