The future shape of housing ‘rescues’
As social housing providers become increasingly large and complex, there needs to be a different approach to failure, writes Sarah Greenhalgh, partner at Bevan Brittan
Sarah Greenhalgh is a partner at Bevan Brittan LLP
As social housing providers become increasingly large and complex, there needs to be a different approach to failure, writes Sarah Greenhalgh, partner at Bevan Brittan #UKhousingFrom the failure of Ujima Housing Association in 2007 to the near collapse of Cosmopolitan Housing Group in 2012, and more recently the rescue of Swan Housing Group in 2023, the sector has seen some high-profile rescues over the years.
In each of these cases, the rescue was undertaken by a larger, financially robust, registered provider group. A safe harbour that could absorb the financial shock and inherent risks associated with an organisation on the brink.
However, it has long been recognised that there is finite capacity for such rescues. The shape of the sector has changed dramatically over the last decade. Ujima owned 5,000 homes. Swan owned 11,000. Landlords are generally larger and more complex businesses compared to what they once were, and resources are stretched more than ever.
This raises a vital question: who will rescue an organisation that is too big or complex to fail?
The Housing Administration Regime was introduced as a partial answer to this question. Under this regime, the housing administrator has two objectives. The first is to rescue the organisation, achieving a better outcome for creditors or (as a last resort) selling the assets. The second (which ranks behind the first in priority) is to keep social housing in the regulated sector.
Essentially this process is designed to enable a housing administrator to package up properties in a way that maximises value, whilst aiming to ensure the sector does not lose properties. However, the regime is a last resort. It would have a damaging effect on the reputation of the sector and its creditworthiness, so it is in everyone’s best interests to avoid.
“The Housing Administration Regime is a last resort. It would have a damaging effect on the reputation of the sector and its creditworthiness, so it is in everyone’s best interests to avoid”
So, are we seeing a new style of rescue? The Regulator of Social Housing (RSH) has publicly acknowledged that it has a list of ‘emergency numbers’ to call if an organisation is in financial distress. At a recent conference, the regulator talked about an increasing number of landlords who expressed interest in being added to that list, and many were regional landlords in search of opportunities for growth.
This aligns with data around where the sector’s financial capacity sits. There is evidence that EBITDA MRI interest cover (a key indicator for liquidity and investment capacity, measuring the level of surplus that a registered provider generates compared to interest payable) is stronger in medium and smaller landlords, particularly outside London.
All of this suggests we could see a new style of rescue, a more traditional group structure between organisations of a similar size, with managed consolidation over time. Alternatively, it could involve the break-up of a much larger organisation, with multiple landlords stepping in to take ownership of the homes within their region or neighbouring regions.
What does this mean practically? Boards should be discussing both scenarios – would we want to rescue another organisation, and what happens if we need to be rescued? The nature of these conversations will be different for each organisation, but there are some key themes everyone should consider.
In relation to the first question, consider what the objective is – is this about regional growth and if so, is it about increasing density or widening out the operating area? How much capacity is there? What are the financial redlines? Are there any other redlines, for example models of delivery? What would the governance be around decision-making, if we were approached?
When considering a plan for when they might need to be rescued, organisations should already have triggers in place to identify when to seek a merger partner. This ensures a managed approach, with appropriate engagement with residents and other stakeholders, rather than one under intense time pressure. The regulatory standards require organisations to have an asset and liabilities register and up-to-date stock condition and tenant data, all of which are essential to enabling a smooth transition.
The ‘lift and shift’ of an entire business is very different to the break-up of a larger one. The sector has focused on gaining efficiency through consolidation and streamlining of structures, but this makes it much harder to divide the business in a worst-case scenario. For larger providers, contingency planning should be undertaken to identify how this would be approached.
“Boards should be discussing both scenarios – would we want to rescue another organisation, and what happens if we need to be rescued?”
One concept associated with contingency planning is the ‘living will’. This was originally proposed by the RSH back in 2014, but it was dropped in favour of a requirement for organisations to maintain a comprehensive asset and liabilities register.
A ‘living will’ goes much further than this. It could include measures you are taking to prevent such a scenario arising, and a high-level assessment of how the business could be divided, as well as how risks such as high-value litigation can be ring-fenced or mitigated, communications strategy, procurement processes and contracting arrangements, and how to maintain up-to-date due diligence information.
Residents must also be involved in these discussions. In our experience, there are no winners in an ‘emergency rescue’ – resources get sucked up in dealing with the nuts and bolts of the rescue, and the voice of the customer gets lost in the urgency.
Reputationally, the sector has a duty to protect and steward the homes of their residents. If you aren’t having these discussions already, then now is the time.
Sarah Greenhalgh, partner, Bevan Brittan
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