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Lucy Grimwood on the use of Development Finance in Social Housing

Modern UK apartment building red and white

For-profit RPs remain a key growth area in the affordable housing sector and present a real opportunity to increase the delivery of new social housing, and our role in both a recent transaction and advising Major Housing Association more generally shows Winckworth Sherwood’s leading position in this area.

Development finance is widely used in the real estate sector, but has traditionally been less prevalent in social housing.

As security is typically granted on the property being developed, rather than the borrower’s existing stock, funders tend to allocate it a different risk profile to traditional term loans. This would be priced in, and funders will likely expect more robust scrutiny of the development – for example key milestone targets, monitoring surveyors (which a borrower would pay for) and security over key development assets.

Where funders are used to providing finance for developments by private developers, early discussions may also be beneficial to ensure an understanding of the regulatory environment in which RPs operate and how a lender’s standard form finance documents may need to be tailored accordingly.

On the borrower side, any development obviously has inherent risks to the developing entity, as does any new funding arrangement.

This is particularly true for RPs, where a failed development or debt default could put regulatory compliance and ultimately social housing at risk, and whose boards might typically be more used to term debt which may not have the additional layer of scrutiny and associated risks of development finance.

Boards must therefore have a robust, inquiring and thorough understanding not only of the development and its viability, but also the funding covenants and obligations being entered into.

Taking appropriate specialist advice and putting governance structures in place to monitor key requirements and milestones would be really important before entering into development finance. A clear exit strategy is also vital – this should be assisted by a value uplift on completion.

Despite these factors to look out for, development finance can provide a good option to borrowers seeking funding to help develop new properties without securing an existing asset base.

It also offers a good opportunity for funders attracted by the stability and natural ESG [environmental, social and governance] synergies of this regulated sector.

Funding terms can be tailored to the specific needs of that project and that borrower, all of which can provide additional flexibility.

Borrowers with investment partner status could also use grants, if available, to part-fund the development, reducing debt levels required and resulting in more quality new build affordable housing.

For RPs facing the very real conundrum of funding both ever-increasing investment in existing stock and developing new homes, then development finance – with any associated risks appropriately managed – can be a sensible solution.

Lucy Grimwood’s above comments first appeared in Social Housing (£)

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