Making the most of your existing stock in an economic downturn

In light of recent economic and political turbulence making way for the unwelcome arrival of a very different kind of recession to the previous economic crisis of 2008, this is an overwhelmingly busy time for Registered Provider (RP) Treasury departments.

Having forensically stress tested business plans and projections in light of the pandemic and the conflict in Ukraine, RPs are once again reconfiguring their business plans to take into account soaring inflation, a new sub inflation rent cap of 7%, rising interest rates, increasing rent arrears, potential ratings downgrades and volatility in the markets. Carefully formulated funding plans based on projections at the start of the financial year may start to look rather different as the sector takes a collective sharp intake of breath at the seismic shocks of the last few weeks.  Interest cover is reducing and a projected decline in credit ratings may increase the cost of capital and potentially reduce investor appetite. Income from sales of stock and shared ownership sales may potentially reduce. The capital markets are eerily quiet as we all take stock to consider the challenges ahead.

An estimated third of RPs are adjusting downwards their development pipeline targets in the short to medium term. From a security perspective, this signals there will be potentially less new properties available to support funding requirements; another curveball to consider.  We are also now seeing commentary in the sector that the property market is going to fall in the short term and this is likely to lead to valuations falling.  

Simultaneously, the escalating costs pressures being felt by RPs and their tenants are being felt acutely as they grapple with decision making about priority expenditure.  The key housing sector objectives of decarbonisation, retrofit and providing safe, sustainable homes for tenants have not suddenly evaporated. Many RPs are increasing expenditure to help tenants through cost of living crisis and are also preparing for more stringent regulation.

The Regulator of Social Housing (RSH) has recently published its annual Sector Risk Profile (SRS) which forecasts greater reliance on debt to deliver investment in existing stock, provide new homes and meet sustainability and safety targets. Business plans from June 2022 projected £47bn of new debt in the next 5 years, increasing debt facilities from £116bn in 2021/2022 to £129bn by 2026/2027. Whilst this may now be adjusted in light of recent events, the key issue from a security perspective is that RPs will need to maintain a flexible Treasury strategy to factor in changes to the cost, availability and conditions of debt.  RPs are working out what their contingencies are and what changes to budgets and services will need to be implemented. Understanding inflationary costs will be key to shape future funding requirements and this will vary between RPs considerably.  As the cost of borrowing soars, the need for funding in the medium term is not likely to abate and many RPs are considering securing shorter term funding for smaller amounts rather than longer term capital markets debt. As ever, the tension is that, just when funding is most acutely needed for the sector, meeting the challenge of obtaining funding can seem quite overwhelming – but there are opportunities in the assets held by RPs.

In terms of Treasury risk management and mitigation, what solutions can RPs look to adopt to combat the tsunami of economic challenges? Where do security considerations sit in this volatile landscape? How can RPs capitalise on their assets to tackle the perfect storm of costs increases and the challenge of meeting priority delivery objectives? We envisage several key areas of focus in terms of unlocking the value of RP assets, which will both require a proactive and strategic Treasury management approach. Waiting for the storm to pass may mean missing opportunities in a tight market. Whatever the funding approach taken, reviewing and maximising the value of your existing security is critical to cater for funding flexibility.

Get ahead of the curve - now is an opportune time to take stock of your existing security position and to consider the security mechanisms below as part of a forward looking “Optimal Charging” security strategy.

Security monitoring as part of a flexible security strategy is a crucial risk mitigation tool and, in light of a development pipeline slowdown, we suggest the place to start is with your existing assets – and asset data. The foundation upon which all decisions are made rest in the quality of data that is available to RPs and the assets that it holds and we can assist you with capitalising on data capture improvement by feeding this into your asset and liability registers.

By taking a close look at your existing security this presents an opportunity to unlock value in existing RP stock with a view mitigating liquidity risk in a deteriorating macroeconomic environment and will also ensure RPs are well placed to take advantage of funding opportunities when the markets get moving again. Drawing out maximum valuation from existing stock will be critical to enhance liquidity and assist with budget planning in this difficult market. Reviewing all existing funding documentation and lists of properties in charge at present can anticipate which lenders will need more security placed earlier.

• Carry out a strategic review and valuation assessment of your existing secured or unencumbered security as part of an “Optimal” or rolling charging strategy.
• Review your ex-LSVT stock currently charged at EUV-SH valuation and consider uplifting to the higher MV-STT valuation and engage early with your valuer to understand the valuation differential for different geographical areas; collate documentation relating to infill development.
• Carry out a ‘Red/Amber/Green’ analysis of security charged to your Security Trust at EUV-SH as unallocated and perfect your security for allocation at maximum value ; carry out short form LLC1 local authority searches to understand planning restrictions which may have an impact on valuation.
• Take a fresh look at ‘challenging’ schemes which have historically been shelved in busy times to potentially unlock hidden value ; intensify efforts to obtain difficult third party consents and deeds of variation to perfect titles to charge.
• Overhaul and perfect your property lists to ensure all the correct security information is included so these are ready to go at the press of a button, therefore reducing transactional risks.
• We can assist with release of properties from charge and drafting the necessary Land Registry documentation, property schedules and plans
• Review your Security Trust Deed to check the requirements for de-allocating and moving security around within facilities and engage with your Security Trustee early regarding de-allocation and release requirements.
• Collate documentation required by funders to secure MMC assets and certification requirements centring on the impact on the fabric and use of buildings going into charge, building safety changes to ESW1, extension of right to buy,  future homes standard (low carbon), retrofit works, energy plant and district heating systems, wayleaves and telecommunication costs etc. We expect an enhanced focus on which contracts bind RPs from a lender’s perspective.
• Anticipate the likely increasing certification requirements of lenders, as is usually the case in an economic downturn.  Will we be seeing a fresh look at the sector standard Certificate of Title (introduced in 2018) or will simple updates to officer’s certificates and valuation scope deal with these issues satisfactorily for lenders?
• Review part charge schemes and prepare the uncharged parts of titles for speedy securitisation. Instruct your lawyers to prepare draft Deeds of Cross Rights and prepare plans in advance. Consider releases of charge where possible in order to charge the whole title
• Make the most of existing stock based on reliable and accessible data, including enhancing your stock condition and ESG data to support sustainable funding and publishing a sustainable financing framework.  Sustainable finance is a growing area generally and has been embraced by many RPs to tie in with their own “net-zero” commitments, so access to robust ESG data to avoid claims of “greenwashing” is critical for RPs raising green finance.
• Engage your development and asset management teams in the process to facilitate an efficient organisation  wide property security strategy
• Anticipate a likely uptake in stock rationalisation and merger transactions and preparing stock data and documentation in advance; review security levels for existing lenders and identify where substitution of security might be required.

Underpinning the security mechanisms above, it is also invaluable in this market to understand your existing loan facilities with a view to seeking opportunities in the market and to restructure interest rate risk and covenant profiles. It is increasingly important to understand the detail in your loan agreements and how they may interact with each other as you may seek to restructure facilities.  What are the cross-default provisions?  Who do you have to notify following a regulatory downgrade?  What information can lenders request in relation to your stock and what consents might be required for a merger? Many RPs are also seeking opportunities in a distressed market, in terms of stock transfers and mergers. Being ‘security ready’ with a security portfolio ready to be funded at maximum valuation will also ensure RPs are well placed to take advantage of funding opportunities both in the short and longer term.

Now is a great time to speak to lawyers about the opportunities above with a view to extracting maximum value from your existing assets to meet challenges ahead and to enhance your asset and liability data.  Please do speak to our Housing Finance team specialising in Security and Optimal Charging: Jessica Church, Wendy Wilks, Richard Stirk and Julie Cowan-Clark.

If you would like to find out more about our loan matrix and health-check on your existing funding documentation, please do speak to one of our Banking lawyers specialising in Housing Finance team: Louise Leaver, Deborah Rowntree or David Moore.