Housing Finance Snapshot #13 July 2024

Contents

• Market Overview
• Positive sounds coming out of the new Government
• Maximising property due diligence and stock values
• SHDF funding
• Service charge challenges for RPs

Bevan Brittan is a market leader in the delivery of legal services to the housing sector. We are ranked in the top tiers for social housing by both Chambers UK and The Legal 500. We are a growing expert team of banking and finance, property security and portfolio transaction lawyers with a deep sector focus in housing and the wider public sector, meaning our clients benefit from our in-depth insight into current and emerging trends, opportunities and challenges. We work for a variety of registered providers of all sizes, including most G15 RPs, for-profit registered providers, banks, investors and other key stakeholders in the sector such as local authorities and care providers. 

Market overview

As the new Labour government takes the helm, bold pledges have been made to invigorate the housing sector. With a commitment to building 1.5 million homes and unlocking the planning system, a fresh perspective is being ushered in by the new Chancellor, the Secretary of State for Communities and Local Government—a veteran of social housing and a new Housing Minister.  More detailed plans were set out in the Kings Speech on 17 July 2024 and headline issues announced are set out below.

Yet, amidst these ambitious plans, a critical question looms: Where is the money going to come from?

Funding challenges

An open letter from key stakeholders in the sector, detailed in The Guardian, questions the financial feasibility of the new Government’s plans for delivering their housing plans - highlighting severe financial strains:

* Capped Income and Soaring Costs: Housing association and council budgets are severely impacted by capped incomes, massive cuts to capital investment, and unfunded new requirements.
* Rental Income Decline: Real-term rental income is 15% lower than in 2015, while up to £50,000 per home is needed for safety, quality, and decarbonisation improvements over the next 30 years.
* Budget Shortfalls: Without action, councils face a £2.2 billion deficit in housing budgets by 2028, with housing association new home starts down by 30% last year and expected to fall further.

In May this year the Housing and Levelling Up parliamentary committee issued a report on the “Finances and Sustainability of the Social Housing Sector” highlighting the considerable financial pressures that the sector is under and whilst still remaining resilient may not be in the position to support the development growth on the scale set out by the new Government without additional Government funding.

Recent announcements from major builders about scaling back land acquisition and development plans underscore the financial challenges ahead. The sector continues to grapple with massive costs related to disrepair, achieving net-zero goals, and meeting the new consumer standards. We have started to see the first inspection results from the Regulator of Social Housing (RSH) with more to come, which will impact the sector’s funding needs in order to meet the increased regulation and scrutiny.

However with UK sterling rising to a one year high against the dollar last week  and the UK economy growing more than expected during May  the Financial Times last week reported that traders in swap markets were evenly split on whether an interest rate reduction will be coming in August - with commentators stating that some retail Banks have already started to lower interest rates on some mortgage products in anticipation.  However with UK inflation reportedly holding steady at 2% for June which was slightly above expectations, the Financial Times have since reported  that traders have now amended their bets on a rate drop next month.

The recent interest rate challenges the UK economy has faced, especially since September 2022, may continue for a little longer than hoped.

Even if interest rates do go down there is potential for some nervousness in the bond market to remain while the new government beds in .  However, having taken soundings from various stakeholders in the sector over the last few months, it appears that there is appetite and interest in the sector for approaching the capital markets again and there could be much more activity there in Q3/Q4 of the financial year after the post-election and usual summer lull.  It could be a busy second half of the year!

Funding solutions

There is a clear call for a variety of new sources of funding, innovative funding solutions, more collaboration between key stakeholders, increased private equity and debt funding and also for the government to step in financially. Is there enough money in the existing government housing funding pot to meet the ambitious development plans?   It is critical to explore all these options.

Despite these challenges, there is a positive and collaborative response from the Ministry of Housing, Communities and Local Government, reaffirming the commitment to delivering 1.5 million new homes and partnering with councils and housing associations to achieve these goals.

In addition, some of the key lenders to the sector are engaging with resolving the housing challenges – including Lloyds Banking Group - who have just this month confirmed their commitment to “actively enter the market” through its landlord subsidiary Citra Living Limited in order to help families at risk of homelessness. 

Equity investment

There is significant investor interest in the UK housing sector but investors need stability and certainty to commit. Long-term rent settlements, consistent planning regulations, and fewer regulatory changes without full consultation are essential to attract further investment.

We are seeing an increase in the amount of institutional investment into the sector which will also be key to its future growth.  It is clear many of these investors are committing long term to the sector.  There has been a huge increase in the number of investors registering as or investing in For-Profit RPs and partnering with not-for Profit RPs over the last few years.  

The issuing of a new Code of Governance by the BPF for For-Profit RPs, demonstrates that equity investment into the sector is becoming an increasingly integral and more established part of the housing funding solution.  

Although such investors have been mainly interested in buying up new/newly built stock - Legal & General Affordable Homes have just reportedly confirmed they are looking at ways to raise equity to buy or support RPs and Local Authorities with problem older legacy stock. This plan, especially if replicated with other investors, could have the potential to be a significant part of the solution to unlocking some of the sector’s funding challenges.

We will need to watch this space to see how the new Government engages with investors over the coming months and the effect of any proposed rental and leasehold reform as set out in the King’s Speech may have on investment into the residential sector.

Collaboration

A key theme of many of the housing conferences over the past year is that the solution to funding the UK housing need is collaboration between various existing and new stakeholders.  We are already seeing this in action.  With CIH and NHF working together to lobby the new Government, the Government committing to working together with the sector to build 1.5 million new homes and the recent announcement of closer collaboration between RSH and the Housing Ombudsman.  We are already seeing increasing partnerships between private capital – either investors, contractors or house builders with RPs and Local Authorities.  It seems we are going in the right direction- let’s hope it leads to successful outcomes for the sector.

As the sector navigates these changing times, we anticipate even more collaboration between private and public entities, with investors also showing a keen interest in local authority housing and infrastructure projects. Banks are also developing new products to fund retrofit initiatives and innovative funding models are coming through.

We hope you find this bulletin informative and insightful. Wishing everyone a relaxing and hopefully sunny summer!

Katie Dyer
Partner – Housing Finance

Positive sounds coming out of the new Government

The new Labour Government has a large majority in Parliament and are making very positive sounds in all areas of housing.  However, was this was reflected in the King Speech on 17 July 2024? – see below for a brief answer

We have heard from the new and first female Chancellor, Rachel Reeves, on 8th July who has set out a number of proposals affecting the housing sector:

• Labour will reform the national planning policy framework in order to deliver infrastructure:
  • Ms Reeves said that “our antiquated planning system” leaves “too many important projects tied up for years and years in red tape before shovels even get in the ground”.
  • Reeves also says that Labour will reform the planning system to deliver infrastructure needs that have been left "unresolved for far too long, adding that   “(The Government) would grasp the nettle of planning reform, and we are doing so. Today I can tell you that that work is under way.”
• The government will restore mandatory housing targets to achieve its goal of 1.5m new homes in England over the next five years.
• Decisions on large projects will be taken nationally, rather than locally.
• Deputy Prime Minister Angela Rayner will write to local councils and planning authorities to review green belt boundaries to prioritise brownfield and "grey belt" land to meet housebuilding targets.
• Rayner says their "golden rules" will allow them to deliver "thousands more homes", including social housing.
• Reeves also says they set out new policy intentions for critical infrastructure in the coming months."I know there will be opposition to this," says Reeves", adding "I'm not naïve, but trade-offs always exist".

The Chancellor’s speech represents a significant shift in government policy, stimulating economic growth, with a clear focus on addressing the housing crisis, and modernising the UK’s infrastructure.

We also have (another) new Housing Minister, Matthew Pennycook who held the Shadow Housing and Planning role since December 2021.  A former trustee of Greenwich Housing Rights he was also in 2015/16 the Parliamentary Private Secretary to the then Shadow Minister of State for Housing. Let’s hope his time as a Shadow Minister will give him a good grounding so he can “hit the road running” to deliver on the new Governments promises on housing.

The National Housing Federation are looking forward “to working with the new government to deliver on its mandate to build the social and affordable homes we urgently need”

The Chartered Institute of Housing have said “The new government should provide a much-needed boost to affordable housing supply by rebalancing the Department for Levelling Up, Housing and Community’s (DLUHC) capital spending and allocating a more significant proportion of the programme to social-rented homes. This would have little to no effect on overall government spend. ”

The British Property Federation have congratulated Matt Pennycook MP in becoming the Housing and Planning Minister. "It's great to see him appointed after shadowing the role for a substantial period and he has really got to know the issues. It’s critical for the Government to hit the ground running on the economy and deliver homes, and we look forward to working with and supporting the Minister in his new role".

It was encouraging to hear the King’s Speech reference the building of 1.5 million homes in England over the next five years, but we still await further details to know exactly how this will be funded. Getting Britain building through planning reform and potentially through English Devolution was also mentioned. Ministers may be hoping that devolving spatial planning powers to England’s metro mayors will help deliver more homes.

News was favourable for England’s renters – no-fault evictions will be banned, tenants will be able to request keeping a pet, and there are plans to end rental bidding wars and improve the standard and safety of rental properties through extension of the proposed Awaab’s law into the private sector. 

RPs local authorities, house builders and investors are all indicating they are poised to work with the new Government to increase the quantity and quality of housing and our housing focused lawyers at Bevan Brittan are equally poised to assist.

Maximising property due diligence and stock values

Valuation uplifts for ex LSVT stock: considerations for security valuations

At a time when maximising property valuations is a crucial security consideration on any funding project, many of our RP clients are looking at uplifting the value of their ex-LSVT stock, originally charged on stock transfer (or subsequently), from EUV-SH valuation to the often considerably higher MV-STT valuation. This has become possible pursuant to the deregulation provisions implemented by the Housing Act 2016, and provides a good option for RPs to leverage additional funds and boost borrowing capacity.

Factors Influencing Valuation Uplift

The extent to which this is a worthwhile exercise hinges on:

• Geographical location and stock profile
• Restrictions in loan agreements
• Obligations in the original LSVT Transfer documentation
• Funder support to an uplift and the existing security profile and values if already in charge

Once these hurdles are overcome, it can often be relatively quick and straightforward to obtain a valuation uplift, subject to any valuation restrictions arising in the title and planning documents.

For older security already in charge to a Security Trustee or funder and valued at EUV-SH or older stock which is uncharged, it is important to be aware of a few planning issues that may lead to valuation uplift limitations as follows:  

Unavailable Planning Permissions – planning permissions which are listed in local authority search results but not available for download or cannot be located pose a potential valuation risk although we can work with the local authority to provide solutions to satisfy lenders with advance preparation time.

Planning Condition Discharges - For older schemes, obtaining planning condition discharges from the local authority may not always be necessary depending on the nature and context of the conditions and their age.  In some cases, irrespective of the age of the property or planning permission, evidence of discharge may still be required in the case of some material planning conditions in order to provide the necessary comfort to a funder.  

Indemnity insurance – this is often available to cover certain planning risks, but not all and in some circumstances, especially where concerns around any ongoing use restrictions may exist, it may be more difficult to obtain a policy that meets different funders’ requirements and could prevent an MV-STT valuation. 

Re-development/Infill Development

Many RPs have redeveloped garage sites and open land within ex-LSVT estates to provide new build housing. For stock constructed less than 10 years ago it is helpful to provide your legal team with a full suite of planning permissions and condition discharges, including any relevant Section 106 Agreements, new build warranties and building control completion certificates.  Failing to provide this information may limit valuation, result in the need for additional indemnity insurance and/or cause delays to any uplift or charging project.

Early Preparation for Valuation Uplift

To minimise potential loss of value on charge during a valuation uplift exercise, early preparation is key. It is advisable to start planning due diligence checks well ahead of transactional timescales. This involves:

• Obtaining missing planning documentation from third parties.
• Incorporating these checks as part of an ongoing and forward thinking pre-charging or “Rolling Charging” strategy.

Please speak to Jessica Church or Katie Dyer if you require any assistance with maximising security valuations on your property portfolio.

Stock condition and potential impact on funding and valuations

Following the introduction of the new consumer standards from the RSH, the outcomes of the first inspections results released by RSH this month and the ongoing review by the Government of the decent homes standards, it is imperative that reviewing and maintaining stock condition is high on the agenda for RPs. This also being the case in order to protect future funding and valuation of stock which can take into account the impact of future maintenance requirements.

In order to protect the value of stock, those responsible for asset management should be undertaking the following:

• Reviews of cyclical, and responsive, repair programmes
• Ensuring that steps are taken to utilise legal remedies, including seeking injunctions for access where there is an inability to carry out repairs or gas servicing obligations
• Reviewing disrepair policies, procedures and processes to ensure that these align, amongst other things, with responsive repairs
• Ensuring that management agreements – in the case where third parties may have legal obligations for the quality and repair of homes – allow the RP to hold the third party to account and to be able to have confidence over their reporting
• Regular reviews as to the quality and responsiveness of external contractors, ensuring that the contractual agreements set clear KPI’s to show both good value for money, and being able to have assurance as to their quality of service to tenants.

If you are interested in discussing any of these issues further please get in touch with Sarah Orchard in our Housing Management Team.

Sarah Orchard
Senior Associate

Raising finance quickly on recently acquired portfolios

When buying a portfolio of properties it is relatively easy to ensure the due diligence on the purchase can also be used for a future charging exercise.  This will save a significant amount of time and costs when such a portfolio is charged.

When buying a portfolio we always ensure that the due diligence on the purchase can also be used (as far as possible) on a property charging exercise.  To ensure the efficiencies can be maximised, the scope of the due diligence exercise when buying needs to cover issues that a funder would require.

This would include:

• ensuring sample searches are compatible with funders requirements
• enquiries raised are sufficient for a funder
• indemnity insurance policies are acceptable and include cover for successors and lenders
• reporting can be relied upon by a funder
• documents which may affect the value of a property are considered and where necessary rectification is carried out to maximise value for a future charging exercise.

It is much easier to deal with these matters when a seller is engaged in the sale process and can provide this information as part of the sale and purchase process rather than a new owner of the portfolio attempting to provide historical information to a funder on a portfolio they have only owned for a matter of weeks or months.

The team at Bevan Brittan have significant experience and expertise in property due diligence for the full life cycle of transactions from asset acquisition to securitisation, with the same expert team carrying out the due diligence for both types of transaction.   The advantage of this to our clients is that we are able to produce efficiencies and add value by leveraging our expertise when carrying out the due diligence on the acquisition of a portfolio by anticipating charging and therefore avoiding duplication of due diligence tasks and maximising chargeability and valuation outputs.

For further information on our experience and expertise in Portfolio Transactions please contact a member of our core team.

Partners, Katie Dyer and Jessica Church – Property Finance and due diligence
Legal Director, Rebecca Gibson – Portfolio Transactions

Social Housing Decarbonisation Fund Wave 3

The Social Housing Decarbonisation Fund (SHDF) aims to upgrade a significant amount of the social housing stock currently below Energy Performance Certificate band C. The aim of SHDF is twofold. The first is to support the installation of energy performance measures in social homes in England and the second is to facilitate the adoption of decarbonised heating systems.

The government have announced a third wave of the Social Housing Decarbonisation Fund with circa £1.2bn available. Applications are not yet open but DESNZ have encouraged applicants to prepare.  The Subsidy Advice Unit has issued a final report and guidance on 4 July and applications are expected to open this summer (2024).

There will be two approaches to access funding under this third wave: Strategic Partnerships and the Challenge Fund. It is expected the Challenge Fund will be the more common route with the Strategic Partnerships route available to applicants with a track record of delivery at scale. 

With key aims to reduce the number of households in fuel poverty and to improve the energy efficiency of social housing, it is a timely reminder that, whilst building safety is paramount, retrofitting and energy measures to upgrade social housing must also remain a priority. 

Harriet Murray-Jones

Partner

 
Service charge challenges for RPs

Increasing service charge costs are having an impact on RPs, their leaseholders and tenants and we are seeing a noticeable increase in the scrutiny of service charge bills from residents, no doubt prompted by the cost of living crisis.  We have set out below some service charge issues that RPs need to be aware of from our recent experience:

Energy and insurance costs

RPs are increasingly utilising the First-tier Tribunal ‘dispensation’ process to manage finance-related costs impacting service charges. If granted, this dispensation allows them to bypass the statutory s20 consultation process, which typically takes at least three months to complete. The s20 consultation is necessary when RPs plan to enter into a contract lasting one year or more, involving leaseholders paying £100+ annually. Recent trends show RPs using dispensation in various scenarios:

• Spiralling Energy Costs:  Fixed energy contracts are being put in place to mitigate exposure to future energy cost rises due to events like the Ukraine conflict. Although there has been a reduction in energy costs over the summer, analysts at Cornwall Insights are predicting further rises in autumn 2024 .  For any RPs looking to put in place long term energy cover quickly to protect leaseholders’ financial interests, the S20 dispensation process should be considered at the outset and legal advice should be obtained;
• Attractive Energy Deals: RPs have brokered energy deals on terms too favourable to lose, provided they do not test the market. The s20 process mandates market testing, which could jeopardise these deals.
• Challenging Insurance Markets: A number of RPs have had to renew with their incumbent buildings insurance provider under tough market conditions to secure decent (or in some cases, any!) renewal terms. Market testing was either impractical or yielded exorbitant quotes, making the s20 process ineffective.

Other service and asset management issues for RPs include:

Building Safety Challenges 

• Leaseholder Protections:  RPs must now ensure that they apply the 'leaseholder protections' as per Schedule 8 of the Building Safety Act (BSA) to avoid charging service charges that are now prohibited. This is complex, and we understand that a number of RPs struggle to comply fully with their lease requirements, compounded by the BSA's added intricacies.  This is particularly difficult where significant funds have been spent on a building and where only some of that cost can be put through service charges and some cannot – as a result of the introduction of BSA requirements. The Court of Appeal is shortly to address the question of whether the leaseholder protections apply to costs incurred pre- or post-implementation of the BSA (on 28 June 2022) or just to costs incurred after that date.
• Service Charge 'Black Holes':  Buildings with safety issues create financial gaps where costs, typically recoverable through service charges, are now shielded by the BSA. Landlords must navigate the BSA's intricate mechanisms to recover these costs from responsible parties using the new legal tools provided by the Act. 

The Price of Sustainability

Over-Spending Concerns:  RPs are reportedly over-investing in sustainability upgrades without considering the reasonableness of passing these costs to residents. Residents have statutory protections against unreasonable service charges, which could lead to Tribunal challenges if they perceive their charges as excessive.  It is important that costs, the benefits and potential impact of any service charges being passed on are carefully considered on any retrofitting projects. In addition, where works of this nature are to be passed down to residents, the law expects affordability issues for residents to be part of a landlord’s thought process in deciding whether to do the works and the scale and cost of those works. RPs should expect Tribunals to look for landlords to have given affordability greater consideration in the current challenging economic times than they may do at other times.

Inadequate Service Charge Scrutiny

Pass-Through Cost Challenges:  Instances have been reported where RPs with intermediate leases pass on costs charged by management companies (Mancos) without scrutinising them as fully as they could be. This lack of oversight can lead to financial shortfalls if residents successfully challenge these costs as unreasonable. Generally, RPs are only able to pass service charge costs down to residents if they are reasonable and so where RPs are passing through costs charged by the RP’s landlord, there will be an expectation that the RP will scrutinise those costs before they are paid to the RP’s landlord in order to protect the residents who will ultimately foot the bill for at least some of those costs. To mitigate this, RPs need to invest in resources to analyse such charges, though this would require additional headcount and costs and we are anecdotally aware that many RPs are not currently resourced to be able to carry out this task as effectively as it should be.

Conclusion

RPs are facing numerous financial challenges around service charges and the costs of asset management.  They are having to navigate financial and regulatory challenges, aiming to protect leaseholders' interests and maintain operational efficiency. The complexities introduced by the Building Safety Act, the push for sustainability, and inadequate service charge scrutiny highlight the need for better resource allocation and compliance strategies. By fostering greater oversight and ensuring fair cost distribution, RPs can better balance their obligations and the financial impact on residents.

Should you wish to discuss or require any advice on any of the above issues that may be affecting your organisation please do not hesitate to contact our experienced Housing and Property Disputes Team who regularly advise RPs on how to navigate these challenges.

Steve Eccles and Katie Dyer

Partners

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