Following one of the sector’s most eventful years, registered providers (RPs) continue to face many hurdles.
As well as political and economic uncertainty, there are commercial and regulatory risks which could have an impact on how RPs operate and their future success. Here we outline 10 of the biggest challenges and how RPs can mitigate them.
Following Jeremy Corbyn’s big announcement at the Labour Conference last year, rent controls could be a fallout from a change of government.
Although we don’t know yet what form of rent controls he has in mind, landlords may face a regime not seen in decades. While rent control may not affect their core stock, PRS models may be shattered and need reworking.
RP’s need to be prepared to switch tenures and meet changing demands – ranging from social to full market rent. Viability models will also need to allow for more risk.
Changing community and local rights
If other local authorities follow the stance taken by the Mayor of London, including introducing leasehold ballots for schemes involving demolition, then significant regeneration schemes will be far more difficult for RPs to implement.
When appraising regeneration projects, RPs will need to take into account the risk of failing to achieve resident buy-in. RP’boards should also consider incorporating the cost of replacing homes with units of the same standard and size as those currently occupied by residents entitled to vote.
RPs may need to review how they consult with residents and work more closely with local communities so that they are more involved in the planning process.
The lack of labour in the construction industry will, inevitably, lead to a constriction in the supply of new homes. This could affect RPs in a number of ways, including reduced values from more cautious valuers concerned about delivery.
RPs must ensure tight delivery obligations in building agreements, perhaps with an incentive for delivery on time. However, legal agreements alone are not a complete fix, so RPs will have to assume the risk of delay in business plans. Additionally, they must consider whether off-site construction is an option.
Changing attitudes towards S106 agreements
The Mayor of London’s “take it or leave it” attitude towards S106 agreements means that RPs face the risk of poorly drafted provisions. These could include shoddy mortgagee exclusion provisions which may only allow charging at EUV-SH (“existing use value social housing” which would produce a lower property value than, say, a valuation based on “market value subject to tenancy”) or other terms which may inhibit a lender’s ability to take a charge over a property.
RPs must not leave security reviews of S106 agreements to the last minute. Allow lawyers time to review, negotiate and fix S106 agreements with the Mayor. RPs should also use their sector clout to debate with politicians and planners to work out how to benefit everyone’s interests.
The leasehold market abuse regime
If there is a clamp down on the sale of leasehold houses (as opposed to flats), then RPs’ revenue from the sale of these houses may be reduced, even though shared ownership units may not be affected.
RPs should look at the impact of removing the capital receipt assumption in their business plans. Alternatively, consider selling freeholds of houses with a rent charge to cover service charges as opposed to selling leasehold houses.
RPs involved in more complex arrangements, perhaps through joint ventures, should check whether they are required to refund buyers. If so, they must allow for this liability before reconciling payments due to JV partners and ending JV arrangements.
Overall, pension scheme deficits are increasing rather than decreasing, despite the significant amounts that are being paid in by way of contributions. Pension deficits have been on the Sector Risk Profile for several years now and the solutions to dealing with the issue are starting to get bolder.
RPs should be looking at whether it is appropriate to continue to provide generous final salary pension benefits, but need to be aware of the significant financial liability that could arise as a result of a decision to close down existing schemes. There are options to manage this, from bulk transfers of liability into new schemes to legal agreements that keep a liability floating whilst ongoing contributions are still made. The latter has been an option with certain LGPS Funds for a few years but will now also be an option within SHPS and Growth Plan.
Third party risk
Post Carillion, there may be a greater insistence for RPs to share risk in joint ventures. Conversely, the RP may face a greater risk of its own counterparty or JV partner becoming insolvent.
RPs must look more closely at the financial strength of counter parties, particularly those with off shore holding structures. As a result, boards may insist that the senior management team only accept tenders from counterparties with high credit scores. With a smaller “pond” of tenderers “to fish in”, RP’s may find that tender prices rise.
The Grenfell effect
New or revised Building Regulations may increase the cost of development and currently RPs face uncertainty as to precisely what standards must be achieved.
Prior to any revisions and subject to further guidance issued by the Ministry of housing, Communities and Local Government, RPs should select cladding systems which have been tested to BR135. They must also ensure that all board decisions and professional advice relating to the selection of the cladding system are carefully recorded.
The new regulatory framework
Although RPs were relieved when deregulation removed multiple statutory hurdles, the blank regulatory pages may be refilled with new rules emanating from the regulator for social housing’s review of the Regulatory Framework. These will inevitably increase costs for RPs.
If the Government gives responsibility for stock condition (especially H&S) to the regulator for social housing, they could introduce new regulatory standards which if breached could impact loan covenant compliance. These would however, be subject to consultation. RPs should, therefore, be ready to lobby as soon as they get wind of the new regime.
Should RP’s continue to be owners and operators or simply operators?
Many publicly traded property owners have “monetised” their property assets by selling them (often as a result of the efforts of activist shareholders) and become managers. Should RP’s also follow this precedent and use the money generated by the disposals to plough into this business, while avoiding the risks associated with owning property?