Upload
zocha
View
32
Download
1
Tags:
Embed Size (px)
DESCRIPTION
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. The Regulator’s Perspective. - PowerPoint PPT Presentation
Citation preview
Housing Treasury – Financing Risk
Plenary three: Regulating social housing providers
Speakers: Jonathan WaltersDeputy Director, Strategy and Performance
Homes and Communities Agency
Gareth HallPartner, Banking, Governance and Corporate
Devonshires
Successful places with homes and jobs
A NATIONAL AGENCYWORKING 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:
– 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:
– 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 HallPartner
Devonshires Solicitors23 October 2013
What I will be talking about
• 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
• 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
• 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
• 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?
• 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