.... with apologies to Bill Bryson
The history of social housing finance makes interesting reading and we have been involved in its story since the early 1980s when we helped set up what is now one of the largest housing groups in the country. Working on the precedents established by philanthropic associations such as the Peabody Trust and the William Sutton Housing Trust, housing associations established in the 1970s and 80s were funded by the Housing Corporation, which provided grant funding and took charges over the housing stock directly. (This portfolio is now in the hands of Orchardbrook.)
The Housing Finance Corporation
From the mid-1980s further funding initiatives were established. We worked on the first THFC (The Housing Finance Corporation) loan agreement, and with the high-street lenders (both alone and in syndicates) who saw the benefits of lending on portfolios of properties with a rental stream guaranteed by housing benefit payments from the government. Further certainty was given to the sector by the fact that associations had to comply with the rent setting formulas prescribed by the government.
Large Scale Voluntary Transfers
The 1990s saw a government initiative for the transfer of housing stock from local authorities to newly established housing associations and housing companies. These were known as Large Scale Voluntary Transfers (LSVTs) and involved the transfer of the stock of over 250 local authorities. A democratic vote approving the transfer was required from the tenants and the LSVT associations were contractually obliged to undertake major improvement works to the properties transferred and have tenants represented on their boards. Wright Hassall acted in more than 50 of such transactions. LSVTs were funded again by high-street lenders, normally working together in syndicates, mainly with 30 year loans based on the business plans of the LSVT associations. The valuations of LSVT property, as indeed with all housing sector property, is based on the rental flow from the properties in the business plans of the associations, having regard to the market value of the properties and to certain assumptions such as interest costs, voids and the running expenses of the association.
Difference in valuations
The models for the valuations of individual properties have also developed over the years. There are two recognised criteria being (i) Existing Use Value of the stock (EUV), which is based on the value of the stock limited to its use as affordable housing; and (ii) Market Value, Subject to Tenancy (MV-STT), which is based on the market value of the property subject to the existing tenancies, but not limited to affordable housing use. The difference in these valuations can be as much as 30%. LSVT stock is currently valued at the EUV because of the restriction on the title when the properties were transferred (known as the “section 133 restriction”).
The last ten years have been interesting and have seen a marked shift in the way that housing sector finance has been provided. Long-term finance from the high-street lenders is no longer available, although we have seen a marked fresh interest in lending on a shorter term basis (more in line with normal commercial lending). It is now common for associations to employ a security trustee (normally the Prudential Trust Company Limited) to hold security over some or all of that association’s properties, with that security then being designated as held on trust for the benefit of one or more lenders to that association. Grant funding is becoming rarer and associations have been looking at innovative alternatives. Over the last five years housing groups have entered the bond market (we have been involved in three bond issues) for long-term financing, and private placements are also now popular (we have been involved with twelve). 42 housing associations in England and Wales have now been listed. Many housing groups are carrying out large-scale debt restructuring exercises (we have been involved in seven) and this has synced in with the regulator’s (the Homes and Communities Agency’s) requirements for all associations to have a comprehensive risk and assets register so that properties can be put into charge easily and expeditiously.
Housing & Regeneration Act 2008
Looking to the future, the budget of July 2015 came as a surprise to many within the sector and sent all associations back to the drawing board in respect of their business plans. The Chancellor controversially provided for a reduction in rents for the next four years, overturning previously ordained rent policy. Caps on housing benefits and a reduction in supporting people payments have undermined the previous certainty in the sector regarding rental flow. The section 133 restriction and required consent under the Housing & Regeneration Act 2008 are to be removed which will influence the current valuation models in a way that is not quite yet understood. The uncertainty within the sector should be alleviated eventually by the finalisation of the Housing and Planning Bill, but this is still before the Lords and has not yet received Royal Assent.
The sector is in unchartered territory and we have interesting times ahead!