Private Investment in Social Housing – Part 1 – Agreeing The Terms

Facing unprecedented financial pressures in a turbulent market, a number of housing associations are seriously considering innovative partnerships to bring more private institutional investment into the social housing sector.

Starting the trend in 2021, was Hyde Group’s partnership with M&G to deliver a £500m pipeline of shared ownership properties, owned by the institutional investor’s for-profit provider and managed by Hyde; and Optivo’s £106m deal with Blackstone-backed Sage Housing to fund and acquire 420 homes in Optivo’s development pipeline, again to be managed by Optivo.

In November 2022, Legal & General’s affordable housing arm agreed a deal with Metropolitan Thames Valley Housing to build more than 2,500 shared ownership and affordable rent homes in London and the South East.

In this article, Krissun Soodin, a Partner in the Real Estate & Projects team at Devonshires, will highlight some key points a housing association should keep in mind when entering into an agreement to sell unbuilt, partly built or newly built units from its development pipeline:

1. Deal or ideal – if, as part of the transaction, the housing association (“HA”) will keep (or take on) the management of the units after having sold them, the parties will need to work together not only to do the deal, but also to then let/sell and manage the units. This is a long-term commitment, which will only work if both parties have done their homework and are comfortable that they are a ‘cultural fit’ and aligned on complementary strategic objectives. Getting this wrong could seriously undermine the transaction, affect resident satisfaction and in turn, impact both parties’ reputations in the market.
2. Death and taxes – no two deals are ever the same. It is important that the structure of the transaction is agreed between parties from the outset. This can be a joint venture, a framework collaboration agreement or a series of agreements dealing with development, sales and lettings and management of the units. The precise structure will be informed by various factors including tax advice, governance and viries issues, exit triggers/strategies, and the interest of third-party stakeholders. The parties should also ensure that the structure works for the delivery of their respective objectives.
3. Heads up – a sufficiently detailed set of Heads of Terms (containing a summary of material components agreed between the contracting parties) can really help the transaction progress smoothly. Delaying key decisions could mean more time and resources need to be spent further down the line and could leave parties feeling as if they were misinformed. Heads of Terms can also help focus everyone and ensure respective solicitors are given a consistent understanding of the deal at the outset.
4. Your papers, please – the HA will need to disclose all title, planning, construction and letting information they hold. This is likely to be a lot of papers (or rather data) and will require co-ordinating with a number of different teams within the HA as well as with the HA’s contractors and advisors.  The HA needs to allocate appropriate resources of the right levels of seniority to ensure this process is handled in a timely and efficient manner.  It is best to collate this information early in a well organised virtual data room and address any gaps or any complex matters in a brief information note which could assist the buyer in understanding the information better.
5. The whole truth, and nothing but the truth – as part of the mass disclosure of information on the units, it is important to consider whether any statements made by the HA or the HA’s original sellers are still correct. If the buyer relies on incorrect information which is disclosed by the HA when deciding to purchase the units, then the HA could be liable for misrepresentation.
6. Risk? What risk? – The HA would have only recently gotten comfortable with the title so they should be able to convince a buyer that they have good and marketable title. Equally, they will have negotiated the building contracts for building out the units, so they should be confident that the contractor can deliver a high-quality product efficiently and on time.  However, the buyer and the HA might have different appetite for development risks, so the buyer may assess the information and decide they require additional protection.  Early disclosure of information by the HA and early due diligence by the buyer should bring these issues to the fore and the parties can agree how best to deal with these.
7. Meerkat conditions – the parties need to be realistic about what can be delivered within time constraints to bridge the gap between two entities with different appetite for risk. Indemnity insurance could be a quick and practical solution to take control of the discussion and mitigate some of the key risks.  As with any contract, the devil is in the detail of the insurance policy, and the parties will need to agree who pays for the policy.

This is just a canter through a few key issues on a type of transaction which will likely develop further during the months ahead.  It is not intended to be comprehensive, nor does it constitute legal advice.  Devonshires’ long track record of delivering developments enable us to understand the context in which complex and multi-stakeholder projects operate.  We can assist you to develop and deliver on your policies and offer practical, targeted advice to identify and resolve issues to progress your transaction to a rapid conclusion. Please do not hesitate to contact Krissun Soodin or another member of the Real Estate & Projects team: Jonathan Corris, Triya Maicha, Hannah Langford, or Elad Yasdi with any queries.

Upcoming Webinar

We will be hosting a webinar on this very topic on Thursday 23 March. You can register now to secure your place.

The webinar will feature a Q&A session where we will discuss the most commonly asked questions. So we can tailor our webinar, we ask you to submit your questions and comments to us on Private Investment in Social Housing when registering.

To help keep this webinar of interest for all delegates, it would be helpful if questions can be kept as generic as possible. Whilst we will endeavour to answer and discuss a variety of questions during our webinar, please note we cannot guarantee that we will be able to respond to all of your questions.

For more information, please contact Krissun Soodin.