Is it time to rightsize your social housing portfolio?

The idea that social homes are being sold to private buyers on the open market can sometimes attract criticism, but many registered providers take an ethical approach to disposals by ensuring that a high proportion of these properties end up in the hands of first-time buyers, rather than buy-to-let landlords or second home owners, often in areas of the country where they are needed most.

RPs might consider selling a portfolio of tenanted stock for similar reasons, but the main reason tends to be because it’s in a non-core area and they want to refine their geographical focus. The money raised can then be reinvested in new development or vital repair and refurbishment programmes.

What is or is not a sufficient number of homes to achieve a viable service varies depending on the organisation. Illustrating the current focus on rightsizing portfolios, L&Q has confirmed in media reports that it is taking a “strategic approach to rationalising stock”, considering homes for transfer or sale where they are located outside of the company’s core areas of Greater London and Greater Manchester, or if they are uneconomic to maintain. 

“RPs might consider selling a portfolio of tenanted stock for similar reasons, but the main reason tends to be because it’s in a non-core area and they want to refine their geographical focus”

We are seeing growing activity in this part of the market as RPs review their asset portfolios and explore opportunities to increase liquidity. A recent report by Savills has confirmed that more social homes are being bought and sold across a variety of tenures, and deals are getting bigger due to the involvement of for-profit RPs, alongside non-profit RPs and local authorities.

In addition to the “push” factors that are encouraging RPs to sell, every sale has a buyer, of course, and just as important are the “pull” factors encouraging them to buy tenanted stock. These are partly the converse of the “pushes”.

For many RPs the appeal of a portfolio of tenanted stock may be linked to its location if they are looking to extend into a new area, increase their footprint in an existing area or (if the stock is relatively new) minimise development risk.

Another significant factor is the arrival of the for-profits. As new entrants to the market, the for-profits have been conspicuous in the purchase of recently constructed tenanted stock as they seek seed portfolios and rapid growth to establish themselves.

According to a recent report by the Ministry of Housing, Communities and Local Government, in 2023-24, about 4,500 social homes were sold by registered providers for continued social housing, and almost 7,000 were sold to tenants on the open market. Activity is further bolstered by the business model of some for-profits, which anticipates that they sell on tenanted properties to another registered provider within a certain timeframe.

“In 2023-24, about 4,500 social homes were sold by registered providers for continued social housing, and almost 7,000 were sold to tenants on the open market”

With more for-profit RPs entering the market, the increased competition they bring is encouraging more stock rationalisation programmes. To date, for-profit RPs have tended to focus on new stock, as their investors often want credibly “green” assets.

However, market forces and legislative changes impacting demand for temporary accommodation may encourage more for-profit RPs to consider buying older stock in need of refurbishment, particularly if they have strong links with a building company.

These are the reasons why rightsizing is happening, but before deciding to rationalise stock, RPs need to consider a range of factors. They should consider whether the assets in question are in their core area (where they are looking to increase their footprint), whether they are generating a surplus, how much investment they will require to meet regulatory and other standards, the extent of local demand and whether they have good relationships with local stakeholders, such as the local authority.

Based on this holistic assessment, it should be possible to identify assets that could be marketed for sale.

Before proceeding, RPs should seek legal advice about their obligations. For example, social landlords are obliged to consult with tenants when their plans are at a formative stage. This is a requirement of the Transparency, Influence and Accountability Standard, published by the government in 2024.

Consultation normally takes place in two stages – an informal consultation to share the organisation’s intention to sell and to find out what tenants might be looking for in a new provider, followed by a formal consultation to share details about a proposed purchaser and what might happen next.

For an RP looking to sell, a careful and considered approach to due diligence is required from the outset. A root and branch review should be carried out to identify any issues that could arise during negotiations and block a potential deal.

It is important to demonstrate that the properties have been well-managed. For example, if Section 106 agreements apply, interested buyers will expect to see all relevant information and evidence that planning consents are in place.

In addition, if there are any secure tenants, there will be restrictions about the type of organisation they can be sold to. The seller should also investigate whether any third-party consents might be required. 

In an increasingly buoyant and divergent market, where tenanted portfolios and void properties are changing hands more frequently, RPs need to take a strategic, long-term view. Supported by a trusted legal team, they can weigh up the pros and cons of divesting assets to boost liquidity or investing to increase their longevity, and take steps to rightsize their portfolio accordingly.

Jonathan Cox and Digby Morgan, property partners, Anthony Collins