It is no secret that social landlords are operating in a challenging economic climate. The increased costs associated with development, building safety, disrepair and retrofit have coincided with a cap on their main source of income – rents – and considerable volatility in the financial markets.
It is in this context that many social landlords are considering selling tenanted stock to another landlord, known as ‘stock rationalisation’, as a way of raising additional funds and/or concentrating their resources more efficiently by focusing services on more specific geographical areas.
Although stock rationalisation is not new, the market has seen a new entrant in recent years: the for-profit registered provider.
“Some charitable landlords remain cautious about the implications of selling tenanted stock to an organisation which… is not required to reinvest all of its profits (or surplus) to benefit social housing tenants”
In today’s challenging market, it is often these organisations that have the capital and commercial appetite to take on new social housing stock, often with management responsibility being contracted back to the selling landlord or another entity.
Although partnerships between charitable and for-profits are generally becoming more common across the sector, some charitable landlords remain cautious about the implications of selling tenanted stock to an organisation which, although is a registered provider and therefore required to comply with the regulatory standards, is not required to reinvest all of its profits (or surplus) to benefit social housing tenants.
Many charitable housing associations may therefore be uncertain about whether additional considerations should be worked through in advance of the sale, to account for a potential buyer’s for-profit status.
Based on our experience, here are our five top tips for non-profit housing associations:
1. Objects
The fundamental question for the board of the selling landlord is always whether the proposed disposal is consistent with the organisation’s charitable objects. This analysis should be transparent and objective.
It should consider the potential benefits and risks of selling to the identified for-profit (as distinct from any other potential buyer) for the specific price and take account of the interests of current and future tenants to enable the board to confidently conclude whether, in the round, this sale is the best way for the landlord to achieve its objects compared with alternatives.
2. Regulatory obligations
It is not sufficient for the selling landlord to rely solely on the fact that the for-profit is also a registered provider for assurance that tenants will be properly protected post-transfer.
To discharge its regulatory obligations, including duties to be accountable to tenants and to protect social housing assets, the selling registered provider should consider carrying out sufficiently robust due diligence on, and assessment of, the for-profit and any property manager they intend to employ post-transfer to manage the stock.
3. Enhanced due diligence
The selling landlord may wish to undertake enhanced due diligence on the for-profit landlord to give themselves greater assurance that any risks associated with the disposal to this entity are proportionate and manageable.
This might include a review of:
- The buyer’s financial profile – to assess the buyer’s ability to continue as a going concern and maintain stock to a high standard.
- The buyer’s constitutional and regulatory status – to assess the buyer’s objectives, constitutional arrangements and commitment to the ongoing delivery of social housing. Note: the vast majority of for-profits currently own fewer than 1,000 homes, so do not have a published regulatory grading.
- Any other relevant matters that will help assess whether the sale will, in fact, have a beneficial impact on the delivery of social housing for the selling landlord’s tenants. The focus must be on more than just financial receipts and might include investigating the nature of the proposed management of the stock, the buyer’s track record of service delivery and its long-term strategy for social housing provision.
4. Advice
From a regulatory perspective, it is strongly advisable for the seller to obtain specific legal advice regarding the charitable and regulatory considerations arising from the proposed disposal to a for-profit landlord.
The seller may also consider engaging a consultant to assist with the enhanced due diligence as an additional independent layer of scrutiny.
5. Board oversight
it is essential that the board of the selling landlord has proper oversight of the transaction so it can assure itself that the disposal to a for-profit meets legal and regulatory requirements. This includes ensuring appropriate delegations and governance approvals are in place at every stage.
In today’s economic climate, many housing associations are keen to pursue stock rationalisation programmes as part of their wider business strategies. For-profit providers can present as valuable buyers as long as housing associations ensure they are mindful of their charitable and regulatory obligations.
This article originally appeared in Inside Housing.