On the money

The Housing Corporation has issued its latest guidance on diversified activities: Regulating a Diversified Sector.

It follows consultation and recognises the need to raise finance for diversified activities.

It also specifies circumstances in which accumulated surpluses generated from social housing activities can be used to support these non-core activities. It even allows social housing assets to be used as secured borrowings to fund other work.

But the guidance includes an overarching emphasis on a risk-based approach, which is to be welcomed.

Where risk to social housing assets is not minimised or there is no “clear and robust business case”, entering into any activity – particularly a diverse one – will count as a breach of the regulatory code.

Registered social landlords must therefore apply a hierarchy when deciding how to fund diverse activities.

Funding can be raised first by granting security over non-social housing assets, then by using available surpluses. Only after exploring those two routes can an RSL decide to use social housing assets to secure loans.

Also, these assets may only be used if a number of criteria are met, including:

• that the RSL has the necessary capacity and skills
• that the proposition is designed to support the RSL’s social housing objectives. The corporation expressly states that simply making a profit to be used elsewhere for social housing is not enough of a justification
• that there is a robust business case
• that the RSL minimises the risk to social housing activities.

The use of social housing as security on borrowing
is unlikely to happen with these conditions attached

But this last point may be where the guidance falls down. Further advice is given on minimising that risk, but there has to be concern that the guidance may prove difficult to adhere to, largely because it’s unlikely to be commercially acceptable to the lenders.

Pointers for minimising risk to social housing include:

• where “all monies” charges are given, getting the lenders to agree not to enforce security over social housing assets
• using separate pots of security – so that social housing assets only secure social housing loans, and non-social housing loans only non-social housing assets
• getting lenders to agree to non-recourse loans to fund non-social housing – to avoid lenders having unsecured creditor rights over social housing assets if their non-social housing security proves insufficient.

Boiled down, that means RSLs may use social housing assets as security only if they ask lenders not to enforce that security – or, at least, not to enforce that security until they have enforced all other security – and to give up their unsecured creditor’s rights.

At best, to put it simply, these conditions will result in a significant increase in loan pricing. Yet they are unlikely to be commercially acceptable to lenders at all.

The corporation may intend to allow the use of social housing as security for borrowing in this way, but it’s unlikely to happen with these conditions attached.

It could be possible to argue that RSLs can comply with the requirements simply by asking their funders to consider these restrictions and go ahead with a deal even if they refuse it. But lip-service isn’t really enough.

Commercially acceptable guidance would be better. Alternatively, perhaps lenders could be persuaded to agree not to let social housing assets pass outside the RSL sector.