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A joint response from JLL and Savills
A new industry advisory document, Budget Impact on Valuations of Social Housing, compiled jointly by JLL and Savills, seeks to give guidance to Registered Providers of social housing (RPs) and lenders on the impact of the July 2015 Budget on valuations in the social housing sector.
Cuts to rents in the social housing sector of 1% for each of the next four years from April 2016 mark a significant shift for housing associations, which have previously been working on the basis of CPI + 1% rises. The government estimates that, by 2020, this will equate to a nominal reduction in rental income of 12% versus current rental forecasts, lowering the starting point in terms of gross rental income for valuations. Valuations for accounts purposes, stock rationalisation and development appraisal will be affected by the rent proposals in the Budget. Valuations for accounts on the basis of Existing Use Value – Social Housing (EUV-SH) are likely to see the greatest drop in value of between 20% and 30%, or more in some cases. In contrast, loan security valuations on the basis of Market Value subject to tenancies (MV-T) will not be affected, as they assume migration to market rent in any event and include sales.
Loan security valuations at EUV-SH will not be materially affected initially. This is because a loan security valuation assumes a mortgagee is in possession and, in those circumstances, both they and their successors in title are exempt from the cuts imposed by the rent provisions in the draft Bill. However, there will be additional pressure on loan security valuations over the period of rent reduction – values will fall, unless mitigating measures can reasonably be reflected in the valuation.
Anne Johnson, Savills Director of Housing & Healthcare, comments: "We can say that, without the ability to adjust rents and other mitigation, the fall in EUV-SH values would be in the order we have indicated for accounts – between 20% and 30%, or more where the operating surplus is slim. But, given the approaches that we expect RPs to adopt to adjust their business plans and operating practices to reduce their rental loss and maintain surpluses, it is possible that the fall in EUV-SH for loan security at any future valuation date can be mitigated. The scale of the relative reduction will be dependent on an RP’s particular circumstances."
To defend their financial positions, RPs are likely to do everything they can to preserve and protect their operating surplus by, for example, eliminating discretionary activities, reducing development programmes and cutting operating costs.
Nevertheless, the successive rent reductions will put great pressure on levels of surpluses, particularly for those housing associations that have not been able to take appropriate cost saving action in a timely manner. The impact for some could be serious, with a negative impact in terms of their ability to raise funds.
Richard Petty, Lead Director, Residential Advisory at JLL comments: "If the surplus can be maintained at the same level, despite rent cuts, then the EUV-SH for loan security should remain unchanged, all other things being equal. It will not, however, be easy for RPs to achieve cuts on the necessary scale and there may be considerable wider impacts in terms of reduced development programmes. It remains to be seen how the RP market will respond in practice to the challenges thrown down by the Budget, and what special assumptions funders might instruct valuers to adopt in the light of it."
Both Savills and JLL remain open to further discussion and exploration of the implications with lenders, borrowers and the regulator. Both firms would welcome an ongoing dialogue in the light of how all affected parties are likely to interpret the new legislation, assuming it is enacted in its current form.
Click here to download the report
Head of Affordable Housing, JLL
+44 (0)20 7087 5971
Associate Director - UK PR
+44 (0)20 7087 5108