Thieving magpies

The National Housing Federation recently reported that the Housing Corporation will seek to share the uplift in the value of properties of registered social landlords in addition to controlling the recycled grant fund. This decision amounts to a significant attack on the independence of RSLs and is unlikely to contribute to the capacity of RSLs or any other agencies to increase the supply of social/affordable housing.

The increase in value of RSL housing stock is driven by two distinct but connected factors. First, general house price inflation and, second, a change in attitude to valuation methods by an increasing number of RSL funders.

Traditionally RSL funders have valued RSL stock on the basis of existing use value social housing (EUVSH). This has been on the basis that it is expected that there will be restrictions in place through the planning system or by means of Section 106 agreements limiting the use of the housing stock to social/affordable housing only.

For a number of years RSLs have been successfully resisting the imposition of such restrictions and/or seeking mortgagee protection clauses, the effect of which is that any such restriction does not bind a mortgagee who takes possession of a property. This enables funders to value property on the basis of open market value subject to tenancy (OMVST). A property valued on this basis may be as much as 30% more valuable than one valued on the basis of EUVSH.

The enhancement in valuation means increased sums can be borrowed. RSLs are not- for-profit distribution organisations and usually charities. Such money has naturally been combined with other borrowings and sums to provide increased investment in social housing, regeneration projects and other (usually income-producing) assets. These can then form the basis of security for further borrowing and further investment, forming a virtuous circle of investment and regeneration.

The success of this virtuous circle depends on the skills of the RSL in negotiating and effecting developments (having account of the local circumstances and conditions) and its ability to understand and meet the needs and aspirations of the local community. Inevitably some RSLs will be better at this than others.

The Housing Corporation proposals strike at the basis of this virtuous circle. RSLs will have to pay some or all of their increased value to the corporation. In effect, they will be forced to refinance to funders and take out increased borrowings, not to invest but to pay what can only be described as a form of taxation.

‘RSLs will be forced to refinance to funders and borrow more, not to invest but to pay a form of taxation’

It has not been made clear what the corporation thinks justifies this position. However, one presumes the justification runs along the lines of “the stock was developed at least in part with the assistance of housing association or social housing grant so it’s right we should participate in the increase in value which at least in part it has made possible”.

Also, (although again not stated by the corporation) funds could then be redistributed in the form of further grant. A few moments thought reveals how fundamentally unattractive this argument is.

Currently, those RSLs that can work the virtuous circle will be more successful and can also expect to be considered attractive merger partners, which would enable them to repeat their success on a bigger scale. Under the corporation’s proposals this could not happen. Successful RSLs will be effectively financially penalised, which will inhibit their ability to meet local needs.

The argument about further grant distribution from the corporation is also flawed. To qualify for grant, RSLs will have to meet further (centrally set) targets and standards, which may be inappropriate for individual areas and will almost certainly foster a culture of compliance rather than innovation. Neither risk-taking nor success will be rewarded only complicity and mediocrity.

In addition to the practical consequences of the proposal, one has to look at the larger effect on RSLs. The proposal amounts to an attack on the independence of RSLs. It is a two-pronged attack on both the assets of the RSLs and their independence of action. If the only way to develop is through centrally administrated grant, the RSL will have to meet the centrally imposed condition of co-operation, with its independence strictly contained. This loss of independence will make it even more difficult to recruit motivated and skilled executives and staff, not to mention board members.

The corporation proposal is more significant than it originally looks. It will lead to the greater imposition of centrally controlled targets and loss of innovation and incentive. To understand the consequences of this form of centralism, one only has to look at the NHS.

Andrew Hurst is a partner at Schofield Sweeney Solicitors, specialising in project finance and housing association funding