In the continuing climate of economic uncertainty, with grant funding cut back severely and traditional, long-term funding options all but dried up, housing associations have embraced bond issuance as an effective way to secure long-term finance at competitive rates.
However, issue of security availability is as severe for a bond issuance as it is when considering traditional funding. With grant funding now heavily constrained to support new developments, the amount of available security required to borrow against will become a real issue in the next few years.
In this article, Carol Matthews, partner of the solicitors, Wright Hassall, describes a possible mechanism for significantly increasing the sector’s lending capacity.
The sector falls mainly into two separate camps of housing associations holding stock in terms of security valuation:
- traditional housing associations where stock has been acquired over the years and
- LSVT housing associations, where the stock holding of the housing associations was acquired by virtue of a large scale voluntary transfer from a local authority.
The stock of LSVTs is valued more restrictively than the stock of traditional housing associations and there is therefore not a level playing field. The reason for this is quite straightforward. When housing stock is transferred from a local authority a restriction (a s133 Restriction) is registered on the Land Registry title in the following form:
“RESTRICTION: No disposition by the proprietor of the registered estate or in exercise of the power of sale or leasing in any registered charge (except an exempt disposal as defined by section 81(8) of the Housing Act 1988) is to be registered without the consent of the Secretary of State to that disposition under the provisions of section 133 of that Act”
For funding purposes, valuers value housing associations’ stock using the RICS “Red Book”, either on the basis of Existing Use Value Social Housing (EUVSH) or the higher Market Value Subject to Tenancy valuation (MVSTT). Both of these valuations are losely based on percentages of the open market value of the housing stock. Valuers take the view that a s133 Restriction on the title will limit the use of the stock to “affordable housing” so the only possible valuation that can be applied is the lower EUVSH. Although traditional housing associations may have stock values restricted to EUVSH by virtue of section 106 agreements without adequate mortgagee exemption provisions or by affordable housing restrictions in title documentation, they do have the ability to negotiate the purchase of properties in an optimum way to obtain an MVSTT valuation. An LSVT currently has no option other than to accept the lower valuation.
The difference in EUVSH and MVSTT values can be significant as set out in the examples below and will vary between areas and property types:
|Property type and location
|2 bedroom flat Lincolnshire
|2 bedroom house Kent
|3 bedroom house Midlands
|4 bedroom house Norfolk
OR PUT ANOTHER WAY: if market value of stock is 100%, valuers will value EUVSH at an average of around 30% of market value and MVSTT at an average of around 60% of market value.
If the s133 Restriction was lifted or amended in the way we are suggesting then LSVT housing associations would have the benefit of additional security value of around 30% of the market value of the stock (a doubling of the loan security they currently possess).
Under standard loan arrangements we are aware that there is always a differential in security to loan ratios of 105% to 110% on EUV valuations and between 115% to 130% on MVSTT valuations. However, there would still be a significant increase in the amount of security if an MVSTT valuation can be achieved. An LSVT would obviously need to be able to service interest payments on the additional borrowing but the value of security would increase significantly. The holy grail for the sector - increase in borrowing capacity.
How can we achieve this?
Innovative ways are needed to introduce more money into the social housing sector and Government should be lobbied to amend the legislation to mitigate the negative impact of s133 Restrictions. Although s133 of the Housing Act 1988 (s133) was implemented to ensure that housing being transferred to housing associations remained affordable in perpetuity, the negative impact of s133 restrictions fetter the ability for LSVTs to produce more affordable housing. This cannot be in the best interests of the sector.
An elegant way to resolve this issue would be to amend s133 to introduce provisions similar to the mortgagee exemption clauses in section 106 agreements so that, in the event of a loan default by an LSVT, mortgagees, receivers and their successors in title could sell free of the affordable housing provisions. An LSVT would still be required to obtain consent from the Secretary of State on disposals so the protection required by local authorities and the Government would still be in place. We have received positive indications that the Government may be open to this suggestion.
In the event such proposed changes are enacted, LSVTs would need to consider their existing loan arrangements to see whether an MVSTT valuation can be substituted for an EUVSH valuation. The best drafted clauses have an option for either valuation model to be utilised at the discretion of the borrower. However, any amendment may give rise to a request for re-pricing by the funder. New loan agreements going forward should make provision for an alternative valuation model to be utilised without the threat of re-pricing and we would advise all housing associations negotiating new funding agreements to request the option for both valuation methods at their discretion.
The National Housing Federation is taking this issue forward and will be doing some further work to understand how much additional capacity could be released across the sector if we are able to get agreement to the change, as set out above. We are keen to hear your views before proceeding.
This article first featured in the National Housing Federation's finance policy quarterly update.