Housing Finance Snapshot #12 March 2024

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

Building Safety Act – Evolving due diligence requirements

With the enactment of the Building Safety Act 2022, there is additional due diligence which lenders will require borrowers to undertake on properties going into charge.  Whilst this may be seen as being more relevant to development funders, it is important that lenders and borrowers in the housing sector are also aware of questions to be addressed both in respect of existing properties in charge and new properties being placed into charge.  At present this is mainly done via the valuation reporting and enquiries and information shared between valuer and borrower, and presented in the valuation rather than through legal due diligence within the terms of the sector standard certificate of title.  With increased liability for the safety of buildings, lenders need to ensure that they are not left holding any liability.  The concerns for lenders are:

1. That liability will fall on the lenders if they are designated as a “duty-holder” under the Act, and therefore responsible for ensuring that adequate funding is allocated for remediation and compliance with building safety requirements – where charged property fails to meet prescribed safety standards
2. The Act increases the standard limitation period to 15 years for prospective claims and 30 years for retrospective claims
3. The Act requires the production and maintenance of a safety case report for higher risk buildings (at least 2 residential units, 18 metres high or 7 storeys)
4. Power is granted to the Secretary of State to intervene to halt or rectify work on unsafe buildings.

For lenders the impact of the Act raises the need to carry out a comprehensive review of existing properties in charge, collation of data on whether there are any safety issues or claims and whether these are sufficiently being addressed by borrowers and where they are not to put in place active management plans to ensure compliance with the Act.  For taking new properties into charge lenders will need to review safety case reports so as to be able to monitor and manage liabilities to ensure compliance.

Is it then time for the sector to consider a review and update of the sector standard Certificate of Title or other standard condition precedent documents to include statements regarding specific compliance with this Act?  Is it sufficient for lenders to rely only on the valuation?  We would expect there to be a check to ensure that there is a fire risk assessment and other required certificates in place, that these are up to date, identify whether any works are required and if so who is required to do what (this can be complex if there are leases involved) and what the financial implications are for the borrower and its lenders and collectively what are the saleability implications (i.e. unsaleable, mainly unmortgageable, expensive to fix and works could be extremely disruptive (possibly requiring occupants to move out) for the lender if it wishes to enforce its security.    

There has been updated guidance issued to valuers, a subsequent shift in lending requirements by lenders to the residential market on defective properties and updates to standard commercial property enquiries, together with an update to the UK Finance Handbook made as a result of the Act so far (for example lenders seeking evidence that a remediation contract has been entered into and that funds are available to pay for works).

Building Safety – Buildings Insurance: Rising premiums and caps

Registered Providers who own high rise blocks are facing increased building insurance premiums when it comes to renewing their insurance. In some cases, insurers are capping the insurance value applied to their high-rise blocks at a figure less than full reinstatement value.

There is an obligation in most loan agreements to maintain insurance for any charged properties for their full reinstatement value, so any cap would result in a breach.  We have encountered cases in the market where insurers are providing intermediate cover for a short period of time with no cap, whilst Registered Providers provide more information and assurance to insurers about building safety which will hopefully result in a satisfactory resolution.

It is understood that some insurers are pulling out of the market and imposing more stringent terms and consequently pricing is increasing steeply in some cases.

Please do get in touch if you require advice on the insurance requirements in your loan agreements.

Local authorities as a source of finance for housing associations

Whilst base rates have stabilised (for now) and we are starting to see green shoots in the capital markets, many housing associations are considering alternatives sources of funding. Whilst new forms of sustainable finance are increasingly popular and on-policy, some registered providers (RPs) are turning to their local public sector neighbours for more immediate financial diversity.

Local authority financial decision making has been a regular theme in the press in recent years. Therefore, some themes for consideration when taking a loan from a local authority lender include:

1. Powers
   The Localism Act 2011 provides local authorities with a General Power of Competence including wide powers to do anything unless prohibited by statute. When considering the vires of a Council to lend, specific rules around borrowing and investment should also be reviewed e.g. CIPFA’s Prudential Code that places limits on what Council’s may utilise borrowed funds for and restricts pure financial return.  
2. Source
   Whilst many local authorities retain reserves of their own, it is typical that Council’s will source low rate finance to on-lend from other local authorities or the Public Works Loan Board. As with the Prudential Code, the regulations on PWLB borrowing limits investment in assets primarily for yield unless it falls within one of the supported categories of spending. 
3. Rate
   Councils can access relatively low cost finance from PWLB but may be unable to pass on the full value of such borrowing as a result of a need to comply with subsidy control legislation.
4. Security
   Whilst secured lending remains the preferred and cheapest option for any lender, some local authorities are willing to lend on unsecured terms identifying specific ring-fenced unsecured assets.
5. Geography
   The location in which you are seeking to spend the sourced funds can significantly impact availability to local authority finance. Many will be unwilling to invest outside their immediate vicinity in order to ensure it doesn’t impact compliance with the Prudential Code and PWLB rules. 
6. Availability
   Councils can access PWLB funds on extremely short notice and in the absence of issues, are as well set up as banks to on-lend in a similar fashion. 
7. Fees
   The fees incurred by a Council setting up and administering a facility are likely to be lower than those of a bank lender whose fixing and commitment costs are usually more substantial.  
8. Solvency
   Whilst the issue of a s114 notice by a Council (i.e. that expenditure exceeds income) is likely to restrict the entry into new loans by that Council until resolved, existing loans should be protected as central government are incentivised to protect the solvency of a Council e.g. via a restructure or combining of authorities.

At Bevan Brittan LLP we regularly advise on transactions involving local authorities investing in and/or lending to their own as well as stand-alone housing associations on specific schemes and as part of a wider housing strategy. If you are interested in discussing this subject further please get in touch with David Moore a partner in our public finance banking team.

Security Due Diligence – Cleaning out your Closet

In a busy Treasury or Securities team there are always urgent deadlines to hit and pressing tasks to deal with.  This is particularly the case during large-scale charging transactions and, more often than not, there will be stock which, whilst earmarked for use in the transaction, ends up not being used as security.

There can be a variety of reasons for this which range from the mundane (e.g. ensuring you are not over-secured when final valuations are received) to the more problematic (e.g. title issues or other problems which prevent the units being charged or limits their value to an extent that makes it not worth while using them as security for the transaction in question).

These units are often placed to one side to be reviewed on a ‘rainy day’ but the reality is that the task of reviewing and assessing those discarded units often slips to the bottom of a very long to-do list.

Over time the accumulation of these discarded units can add up and the value that these units could represent in the charging exercise is ‘locked’ because the Treasury team know they were put aside from a previous transaction but do not necessarily know the reason why or what needs to be done to allow them to be used in the future.

Whilst not the most appealing of exercises the cleaning up of these titles is a vital exercise for all Treasury teams to ensure that they maximise the Stock pool available to them on future charging exercises.

Bevan Brittan provide a range of services to assist Treasury teams with this exercise including full project management of the “cleaning the closet” task starting with a review of stock lists against units placed in charge to identify ‘dropped’ units, reviewing ‘dropped’ units to assess potential issues, RAG rating the reviewed units in relation to the ease of resolution of the issues and advising and assisting with the necessary steps to resolve those issues (where possible).

Pensions

Three pensions events potentially impacting housing associations:

1. Social Housing Pension Scheme
   The upcoming case about the validity of amendments purported to be made to the scheme over several decades, means that admitted employers face a potential increase to their liabilities. The case is due to be heard in May 2024 and the judgement is expected in Autumn 2024. In anticipation of the case being determined adversely, a potential option for employers is to enter into a standstill agreement, and whilst some clients may have been holding off to minimise wasted costs in the event the case settles, the hearing is drawing ever closer. We will circulate an update on any developments. 
2. Local Government Pension Scheme
   Due to input from the Pension Regulator, we are seeing these schemes increasingly use Deferred Debt Arrangements with employers under the scheme being asked to provide security over assets to secure future liabilities. Housing associations are prevented from using housing stock to provide security for pensions’ liabilities but other assets (including head-offices) are popular choices with pension providers as they usually exceed the future liabilities many times over, making it more attractive for the scheme trustees to negotiate a favourable timetable for employers to make contributions. We are working with a number of organisations where they are aware that their liabilities are about to crystallise or are making anticipatory plans in case of an accidental termination, so they are not suddenly required to find a suitable asset to secure. 
3. Stand-alone schemes
   We are working with a number of housing associations who are looking to streamline the administration of their multiple pension schemes by utilising their standalone schemes and transferring in employees from legacy schemes from amalgamations, mergers and similar arrangements as well as from other schemes such as LGPS and SHPS. 

If you are interested in discussing any of these issues further please get in touch with Nigel Bolton in our pensions team.

Lotting - A New Approach to Security Valuations?

With the rising capital cost of decarbonisation in the sector, valuers have been testing the waters with lenders about the concept and value of “lotting” in loan security valuations for social housing - breaking down properties into optimal groups according to, for example,  tenure and geography, which would sell potentially at a higher valuation where favourable assumptions can be concentrated.  This is the same rationale underpinning valuations for portfolio sales where there is an optimum size of portfolio which is tried and tested for attracting bids. The concept came from forecasting valuations when looking at a portfolio as a whole once costs have been applied to achieve net zero, which can significantly reduce the value of a portfolio. Valuers are carrying out sensitivity testing to determine values in lots as opposed to larger mixed portfolios with a wide range of applicable assumptions, to quantify if the sum of the parts is potentially greater than the whole.

At present, funders only instruct valuers to value units as a single hypothetical valuation. This can potentially result in lower values than for individual lots because valuers have to apply a discount if there are large numbers of units in one place or even if the stock portfolio is so large that it might be difficult to find one RP to take it on. If they were able to apply a “lotting approach” they may also be able to take advantage of local specifics. For example, a RP in a particular area may bid more for a lot in “their area” than a larger RP would bid for units in that area if they were buying a portfolio spread across multiple areas, which could result in a higher notional valuation for the units than if they have to assume it is all sold as one Lot. In a default scenario, there might also be more appetite in the market to acquire smaller portions of security at speed.

The counter argument is that funders might not be able to sell certain lots in certain areas if the security is split or apportioned and there could be an impact on how asset cover is applied. If the security is sold in one Lot, the total price for the portfolio might be lower but the funder may be able to realise more/all of their security.

The key valuers in the sector are supportive of the merits of lotting for security valuations. Should funders get on board and allow this approach, it would have a significant impact on the way security transactions are valued and structured in the future.

Housing Market in Focus

A brief highlight of some other news in the housing finance market:

Capital Markets update
Early 2024 has shown the first subtle but promising indications of renewed confidence in the capital markets after a challenging period.  January saw the issue of Sovereign Network Homes’ first bond since its merger late last year with a number of other capital markets issues being prepared for or considered.  The real estate sector generally has been seeing some renewed energy and interest from investors despite the continued challenging economic, political and changing regulatory landscape the sector is facing.  Treasury teams and financial advisors are cautiously optimistic around a more permanent return to capital markets activity for the sector.  Investor appetite appears strong with a number of housing association borrowers keen to raise funds on the capital market in the right circumstances.  Preparation from both a security and treasury perspective will still remain key to a successful issuance and ensuring strong investor interest.  If you are considering a capital markets issue, then forward planning is key in ensuring that your organisation can go to market at the optimum time.  If you are considering raising funds on the capital markets, either through a bond, sustainability linked bond or Euro Medium Term Note programme then do get in touch as we can assist you in getting ready for any capital markets issue.

Awaab's Law Consultation 
On 9 January, a new consultation was issued by the Department for Levelling Up, Housing and Communities (DLUHC) regarding the proposals and implementation of Awaab’s Law. The consultation applies to England only and will close on 5 March 2024. The content of this consultation will impact all social housing landlords as well as many other parties.  Our bulletin sets out further detail on the potential impact of the proposed legislation and issues to be considered as part of the consultation.  The proposals would mean associations ensuring they have in place robust data, management practices and consumer protection measures in order to ensure compliance with any new legislation.  Housing associations should think through the proposals and whether they could have funding and valuation implications for their organisations. 

Shared Ownership Rents
The Regulator of Social Housing has confirmed that social housing rents can be increased from 1 April 2024 in line with the current Rent Standard up to CPI plus 1 per cent.  Rent increases for shared ownership properties have reverted to RPI plus 0.5 per cent (except for new shared ownership leases granted from 12 October 2023 which have been brought into line with other social housing rents to be increased by CPI plus 1 per cent).   However if clients applied the voluntary rent cap of 7 per cent to their shared ownership rents, you should re-visit the position for this year to determine the impact of this year’s increase, which in certain circumstances may “wipe-out” the cap from last year and may require funder’s consent if a decision is made to re-apply the cap. 

What else to look out for in 2024
The Department for Levelling-Up, Housing and Communities (DLUHC) has updated its Rent Standard confirming the maximum Social housing providers in England can raise rents for existing tenants 
The Regulator of Social Housing has just set out its new consumer standards which are being assessed from April, introducing “C” grading in addition to “G” and “V” grading (Governance and Viability)
Increased regulatory and enforcement powers of the regulator will to come into force from April
A consultation on the new Decent Homes Standard – expected late 2024.

It will be interesting to see whether an anticipated general election may impact on timing of some changes yet to come into force.

Conferences and events

NHF Finance Conference, 13 & 14 March

Colleagues from our housing finance practice will be attending the Liverpool event on 13 and 14 March.  If you are attending, please do let us know – it would be lovely to see you.

During the conference, Louise Leaver will be presenting at the Investment and funding: How to fund your retrofit project session on Wednesday 13 March at 2.05pm. Join her and colleagues from The Housing Finance Corporation as well as UK Investment Bank and Pobl Group, as they discuss how you can fund your retrofit projects.

Housing library

Have you missed our recent publications?

Building Safety - New provisions now in force

Housing Ombudsman identifies the meaning of 'vulnerability'

Social Housing landlords – are you ready for what’s happening?

Awaab's Law Consultation – Strict times to investigate and resolve repairs 

Housing Matters – our new publication where we look at some of the key topical issues affecting our housing clients.

Company Secretary Snapshot – key changes and current affairs for Company Secretaries working in social housing

Energy Matters November 2023 - updates across the energy sector

Social Housing (Regulation) Act 2023 | Bevan Brittan LLP

Key Reforms of the Social Housing (Regulation) Act 2023 – Video digest series:

• Digest 1 - Access to Information Scheme
• Digest 2 - Focus on Vulnerable Residents
• Digest 3 - Safety and Quality Standard
• Digest 4 - Transparency, Influence and Accountability Standard
• Digest 5 - Tenancy Standard and Neighbourhood and Community Standard
• Digest 6 - Introduction to the new regulatory regime and RSH Powers

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