SOCIAL HOUSING FINANCE NEWSLETTER

MARCH 2020

Introduction

by Charlotte D'Avola

Welcome to our social housing finance newsletter.

Rishi Sunak will announce his first Budget tomorrow. The Government faces a number of challenges as it tries to balance the books carrying out its significant infrastructure projects and levelling out investment in the north, while dealing with the inevitable impact of Brexit and, more recently, the significant effects of the coronavirus (Covid-19).

The Government announced on 20 February that it will continue with the Help to Buy (HTB) Scheme from 2021 to 2023. This means help will remain in place for first time buyers for properties up to a market value and up to a regional price cap. Housing associations who wish to continue to use the HTB scheme, must commit to measures to improve consumer quality and experience. These include:

ground rent on leasehold sales must be limited to a peppercorn
minimum energy efficient requirements must be complied with.

In addition, enhanced fire safety standards will be published and housing associations will need to sign up to the new Building Safety Charter when it is launched.

There has been significant criticism of HTB, and the sector has asserted that it has had an adverse impact on shared ownership. The National Audit Office has questioned whether it has delivered value for money. In the longer term, the sector expects the HTB financial assistance to be replaced with greater investment in shared ownership.

It will be a significant year for the housing sector. Social Housing magazine has published research showing a third of housing providers are looking overseas for funding. In addition, the Bank of England and the Financial Conduct Authority have stepped up pressure on the financial sector to implement the transition from LIBOR to risk free rates.

Our first article is written by Stephen Goldstraw a partner in our corporate tax team. Stephen gives his predictions on what is likely to be contained in the Budget.

Our second article is written by Michael Brown, a partner who specialises in financial services. Michael sets out what housing associations need to do now to prepare for this change, and how to approach negotiations.

I hope you enjoy these articles, and do not hesitate to get in touch.

Contact Charlotte D'Avola

The budget and social housing

by Stephen Goldstraw

We cannot be sure that the 2020 Budget will improve the position of the social housing sector, but that does not mean we cannot speculate!

One thing we know is that the Queen’s Speech contained an undertaking that the Government will take steps to support home ownership, which included a promise to make homes available at a discount for local first-time buyers. The details of this proposal are not known and it seems fraught with difficulty, but hopefully the Budget will give some clarity. It will be easier to introduce such rules for housing association properties than it will to apply it to private sales, so maybe that is where the initiative will start. It may be relatively easy to define and monitor whether someone is a first time buyer – there is already a definition of this for stamp duty land tax purposes. But to define and monitor whether someone is “local” may prove trickier, and somewhat political.

The UK has left the EU and this means that, unless it has to negotiate this freedom away in any deal with the EU, the Government can alter the VAT rules as it sees fit. The social housing sector could benefit from this. At present the letting of social housing by housing associations is a VAT exempt activity, which means that housing associations cannot recover any VAT incurred in connection with this business. Freed of the constraints of EU law, might the Government consider zero-rating it? This would simplify many construction projects, which have to be designed carefully to avoid irrecoverable VAT arising on the purchase and construction of the properties. And it would mean that the ongoing activity of letting the properties could be carried out without a VAT cost. Any such change would probably not be implemented in the transition period (currently up to 31 December 2020), but it could be announced in the Budget for implementation after the transition period. We can at least dream!

Contact Stephen Goldstraw

Act now on LIBOR

by Michael Brown

Since the National Housing Foundation's update in December, the Bank of England and FCA have stepped up pressure on the financial sector to implement the transition from LIBOR to risk free rates (RFRs) long before the end of 2021 when LIBOR will generally stop being available. The NHF is actively looking after the sector’s interests as a whole and has encouraged housing associations (HAs) individually to consider the impact of LIBOR’s replacement upon them.

Existing agreements do not cater for the permanent end of LIBOR. New terms will have to be agreed providing an opportunity for HAs to engage with lenders to achieve the best outcome for them. The Update mentions two steps that need to be agreed before HAs can move to a SONIA rate that reflects three-month LIBOR in existing contracts: (i) whether a term rate or a compounded in arrears rate should be applied and (ii) what a credit adjustment spread should be based on. These points arise because:

sterling LIBOR is a forward-looking term rate. SONIA, is a backward looking overnight rate. LIBORs in other currencies will also be replaced with RFRs. For 90% by value of the sterling LIBOR loan market, SONIA compounded in arrears is likely to be appropriate with alternative rates (e.g. a term SONIA) appropriate only for the remaining 10%. However, HAs and financial institutions may have differing views on the most appropriate form of replacement rate.
LIBOR produces a higher figure than SONIA because LIBOR includes the risk of institutional failure that is not present in SONIA; to compensate for this disparity an appropriate margin will have to be negotiated for adding to SONIA.

With these points in mind, HAs should prepare for negotiations by:

reviewing their financial agreements to determine which reference LIBOR and the economic impact LIBOR has on those agreements;
assessing the net impact of LIBOR where multiple agreements are linked - e.g. a swap hedging a loan’s interest rate risk;
assessing whether the HA is a net LIBOR payer under linked agreements;
assessing whether the swap remains an effective hedge after a switch to SONIA under a linked loan agreement;
checking how financial covenants are affected by changes in the interest rate to avoid a breach;
assessing whether a backward looking overnight rate like SONIA is appropriate for the HA’s financing needs;
checking the potential impact on accounting practices (e.g. hedge accounting) to ensure they remain valid.

Only when the impact of LIBOR’s demise is fully understood can HAs properly negotiate a replacement rate.

Contact Michael Brown

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