Welcome to our July 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.
New Right to Buy – a view of funding implications
The Government has announced plans to introduce the Right to Buy for all housing association tenants in the form of its “Benefits to Bricks” initiative This has caused a degree of consternation in the sector as housing associations expressed their concerns (some more strongly than others) about the viability of the policy. The Prime Minister has pledged a one-for-one replacement of each social housing property sold and adjustments to the welfare system so that housing benefits can be used towards mortgages.
From a funding point of view, there is a potential significant impact on stock levels and therefore borrowing capacity. In the event the policy materialises, serious thought will need to be given to a plethora of funding issues and the consequences for delivery of new affordable homes, including:
- Loss of stock in high value areas (where affordable homes are often most needed) may result in a significant loss of borrowing capacity and the loss of potential to uplift in value from EUV to MV-STT valuation, which has been a significant source of revenue for associations in recent years;
- Loss of stock in Iow value areas may not produce enough capital receipt to fund the like-for-like/one- for-one replacement required, leaving a funding shortfall and loss stock to securitise. There will be a likely time lag between each new Right to Buy sale and the replacement of the unit, as associations will need to locate schemes, land or units to replace the sold units;
- Potential adverse valuation impact arising from loss of a “guaranteed” rental stream for the period of the loan, perhaps resulting in either a valuation discount or reduction and/or valuation assumptions about the potential number of units leaving any portfolio during the term of the loan increasing;
- Replacement with a change of tenure to Shared Ownership may not be as attractive to investors given unpredictable returns when compared to “pure” rented units;
- Complications to budget and liquidity planning to deliver future development plans if access to security becomes a risk, requiring further stress testing and balancing with other competing costs pressures. This could be compounded by a loss of investor confidence as a result of changes and uncertainty in the sector, with consequential impact on ratings;
- Potential adverse impact on current funding arrangements with lenders in terms of asset cover and covenants. Higher asset ratios may be required to ensure funders are protected against stock numbers reducing to unacceptable levels during the course of the loan;
- Considerations around funding retrofit and place making initiatives if stock is going to be sold at a substantial discount.
As further details emerge from the Government, the sector will be watching developments with a forensic eye and assessing the implications for funding, security and funding the delivery of affordable housing. This is a talking point the sector has seen come and go several times and it remains to be seen whether the policy will gain practical traction this time around. Please contact Richard Stirk, Jessica Church, Louise Leaver or Sarah Greenhalgh if you have any further queries.
EWS1 Update – a more flexible funding approach?
Since the introduction of the External Wall System Fire Review form (EWS1 form) a number of guidance notes and publications have been issued. The latest joint statement made by RICS and six major lenders: Barclays, HSBC, Lloyds, Nationwide, NatWest and Santander (and endorsed by UK Finance and the Building Societies Association (BSA)) signals a significant shift in the position that lenders are adopting with regards to tower blocks. In the statement, the lenders have announced that they would “take necessary steps” to facilitate lending on tower blocks that have been covered with cladding considered to be dangerous so long as there is a “costed and funded remediation plan agreed with committed dates for starting and finishing all specified/required work”.
This statement will be welcomed in the social housing sector as it will allow registered providers to realise security against the value of blocks on which remediation works are either planned or being carried out. It will obviously also come as a significant relief to leaseholders, many of whom have been unable to re-mortgage or sell their flats, without an EWS1. This move follows market practice and we are dealing with transactions where we are seeing a noticeable willingness from lenders to work with borrowers provided that dialogue on this begins at an early stage of the deal (and with a sufficient level of detail being provided). Our advice to registered providers would continue to be:
- update your valuer, lender and solicitors about the existence and nature of tower block units in a portfolio as early as possible, especially if the building is covered in material that has been identified as dangerous cladding and identify any relevant units in your security property lists;
- provide valuer, lender and solicitor with as much detail about the blocks as possible, particularly with regards to combustible materials and required remediation works and costings, noting that the guidance is that these should be “costed and funded” with “committed dates for starting and finishing” the work;
- be prepared to provide details of fire risk assessments and other technical documents;
- share information regarding any other building defects and details of any proposed remediation works.
A full copy of the statement made by RICS can be found by following this link.
Sustainability Reporting Standard – new edition
The Sustainability Reporting Standard (SRS) for the Social Housing sector was launched in November 2020 and is currently being updated with a new version anticipated for later in the year, with a further sector wide consultation expected next year. A report has been published on the findings from the first year - ESG Social Housing – Building a sector standard approach to ESG reporting. As at May 20222, there are 104 adopters, including 36 funders and a variety of housing associations of all shapes and sizes (up from 78 adopters in November 2020). Bevan Brittan is an endorser of the SRS, one of only two law firms.
Adoption of the SRS is completely voluntary but the findings from the recent report confirm that:
- SRS is seen as “best practice” and provides a common language
- SRS is becoming expected of all housing providers who seek commercial finance
- SRS beginning to be used during credit assessments and shapes investment considerations
- SRS is expected to influence pricing models.
The anticipated changes to the SRS are not expected to be a modification of the current 48 reporting criteria and are more seeking to provide greater clarification on how to report against the criteria. For example, C14/15 (EPC Ratings ) now includes an option to report % of homes without EPC ratings and C35 makes a change to report absolute number of board members on audit committee with financial experience and not the % ( as previously).
Bevan Brittan presenting at CIH Housing 2022 – and enjoying some novelty cocktails with our clients!
Our Housing Finance team was out in force at the CIH Housing 2022 conference in Manchester at the end of June. It was fantastic to see so many of you at the conference and those of you that were able to attend the ‘Securing the funding to make net zero a reality’ session presented by a panel of experts including our very own Louise Leaver. We are delighted that you were able to attend and hope you found the discussion useful.
It was also wonderful to see so many of our lovely clients at the Bevan Brittan drinks reception at The Alchemist on the Wednesday evening where the conversation (and the cocktails!) were flowing until late into the evening. We really enjoyed the event and catching up with friends old and new alike and hope you did too. We do anticipate holding the same event next year – same time, same place – so watch this space!
Watch this space
- The number of for-profit RPs continues to grow as the regulator registered three providers in June 2022 including one which is backed by Qatar’s sovereign wealth fund and other institutional investors.
- The government has announced that it plans to make changes to Local Government Pension Scheme (LGPS), proposals include - a requirement on investment pools to invest up to 5% of assets to support the government’s ‘levelling up’ agenda and to report on climate risks and the management of these.
- The NHF has, in conjunction with CIPFA (Chartered Institute of Public Finance and Accountancy) launched a joint guide to financial and treasury management for housing associations and please click here.
Bevan Brittan – Housing Conferences
Our Housing Finance team will be attending the NHF Treasury in Housing Conference on 4 October 2022. Join us at 11.45am for the breakout session on “Exploring joint venture opportunities with developers” as our own Wendy Wilks chairs the debate, alongside speakers: Chris Harper – Partner at Bevan Brittan, Matthew Bolwell from Peabody and Helen Collins from Savills.
If you would like to arrange a chat over a coffee during the conference and find out how we can help you, please contact Wendy Wilks, Jessica Church, Chris Harper or Louise Leaver. We look forward to seeing you there!
Our Housing team has published a number of articles on pressing issues in the sector in recent weeks which will be of interest to you and your colleagues:
- Leasehold (Ground Rent) Reforms Act - The rules, exceptions and implications
- 5 years post Grenfell – what have we learnt and are high-rise residential buildings now safe?
- Building Safety Act 2022 Published
- Health Warning: Error in Homes England – Designated Protected Areas – Mandatory Buy-Back Lease
If you have been forwarded a link to this article, you can subscribe to Housing Finance Snapshot to ensure you receive future editions.