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With the government expected to announce its spending review this autumn, there is no doubt that the development of new affordable housing projects will be badly hit.

Considering this, and the continuing high demand for affordable housing, how can registered housing providers deliver new affordable housing without exposing themselves to unacceptable levels of risk?

Whilst the outlook may initially appear bleak, there are a number of ways in which registered housing providers can restructure their business so that they are less reliant on public money and can continue to develop new projects themselves.

Debt finance by way of bond issue

Recently, bond issues by registered housing providers have highlighted the ability of the sector to attract alternative finance sources, even in circumstances where credit is otherwise difficult to obtain. A bond issue may reduce the re-pricing risk, leading to more stability in volatile times, as well as being an effective way of introducing outside investors to the sector without destabilising the core business.

Alternative investors

Investors, such as pension funds, may find registered housing providers an attractive investment opportunity. Whilst not providing a high return, investing in a long term property business would provide a stable return as part of a balanced portfolio.

Restructure

A review of the current group arrangement may lead to a restructure, which diversifies the activity of the group. A non-charitable subsidiary selling or renting on the private market can generate profit to cross-subsidise affordable housing in a charitable registered provider. The legalities of this for each provider will require a review, but it does open up possibilities to generate other sources of cash and the possibility of shareholder investment in non-charitable subsidiaries.

Joint venture arrangement

Finally, a joint venture arrangement with a private developer may also be considered. The question is whether a registered housing provider has a strategic relationship or stand-alone relationship with developers for particular projects. These arrangements can be structured in a number of different ways, such as the developer obtaining an equity stake in the development vehicle or, for example, simply having a right to receive a profit share or other fixed return under the development agreement itself.

The risk and reward for each party needs to be considered carefully. The private developer will need to generate a sufficient return, whilst the registered provider will need to manage risk, both in terms of the corporate structure and the arrangements in place with the developer.

Although not entirely without risk it seems that joint ventures can offer a viable development option, without the registered housing provider being required to raise capital or expose itself beyond an acceptable level.

Whilst the funding climate is undoubtedly more challenging, forewarned is forearmed and the recent government announcements of cuts to Home and Communities Agency funding are perhaps a call to housing associations to begin considering alternatives to the traditional models of funding development. Whilst some of these alternatives are more complex and may involve seeking advice, it is surely much better to start thinking about the options now, so that when the time comes measures can be put in place to secure the continued delivery of much needed social housing.

For more information please contact Pete Naylor on 0117 917 7793. Pete is an associate in the corporate team in TLT’s commercial services group. www.TLTsolicitors.com

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