Housing Finance Snapshot #7 April 2022

Welcome to our April edition of Housing Finance Snapshot - a newsletter providing banking and finance updates and opinion for those based within the affordable housing and local government sectors.

Modern Methods of Construction – progress on funding requirements

In recent weeks, there has been significant progress regarding modern methods of construction (MMC) units being accepted as loan security in the market. Registered providers (RPs) are increasing the number of MMC units they build and valuers have announced that there is a strong re-sale market from MMC homes already. The most notable development from a funding perspective is that bond aggregator, The Housing Finance Corporation (THFC), recently charged 844 offsite manufactured properties to its subsidiary, bLEND Funding, to secure a £75m loan with GreenSquareAccord.

In common with housing providers, lenders have been working with advisors, manufacturers and warranty providers to understand more about the build quality and longevity of MMC properties and to inform their lending criteria against such homes. Whilst it is an evolving picture, there is a marked shift towards achieving consensus on funding requirements across the sector. The emerging criteria include production of a satisfactory construction methodology, manufacturer’s warranty, maintenance schedule and storage, transport and installation advice, provision of BOPAS assurance for a min of 60 years and an NHBC Cover/NHBC Accepts with a 10 year warranty (or equivalent at the discretion of the funder), satisfactory insurance and thresholds on maximum height and portfolio proportion to spread risk. The required information will vary depending on whether the units are wholly MMC in nature or comprise a hybrid construction and whether the units are constructed in an association owned factory or off-site. 

Where alternative warranty and assurance documentation is provided, transactional timescale impact is likely as funders and valuers will require additional time to risk assess. Production of a comprehensive suite of documentation at the earliest stage possible is therefore critical to secure approvals and valuation assessment. On the whole, there are positive developments in the market regarding the securitisation of this new asset class and we expect to see a continued move to crystallise funding requirement to increase funding a capacity for associations. If you require further information about how to successfully fund MMC units, please do get in touch.

“For–Profit” Registered Providers - increasing registrations and upscaling delivery

The number of registrations of “For Profit” Registered Provider (FPRPs) has been increasing year on year. As of March 2022, there are now over 60 FPRPs listed on the register of RPs published monthly by the Regulator of Social Housing (RSH). The majority of these are equity backed in nature and pending registrations are also following suit, although there are a number of RPs who have set up their own. The projected increase in the number of FPRPs is anticipated to have the potential to deliver between 100,000 and 130,000 new homes by 2026.

Such is the ambition of FPRPs in the sector, it is of note that Blackstone backed FPRP Sage Housing has now increased its housing delivery target to 30,000 by 2030, which is an increase of 10,000 on its pre-existing target. Sage have also announced that it was the largest provider of new affordable housing in 2020-2021, having provided 3,400 new homes. This is a significant shift in the sector and it has been a rapid gear change with the Regulator of Social Housing keeping a close eye on developments. Many FPRPs have scaled up delivery of affordable housing during the pandemic and are partnering with traditional registered providers, local authorities, Homes England and developers.

Traditionally, FPRP’S have taken on low cost home ownership products such as shared ownership, which remains attractive due to its nature of providing long term income streams although the RSH has always emphasized the need for long term investment, a focus on social outcomes and meeting the needs of tenants for the long haul. However, sector analysts predict that that we can expect to see FPRPs taking on more general needs rental stock as they become more established and can benefit from efficiencies of scale.

As the sector evolves at a fast pace, we are seeing regulations and entry requirements develop in tandem. On 16 March, the RSH issued an updated edition of “Regulating the Standards”, detailing how in-depth assessments will be reported on for FPRPs and how first regulatory judgements for those that own more than 1,000 homes will be given. The RSH expects all RPs to be subject to the same regulatory standards but acknowledges that FPRPs have different capital structures and are often connected to group structures, which will be taken into account in determining judgements. Another factor to flag is that FPRPs may be liable to new taxation measures which traditional RPs are exempt from due to their charitable status, such as the new Residential Property Developer Tax coming into force this April 2022. This is essentially a cladding tax and it is understood that FPRPs may potentially liable but watch this space.

Importance to Housing Associations of being “security ready” in a volatile market

The Russian-Ukrainian conflict invasion has injected inevitable instability into the market and issuers across all sectors need to be ready to move quickly.

Nonetheless, we have seen two recent capital markets transactions for housing associations that spanned the temporary shut down in the bond markets in reaction to the crisis. Peabody’s 12 year bond priced on 23 February at 125 basis points over gilts, with 37 investors participating. In the following week bond aggregator bLEND became the first issuer to return to the markets after the temporary shutdown, making a £107m tap at a spread of 142bps (for its 2054 bonds) and 132 bps (for its 2047 bonds) over gilts, on behalf of three borrowers. The Bevan Brittan team were able to support their client Connect Housing on both the funding and charging side in a short time-frame to enable them to participate in this transaction.

We continue to hear positive messages from investors at the NHF Housing Finance Conference that the investment tap is still switched on, with investors having a preference for higher-quality, low-risk sectors, like social housing. The private placement market also remains stable and open to borrowers and has been durable during market turbulence, albeit with investors being more selective

In light of the advice to be flexible and agile there is a critical need for associations to think strategically about their charging programmes so that they have sufficient assets to allow them to take advantage of market conditions at short notice.

Market uncertainty is set to remain, but one thing is for sure: interest rates will only go up and it may be prudent for associations to continue to take advantage of the current low borrowing rates. Our charging team can help support clients to plan ahead – for more tips on strategic charging plans see Jessica Church’s recent article.

NHF Housing Finance Conference 2022

It was great to back at the NHF conference in Liverpool in March after a two year hiatus. Attendance was strong and there was a definite positive energy in the room as the sector came together to discuss challenges and opportunities and how finance can create impactful change and long term sustainable benefits for society. Our very own Jessica Church presented at a break out session on the impact of finance considerations on asset management strategy and stock rationalisation. Check out these videos from Jessica Church and Julie Cowan-Clark on stock rationalisation tips: Part one, Part Two

Key themes from the conference included:

• Escalating cost pressures facing housing associations and the need for treasury stress testing in light of market uncertainty as a result of the rising cost of living and interest rates – and the Ukraine crisis.
• Managing and meeting the competing demands of decarbonisation, retrofit costs, building safety and value for money.
• The continued impact of ESG on the funding landscape and how associations can effectively demonstrate their credentials.
• Asset management – taking a long term cohesive approach to asset management aligning all parts of your business and optimising your assets to create social value, enhance sustainability and tenant satisfaction and to attract new sources of finance.
• The impact on the sector of the levelling up agenda.
• Innovation in data and technology and the positive impacts on performance and economic efficiency.
• The evolving requirements and issues on building safety and funding requirements and securitising MMC units as an asset class.
• The continued emphasis on mergers and public/private sector collaboration and partnerships to upscale delivery and produce efficiencies.
• The new shared ownership model and the impact on asset valuation.
• For profits and the case for additionality to increase capacity.

If you do wish to follow up on any of the opportunities and issues discussed at the conference, please do contact the Bevan Brittan team.   

Watch this space

• Social Housing Regulation Bill

The Secretary of State for Housing, Communities and Local Government has announced that he expects the Social Housing Regulation Bill to now be published in the third sitting of parliament, which means sometime in May or June as opposed to the originally anticipated March. However, a number of draft clauses have been published on 29 March 2022 – please see our summary of the proposals.

• NHF Code of Conduct

The National Housing Federation has now closed its consultation with its members on its draft new code of conduct. Our governance team will be reporting on the new code during the course of 2022.

• Pensions Regulation

We are awaiting the regulations implementing the Pensions Schemes Act 2021 which are expected imminently, but based on the consultation draft are expected to contain a significant expansion of powers for the Pensions Regulator. They are likely to include new notification obligations around certain events, which the Pensions Regulator believes may have the potential to harm pension schemes by reducing employer covenant or possible return for the scheme on an insolvency. These changes seem likely to guarantee it or scheme trustees a seat at the negotiating table on certain corporate activity.

The existing list of specific notifiable events is broadened with the following:

1. A decision in principle to sell a material proportion of its assets (broadly 25% or more of its gross revenue or gross value) – this includes a transfer of engagements or amalgamation, even if an internal re-organisation; or
2. A decision in principle to grant or extend security in respect of new debt in value equal to 25% or more of its gross assets or revenues, assets and the secured creditor ranks ahead of the pension scheme.

Note that refinancing of existing debt outside of these two tests will not be included in the notification obligation.

This notification requirement is triggered at ‘decision in principle’ stage – this would be prior to any heads of terms or preliminary agreements are entered into, and prior to even preliminary negotiations i.e. from the moment a decision is made to proceed (even if terms are not agreed).

Further duties will be introduced for employers (and associated and connected advisers) when the main terms have been proposed. Any material changes to the transaction or event or it aborting will trigger a further duty to report to the Pensions regulator.

Failure to comply with the requirements could in theory find individual subject fines of up to £1million.

Question marks remain around, for example, what amount of planning becomes a decision ‘in principle’ or indeed who makes that decision. For example - decision making power is usually held at Board level, but in scoping the initial proposal for a merger a HR manager may be asked to look into the impact of a TUPE Transfer - that person has no power nor does it appear a decision in principle has been made.

Whilst most industry focus has been on the criminal sanctions and huge fines in the Pensions Act, these new notification requirements have the potential to be a bigger driver in changes in behaviour. It may necessitate more thought or investigation of issues and better recording of thought processes early in any potential transaction ahead of a decision in principle to proceed.

Organisations will also need to balance this with the requirements around Insider Information for those RPs with listed debt.

Please do contact Louise Leaver or Nigel Bolton (our pension specialist) for any advice on the implications of the new notifiable events regime.  We will be providing an update once the new regulation is published.

• Bevan Brittan presenting at Housing Conferences – we hope to see you there!

Our Housing Finance team will be attending the Social Housing Finance Conference on 11 May 2022. If you would like to arrange a chat to find out how we can help you, please contact Jessica Church or Louise Leaver.

Partners Louise Leaver and Deborah Rowntree will be speaking on sustainability linked loans and ESG bonds at the NHF Climate Change and Sustainability in Housing virtual conference on 24-25 May 2022. 

Sarah Greenhalgh is also presenting at the NHF Housing Governance conference on 23 June 2022 on alternative funding models. 

• Welcome to our new team members!

We are delighted to confirm that solicitors Stavroula Gavridi and Rubyn Campbell and associate Louise Mookerjee have recently joined us to support our growing housing finance team. Rubyn is a property security specialist working alongside Partners Jessica Church and Wendy Wilks and Stavroula and Louise will be working in the banking team with Partners Louise Leaver and Deborah Rowntree.

In the news

• Peabody and Catalyst merger 

Bevan Brittan were delighted to lead the successful conclusion of a nine month merger process to create one of the largest associations in the country owning 104,000 homes and providing homes for 220,000 residents. Please click on this link for further details.

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