The New Right to Buy for Housing Association Tenants

The Government announced plans a few weeks ago to introduce the Right to Buy for all housing association tenants.

This caused a degree of consternation in the sector as associations expressed their concerns (some more strongly than others) about the likely successfulness of the policy (bearing in mind the experiences of some housing associations with the Voluntary Right to Buy pilot).

It is not clear either at the time of announcement or subsequently, how this will be implemented in the sector whilst also guaranteeing the “one-for-one” replacement of stock taken from the sector under this proposed policy.

However, should the policy be brought into force, there are a number of factors for associations to consider from a delivery and operational perspective.

These include issues around planning and the ability to change the tenure of affordable housing from affordable housing to, effectively, open market use, (following exercise of the Right to Buy), governance considerations, charitable status considerations and the potential impact on funders and securitised stock.

Planning

Whilst the Government have indicated that Right to Buy may be extended to all HA tenants, the planning position is not quite so straightforward as simply saying that all properties are subject to Right to Buy.

For dwellings that have been delivered under a section 106 obligation, the affordable units will, more often than not, be a fixed affordable housing tenure type and that tenure type will be fixed in perpetuity.  There may be provisions that allow the units to be released from those obligations, but those provisions will need careful consideration to assess whether or not they allow the unit in question to be sold on “new Right to Buy”.

Many s106s will have exclusions, from this affordable use in perpetuity obligation, for Right to Acquire (RTA), some will include Right to Buy (RTB), although one would have to consider whether this was aimed at traditional, historic Right to Buy or Preserved Right to Buy (PRTB), or whether it was broad enough to encompass the new Right to Buy (whatever form that may take).

However these provisions are usually caveated so that they only apply where there is a statutory obligation to allow the tenants to exercise RTA, RTB or PRTB.

This means two things:

1. If new legislation is brought into force to impose this obligation on HAs, it is possible that the existing exclusions in the s106 may not be broad enough to catch this “new Right to Buy” meaning that, without the co-operation of the local authority, it may not be possible to offer this right to tenants of those units.
2. If the "new Right to Buy" is a voluntary programme (which has been hinted at), it may not be possible to offer it on certain developments if the s106 exclusion does not include some kind of exclusion where a HA chooses to dispose on a voluntary basis. In fact, this particular problem may not be a huge issue, as one has to question how many HAs will want to offer "new Right to Buy" on a voluntary given the concerns about “one-for-one” replacement of the units and the funding for that process.

Funding

From a funding point of view, there are a number of potential concerns for HAs as the proposal has the potential to have a significant impact on stock levels and therefore borrowing capacity. In the event the policy materialises into a formal obligation (whether through legislation or otherwise), serious thought will need to be given to a variety of  funding issues and the consequences for delivery of new affordable homes, including:

1. In high value areas (where affordable homes are often most needed) a loss of stock may result in a significant loss of borrowing capacity. As a double whammy, it could also lead to the loss of the potential to uplift stock valuations from EUV to MV-STT valuation, which has been a significant source of revenue for HAs in recent years; 
2. In lower value areas the loss of stock may not produce enough of a capital receipt to fund the like-for-like/one-for-one replacement required. This potential risk of not being able to recover sufficient funds to cover the cost of one-for-one replacement will leave a funding shortfall for development and the knock on impact of less available stock to securitise. At best there will be a likely time lag between each "new Right to Buy" sale and the replacement of the unit, as HAs will need to locate schemes, land or units to replace the sold units which all takes time.
   For HAs with large development programmes this may be less of a concern as they will have a pipeline of schemes and may, arguably (and depending on take up under the scheme), be able to swallow up the re-provision within existing schemes (although this will in itself, presumably, impact on their delivery of “new homes” figures for Homes England!). But for smaller associations it is difficult to see how they will manage to address the requirement to re-provide (particularly if they have only small or non-existent development programmes);
3. What will the investor/funder view be of schemes which, without the "new Right to Buy" would have provided a “guaranteed” rental stream for the period of the loan, but which now could have that rental stream cut short by the exercise of "new Right to Buy"? One has to expect that there could be either a valuation discount or reduction and/or that the valuer assumptions about the potential number of units leaving any portfolio during the term of the loan will increase - as previously it would only have been likely to be RTA being exercised (and the discounts under RTA are not as attractive as those under RTB). There is also the potential prospect of a higher asset ratio requirement to ensure the funder is protected against stock numbers reducing to unacceptable levels during the course of the loan.
   For HAs with smaller portfolios this may mean that they have to offer some kind of cash reserve against stock reduction (if they have insufficient stock to meet any increased asset cover requirements), or that they have to pay funds from the lender on sale of the affected unit - which will, in turn, dent their ability to provide the one for one replacement required!
4. If the "new Right to Buy" allows for right to shared ownership through that Right to Buy (in addition to the ability to buy outright) this replacement/change of tenure may not be as attractive to investors due to the less predictable returns of shared ownership when compared to “pure” rented units.
   There is also the question of whether there will be an impact on investor confidence as a result of these changes and the uncertainty it will foment in the sector, with a potential consequential impact on ratings along with the potential considerations on restructuring current funding arrangements with lenders in terms of asset cover and covenants;
5. All of the above issues in relation to "new Right to Buy" and the impact on investor approach and confidence are likely to lead to complications for HAs in budget and liquidity planning to deliver future development plans if access to security becomes a risk or requires greater stock levels than would previously have been the case. HAs will need to consider further stress testing and balancing with other completing costs pressures;
6. Finally, there is the question of how this all fits together with funding retrofit, net zero and place making initiatives if the stock which will be invested in through those schemes is going to be sold at a substantial discount (particularly as there is no apparent indication in the market at the moment that retrofit works actually increase the value of the stock being retrofitted).

Governance Considerations

The governance and charitable objectives considerations relating to any proposed policy are also problematic.

The Government went to great lengths a few years ago to deregulate the sector (The Regulation of Social Housing (Influence of Local Authorities) (England) Regulations and deregulation including the removal of the disposal consents regime), giving HAs more freedoms in relation to the running of their businesses than they had ever had in the past.  This included of course the result that HA debt was removed from the public books.

Should "new Right to Buy" take the form of a mandatory policy for HAs, this would cause an issue from the perspective of Government control over charities (taking discretion away from boards about how they use their charitable assets to benefit communities and residents) and run the risk of dragging HA debt back on to the public books, a result which, presumably. any government will want to avoid.

Market Considerations

On top of all the potential issues for HAs outlined above, there is the burning question as to whether institutional funders will be prepared to consider accepting mortgage applications for "new Right to Buy" when the mortgage is intended to be paid in whole or in part through housing benefit.

Summary

Given the events of the last few days in Government, it remains to be seen whether this proposed policy will ever see the light of day.  However should it do so, there is a sense of déjà vu about the proposal. The concerns raised in relation to Voluntary Right to Buy when it was proposed (and subsequently piloted ) remain, and this new proposal doesn’t feel any different to that policy as far as challenges and risks for HAs are concerned.