The Regulator’s most recent Quarterly Survey reveals the increased scale of investment activity by RPs, whether via wholly owned subsidiaries or through joint ventures.
In the Quarterly Survey, the Regulator takes the opportunity to remind those RPs involved in such activities of the assurances that it requires.
The Social Housing Regulator’s latest survey covers January to March 2019 and reveals that registered providers (RPs) invested £8 billion in non-registered subsidiaries, special purpose vehicles (SPVs) or joint venture entities.
This figure has increased by 26 percent compared to the same period last year. This is no surprise given the sector’s challenge to increase housing output at a time when rents have been reduced and grant rates remain low. We have seen a steady increase in RPs using their investment powers to facilitate the development of housing for sale on the open market.
But as RPs’ investment activity increases, so does their exposure to incurring financial losses and impairments. The Regulator will, therefore, be seeking assurance that RP boards understand their level of exposure, how this can be mitigated, and whether it can be accommodated without the need to sell social housing assets.
As a result, investment activity via joint venture vehicles and trading subsidiaries is likely to be an area of particular focus for In Depth Assessments (IDAs). This is not unexpected; the Regulator has been piloting an approach to assessing investment-related exposure in IDAs undertaken over the last couple of years.
Mitigating risk – Key Considerations
Investments by RPs in joint ventures come in a number of different forms and contractual arrangements are not uniform. Assessing the level of exposure and how it can be mitigated will therefore vary, but here are the main issues RP boards and officers should consider:
- What is the level of investment that the RP is required to commit to? What level of control does the RP have over cost exposure? Have the parties agreed on a particular course of action if the investment cap is reached?
- Is there a genuine share of risk and reward under the joint venture documentation that correlates to the level of each party’s input to the joint venture?
- Is there a unilateral right for the RP’s representatives on the relevant joint venture vehicle’s board to “turn the tap off” on development activity or slow it down? Can it be assumed that the parties’ commercial interests are aligned?
- What happens if there is no unilateral right? Is acquiring the joint venture partner’s interest an option that the RP might/can consider (having regard to loan covenants etc.)?
- What are the exit options available to each party and what is the potential impact of each option on the RP’s investment?
- Assuming the terms are attractive to the RP, is the RP in a position to acquire unsold units and convert them to affordable housing or to hold as PRS units?
Being prepared and addressing these issues at the earliest opportunity will put an RP in the strongest position for an IDA.