Improving valuations and unlocking sector capacity

Speakers: Richard Petty Lead Director, Affordable Housing, Jones Lang LaSalle Carol Matthews Partner, Social Housing, Wright Hassall Andy Smith Director of Valuation, Housing Division, Savills

Chair: Anthony Hilton Financial Editor, Evening Standard

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How to maximise Value and the S133 Issue

Carol Matthews Partner, Wright Hassall

How to get maximum value from stock?

Need to elevate from an EUV valuation to MV-STT by: • No affordable housing restrictions on title; • No personal planning permissions; • S106 Agreements with acceptable mortgagee exemption

provisions which are that affordable housing provisions should • Not bind a mortgagee, chargee or a receiver and their

successors; • Any obligations to try to sell back to LAs or other RP must be

within a period of three months or less.

Get your ducks in a row

Work with the NHF which is pioneering new initiatives to streamline the charging process; Do a tidy of your rent roll – HCA out to consultation on “living wills” so you have to do it; Allow twice the time you think you need to sort your property lists for in charging exercises – esp Bonds and PPs; Vary your old S106 Agreements to elevate your valuation; Work with the Valuers as a team so you all use the same list; Support the initiative about the S133 restriction if you have LSVT stock!!

The current scenario – the S133 Issue

2 different categories of RPS

• Traditional RPs • LSVT RPs

BUT they do not have a ‘level playing field’ in asset valuation

Why is this?

All RPs have a restriction on disposal under s172 Housing and Regeneration Act 2008 Consent to disposal needed from HCA This falls away from title on disposal including sales by mortgagees in possession

The S133 Restriction

Feature of the LSVT regime; Local Authorities had certainty that stock would be protected as affordable housing. “ RESTRICTION: No disposition by the proprietor of the registered estate or in exercise of the power of sale or leasing in any registered charge (except an exempt disposal as defined by section 81(8) of the Housing Act 1988) is to be registered without the consent of the Secretary of State to that disposition under the provisions of section 133 of that Act”

What is different about an LSVT RP?

All properties transferring by virtue of an LSVT have the additional restriction on the title under s133 of the Housing Act 1988 RPs need consent to disposal under this restriction from the Secretary of State

BUT under s133(2) the restriction does not fall away on sale by mortgagee in possession

What does this mean in valuation terms?

RP stock is valued under the RICS ‘red book’ as either:

Market value subject to tenancy (MV-STT)

stock valued subject to a tenancy but not limited to social housing;

Existing use value (EUV)

assumes properties will be re-let as social housing

Valuers always value stock with an s133 restriction as EUV.

What can be done?

Move afoot to change the impact of s133(2) restriction

• Supported by NHF and CIH • Treasury interested in proposal • Consultation promises to tenants on LSVT will not be affected

Can be done by:

• Legislation • General consent provisions

The on-going debate

May not elevate LSVT stock to MV-STT • Loan agreements may prohibit this valuation

• Funders/valuers may take the view still EUV due to size and

density – could be EUV “basis 2” – 45% of MV

• Local authorities may object

savills.com

Improving valuations and unlocking sector capacity NHF Treasury Management Conference, 30 Euston Square, London

Andy Smith, Director, Valuations – Savills

8th October 2014

UK Housing Tenure – More Market Renting? More intermediate tenures?

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Opportunity?

Source: Savills, CLG, Survey of English Housing

Social housing stagnant

Home ownership in decline

In-betweeners

Market renting expected to increase

Policy flexibility

Opportunity for social landlords and institutions

Quality product

The Housing Association world is changing

HA’s – moving into private renting and build for sale Internal cross subsidy Becoming providers across all tenures JV’s/ investment partnerships Looking at assets (honest) Bogged down in low value areas

Privately Owned HA’s - For Profit RP’s 2013: 25 registered; 10 in pipeline, some substantial Range of innovative forms of Affordable

Change Drivers: Political

Government messages to RPs – build additional homes, and value for money– or merge and let someone else use the asset base

HCA wants a smaller number of larger partners and delivery of the agenda

More Welfare Reform

Additional uncertainty in HA capital and revenue income stream despite CPI plus 1% rent settlement – Univ Credit cap not

helpful so make max use of resources

Housing supply – lessons from the past?

Source: DCLG +Savills

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Supply gap over and above private sector construction – filled with market rent & affordable housing?

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Government plans to deliver 165,000 affordable homes between 2015 and 2018

Affordable Homes Programme - HCA Funding for new homes at 80% market rents. Up to 2015 allocated. £1.7bn 2015 -18 To hopefully fund 165,000 new homes 75% of grant if on site pre March 2015

Affordable Homes Guarantee Programme - HCA Government debt guarantee to bring down the cost of borrowing for new homes. Approximately £220m has so far been allocated out of a £350m fund to be spent by

2017.

But Starts down by 5,650 in 2014 Enthusiasm of HA players? Level of grant? Regulatory burden? Affordable Rents = more risky than Target Rents?

Are we clear about our objectives?

Low and affordable rents

Good quality well managed homes

House maximum number of people

Build more Housing

Community initiatives

Ok - let’s use the profit approach to help us meet our

objectives

Why is the profit motive good for Housing?

Higher surpluses

Greater financial capacity

More money to spend on meeting objectives

Make the right compromises

Use finite resources more effectively

The key is what you do with the profits

EUV-SH or MV-STT How do they differ?

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New House New Flat 1930s House 1970s Flat

VP

MV-STT

EUV-SH

What does that mean in terms of £££s?

EUV-SH MV-STT VP

Asset Value £1m £2m £3m

Loan to Value 1.10 1.25 N/A

Amount Borrowed £909,000 £1,600,000

Existing Use Value for Social Housing Key Factors Affecting Valuation

Assumes sale to another RP only

Social / target / affordable rent levels

Rental growth

Condition – costs to repair / maintain

Discount Rate (All Risks Yield)

Market Value subject to Tenancies Key Factors Affecting Valuation

Assumes Mortgagee in possession

Move from Social/Affordable to Market rent levels

Active Asset Management

Opportunistic sale of voids/break up

Yield required by investor

Does location matter?

YES! In some parts of the Country, MV-STT and EUV-SH will

be the same It’s all in the Rents!

Does location matter?

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£160,000 Average Max Bid by Local Authority

Price movements for VP’s, MVSTTs and EUVSH - illustration

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Uplift above Base EUVSH by type

Tenure % EUV-SH Extra Care 81% General Needs 137% Mixed Lots 130% Housing for Older People 138%

Intermediate Rent 100%

Shared Ownership 81% Sheltered 128% Supported 165% 127%

£15k per unit released for new development

So what does this tell us?

What are we being asked to value? Its all in the lotting! Market Evidence points to latent headroom

in EUV-SH values MV-STT is a higher value – but LTV? Funders Attitudes

Thank you

Andy Smith Director, Valuations Savills, 33 Margaret Street London, W1G 0JD +44 (0) 20 7409 5993 +44 (0) 7967 555 480

Improving valuations and unlocking sector capacity

Speakers: Richard Petty Lead Director, Affordable Housing, Jones Lang LaSalle Carol Matthews Partner, Social Housing, Wright Hassall Andy Smith Director of Valuation, Housing Division, Savills

Chair: Anthony Hilton Financial Editor, Evening Standard