Housing Treasury – Financing Risk
Plenary three: Regulating social
housing providers
Speakers:
Jonathan Walters
Deputy Director, Strategy and Performance
Homes and Communities Agency
Gareth Hall
Partner, Banking, Governance and Corporate
Devonshires
Successful places
with homes and jobs
A NATIONAL
AGENCY
WORKING
LOCALLY
The Regulator’s
Perspective
Jonathan Walters, Deputy Director
Strategy and Performance
23 October 2013
The SHR’s objectives, duties
and general approach
 The economic regulation objective
 The consumer regulation objective
 Ensuring that social housing assets are not put at risk
 Protecting the public value in the assets
 Helping to ensure that the social housing sector can continue to
attract the necessary finance to build new homes
 Minimise interference
 Proportionate, consistent, transparent and accountable
 Co-regulatory principles underpin the regulatory approach
Diversification in the sector
 Involvement in a greater range of activities
 More complex financing arrangements and organisational structures
 Wider range of business models involved in social housing
 Different business models emerging
 What is the function of a social housing business?
Diversification – the case for
 A rational response to changes in the operating environment
 Cross-subsidisation (ish) of social housing activities
 Facilitates development of new homes
 Contributes to wider economic and social benefits
Diversification – the issues
 Legal ability to undertake an activity
 The full range of implications and legal obligations
 The links between social and non-social activities and within groups
 Cross-subsidisation of non-social housing activities?
 Impact of capital outlays on cash balances
Current regulatory approach to
diversification
 In line with the Regulatory Framework and Regulating the Standards
 Boards sighted on risks and have effective strategic planning and
control frameworks in place
 Understanding the links between social and non-social activities and
within groups
 Understanding the mechanisms for ensuring that social housing assets
are not put at risk
 Using the same sources of assurance that Boards use where possible
What is the regulator looking for?
 Liquidity
 Interest cover
 Gearing
 Security
 Headroom against covenants and stress tested, for example:
– Delay in sales / drop in values
– Increases in interest rates
– Reduction in rental income (e.g. owing to welfare reform)
 Board engagement and quality of advice
 Fit with business plan
Some more challenging issues
 Non-social housing: level of recourse to the social housing assets?
– On balance sheet
– On-lending
– Guarantees
 Technical covenants – e.g. around on-lending
 Complexity and byzantine structures
 Manage future exposures – e.g. index-linked finance; derivatives
 How do the new finance structures play out in an insolvency?
– Capital markets – public bonds / non-UK private placements
– Sale/lease and leaseback
– Unsecured creditors (including retail investors)
Diversification
 Where are we?
– Responses to the discussion document are due to be
published this week
– Series of external stakeholder events in the autumn
– Working towards publication of discussion document early
next year
What was in the discussion
document responses?
 Recognition that there was a problem that needed addressing
 Many providers concerned about ring fencing, although many
lenders were keen on the concept
 General support for resolution and recovery planning, but concerns
over practical implementation
 Jury divided on the disposal of properties to for profit entities
What will be in the consultation
document?
 Revisions to G&V standard
 Disposal of Assets
 Registrations Guidance
 Rents – following direction from DCLG
Protecting the social housing
assets
 The regulator is looking for a 5 pronged approach:
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Understand you assets and liabilities
Understand your contingent liabilities – not just on a legal basis
Understand how they perform through an economic cycle
Understand what combination of factors can derail the business and
what mitigations can be put in place
– Have a plan for protecting the social housing assets in the event of a
business failure
 This will be set out in the revised G&V standard and the associated
code of practice
Issues to be resolved
 The regulator’s thinking is still developing, but issues to be dealt with
include:
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What is the role of boards and executives?
Is there a place for third party assurance?
How does the regulator judge a good plan?
What happens if the regulator has concerns?
 This will be a step change for many providers and there will be
greater scrutiny of the business models of providers
 The fundamental issue remains – how do we protect social housing
assets, whilst funding new development, in a more challenging
operating environment
Regulating Social Housing Providers
Gareth Hall
Partner
Devonshires Solicitors
23 October 2013
What I will be talking about
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What’s it like out there for RPs?
Conclusions from consultation paper
HCA: investment and regulatory roles
Permitted activities: legal constraints
New business, new ways of doing business
Risks and how to manage them
Recovery planning
What’s it like out there for RPs?
• Rising delivery targets, falling grant
• Need to cross subsidise: diversification
• Diversification brings risks – need to accept and
manage them
• RPs need freedom to deliver their development
programmes
• There’s no going back
Conclusions from Consultation Paper
• Full ring fencing not achievable
• Some trade-off risk and reward is inevitable
• “One size doesn’t fit all”
 capacity; capability; size; history; geography;
appetite for risk
• Regulatory focus on outcome: maximise output,
manage risk
• …and robust measures to prevent business failure
HCA: investment and regulation
• Investment arm: more than social housing: objects relate to, in
England (H&RA, s2)
 Improve supply and quality of housing; regeneration and
development of land and infrastructure; creation,
regeneration, development and wellbeing of communities;
sustainable development and good design.
• Initiatives have included Help to buy; Build to Rent; Get Britain
Building; PRSI
• Regulatory focus: protect social housing and associated funding
(section 92K)
RPs’ permitted activities
• Provider of (at least some) social housing: low cost
rent, LCHO (s80, 112)
• Registered (or small) charity or (s115):
• Non profit; purposes are provision or management of
housing, and matters connected with or incidental to
provision of housing
• Complies with regulation: financial, constitution
(governance) and management (s112)
Charity law
• Primary purpose activities: low income (affordability),
elderly, disabled
• On-balance sheet non-primary purpose trade: “no
significant risk”
• Financial investment: market rent; loans/equity for
subsidiaries
• Investment policy: issues similar to HCA’s i.e. identify and
manage types of risk and return
• Mixed motive investment
• Tax/gift aid
Diversification: non-social housing business
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Sale
Market rent
Key worker, student?
Care (stand-alone)
Commercialisation: how you do business
Could be social, non-social or mixed
• Group structures
• Joint ventures and consortia
• Cost share groups
• Buying businesses and companies
• Agency and Franchising
• Leasebacks
• Bond issues? Use of proceeds
Legal risks to core business
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Equity/loan investment
Who contracts for mixed developments
Guarantees, indemnities, step-in
Cross collateral
Comfort letters
Leasebacks: forfeiture risk
Loan covenants: repricing, intra group cross default
Legal protection
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It’s all about risk; so manage it
Identify your limits: mission-creep, support-creep
Play the vires and regulation card
RPs are not banks
Internal processes; training
Recovery planning
• Stress test business plans to ensure they can
withstand most serious challenges
• Can social housing assets be protected?
• Not just the usual sensitivity analysis
• Will the HCA sign them off? Capacity/expertise
• External validation?
• What if things change? Monitoring/review
• Tendency to down play risks? Implications for rating
agencies
Where should the focus be?
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Effective risk management and monitoring
Exit strategy/risk management plan
Vires may prevent bringing activity on balance sheet
Board composition– capacity to understand and
manage risk
• Don’t lose sight of core social housing business
• Value for money