Valuations and changes to definitions post-deregulation

The requirement for registered providers (RPs) to obtain the prior consent of the Regulator of Social Housing to dispose of their social housing stock ended in April 2017, when the relevant provisions of the Housing and Planning Act 2016 become operational.

Since that date, there has been much talk about how this new freedom will impact on the values of that social housing stock.

The abolition of regulatory consent affords greater disposal freedom for RPs. That has propounded the possibility of sales out of the sector of housing stock which was previously valued on an EUV-SH (Existing Use Value – Social Housing) basis.

Faced with a desire to leverage their assets (within the constraints of wider gearing tests) RPs are hopeful that values will increase to reflect the legislative change, which may ultimately lead to increased development of new housing.

Valuers had responded by proposing amendments to the definition of EUV-SH, a valuation basis which has featured in the RICS Red Book for over 25 years as the only sector–specific basis of valuation.

The proposed amendments introduced the possibility of void sales out of the sector as part of a new definition. These amendments were under consideration by various stakeholders, but at the National Housing Federation’s finance conference earlier this month a compromise position by way of change to the proposed amendments was discussed.

The compromise position now leaves the traditional EUV-SH largely unchanged, simply removing the reference to consent of the social housing regulator.

Instead valuers are considering whether to create a new definition called ’Market Value – Social Housing’ (MVSH) that brings in the assumption of void disposals. The assumption of void disposals is in turn now dropped from the previously proposed EUV-SH definition.

While all of us who work in this sector are keen to see the social housing need met, which clearly necessitates more development, there are reasons to be cautious over changes to the bases of valuations to increase values of existing stock:

1. It is not only the regulatory consent regime which restricted use of social or affordable housing stock or restricted disposals out of the sector.
2. The value of the social or affordable housing stock as security is not the only factor to secured lending.
3. Existing funding documentation secured by the social or affordable housing stock may not have anticipated changes to valuation bases.

Clearly the definition of EUV-SH needs amendment to reflect the legislative changes, and the compromise position now deals with some of the concerns raised by various stakeholders.

Parties will need to consider the proposed MVSH definition, where this will sit as against the existing EUV-SH and MVSTT bases and how this will be reflected in loan terms and bond documentation going forward.

We are talking with stakeholders and will be following up in more detail on the factors we have flagged here and how any new valuation bases might impact, but clearly a great deal of thought will be needed as to how the secured lending landscape may adjust when any new valuation bases become part of the RICS Red Book.

Jennie Chilton is legal director for Addleshaw Goddard.