The social housing sector is changing rapidly. Historically providers could rely upon substantial levels of government grant to fund new development, high street banks providing long term debt on low margins and housing benefit being available to underwrite rents in full.

The world is now a very different place. We have seen increasing diversification by registered providers away from being involved solely in traditional social housing to providing private rented and private for sale units as well as student accommodation and other activities. Recent transactions, such as the Genesis/M&G sale and leaseback show the appetite of both providers and investors to look at new ways of developing, holding and financing social housing.

Last month the Homes and Community Agency published a discussion paper focusing on potential changes to the regulatory framework for social housing entitled “Protecting Social Housing Assets in a more diverse sector”. The paper examines a number of proposals to alter the way the social housing sector is regulated so that the statutory framework provides sufficient protection to protect social housing (this is HCA’s main priority) in the current market.

The proposals set out in the paper include:-  

  1. In the same way that the Government is looking at ring fencing in relation to banks’ activities there are proposals that a registered provider should ring fence its normal social housing business from other activities. The HCA recognise that diversification of activities can be a good thing but it also involves risk and can potentially put at risk social housing assets - for example if lenders enforce security against social housing assets, the assets may be lost to the sector; the tenants may adversely suffer in terms of rent increases and sums invested by government in the past will be put at risk. The proposal is that the social housing activity should be undertaken in a discreet corporate entity and that all social housing activities should be funded on a non-recourse basis.
  2. As part of risk planning social housing providers should be actively undertaking recovery planning (i.e. what to do in the event of a major financial failure). The proposal is that the Regulatory Framework should be developed so as to ensure that relevant providers have adequate plans in place this would allow for the decision to be made more quickly in the event of a major financial failure.

The HCA recognises that the Regulatory Framework should not act as a disincentive or break on potential private sector investment (which the HCA wishes to encourage). Historically there has always been a perception that the social housing sector is implicitly guaranteed by the Government and that a social housing provider would not be allowed to fail. There have been a couple of well publicised instances in the past where action has had to be taken and other social housing providers have taken over the assets of existing providers in financial difficulty. Going forward it is by no means clear that the financing and investment sectors will be able to rely on this implicit understanding.

Responses to the discussion paper are required by 4 June. See link here for a copy.