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EWS1 and how housing providers can maximise loan security
The cladding crisis means that some social landlords are having trouble using their buildings as security for loans. Catherine Wilson and Andy Smith consider what can be done
What do we need to do to ensure our properties can be used as loan security? This is a key question that valuers have faced from housing providers in recent years, as the sector has grappled with the introduction of new rules relating to building safety in the wake of the Grenfell Tower tragedy.
EWS1 forms have been a central part of this process since their introduction by the Royal Institution of Chartered Surveyors (RICS) in 2019. The forms were intended to clarify which buildings required assessment for potential remedial works, based on the presence of combustible cladding or other flammable external materials such as wooden balconies. This is particularly important for any transactions taking place in a block of flats, such as individual property sales or use as loan security, in order to provide certainty to lenders.
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Current EWS1 form picture
Unfortunately, the use of EWS1 forms has faced significant challenges. This has principally been due to inconsistencies among lenders and valuers on when an EWS1 form is required, causing delays that have been compounded by a shortage of qualified EWS1 assessors.
“It is increasingly becoming the case that buildings cannot be used as loan security due to a lack of required information – this is particularly the case for buildings above six storeys”
As a result, many personal mortgage transactions have stalled and housing providers have been frustrated when blocks requiring an EWS1 form have been unable to be included as loan security. RICS introduced updated EWS1 form guidance in April that was intended to help address these concerns. So what is the current picture for housing providers on loan security?
The updated RICS guidance set out three building categories:
- Category One: buildings of more than six storeys; EWS1 form needed if any cladding present, or vertically stacked, combustible balconies
- Category Two: buildings of five or six storeys; EWS1 form needed if 25% or more of the building is clad, or any aluminium composite material (ACM), metal composite material (MCM) or high pressure laminate (HPL) cladding; or vertically stacked, combustible balconies
- Category Three: buildings of four storeys or fewer; EWS1 form required if any ACM, MCM or HPL cladding
Challenges remain
While the collaborative approach taken by RICS to try to improve the process is welcome, the fact is that challenges remain. This is mainly due to the continued shortage of qualified EWS1 assessors. Although more people are being trained, there is a large backlog to work through.
Alongside this, lenders continue to be very prescriptive on the information that they need to be able to accept a building as loan security. In our experience in the affordable housing valuation team at Savills, it is increasingly becoming the case that buildings cannot be used as loan security due to a lack of required information – this is particularly the case for buildings above six storeys.
Usually lenders will only accept buildings as loan security once works have been completed – this can take years in many instances, due to the current scale of demand and also the time needed to work through the details of who is liable to cover the costs.
Suggested improvements
What steps can be taken to improve things?
First, housing providers should focus on improving the quality of information in their asset registers. Quite rightly the emphasis in the past four years has been on higher-rise buildings of six storeys and above, but lower-rise properties need to have rigorous information available as well. The lack of information for lower-rise buildings – especially those acquired through Section 106 transactions – is affecting recharging situations in particular.
“Although at present lenders are not accepting buildings as loan security until any remedial works have been completed, Savills has suggested an alternative approach”
Second, Savills is offering support from its building surveyors where possible to help borrowers to give robust cost estimates for required remedial works. However, there are limitations on what we can do within the scope of valuation instructions – intrusive inspections, for instance, are not possible.
Third, although at present lenders are not accepting buildings as loan security until any remedial works have been completed, Savills has suggested an alternative approach. Once the costs of required works are known, a building could be ascribed a value on a provisional basis. This would be reporting what the value of a building would be once the required works were completed. It is unclear whether lenders would accept this approach, but we are continuing discussions.
In the meantime, housing providers should continue to approach us with any questions regarding loan security portfolios. It is important that available loan security is maximised to ensure housing providers have as much flexibility as possible in delivering their business plan aims.
Catherine Wilson and Andy Smith, directors, Savills
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