New money, new ideas: Part 2 - Shared ownership portfolio transactions– the registered provider's answer to development funding?
Shared ownership reversionary portfolio transactions (SORPs) are generating interest in the affordable housing market – from both registered providers (RPs) and institutional investors alike – but what are they are and what can they offer your business and your residents? This article will explore what SORPs are, what the investors behind them can bring to the table and, critically, what they can offer to an RP in terms of funding its development pipeline.
What is a SORP?
A SORP is the sale of a portfolio of the reversionary interest in shared ownership units by an RP to an investor. The product as an asset class is attractive from an investment perspective – providing an index-linked income stream and meeting ESG investment criteria via its social benefits – but what benefits does this bring to the selling RP?
Benefits for registered providers
Only a few short years ago, the term "new entrants" generated a degree of uncertainty among the affordable housing sector, with RPs in particular querying the extent to which investors would protect the needs of the residents. In the short time between now and then the tone of that conversation has changed dramatically, and there is both optimism and even excitement about the weight of investor activity and the impact this structure of transaction could have on the supply of much-needed affordable housing.
Benefits to RPs include:
- Cash: with the ever-growing pressures of building safety requirements, rising build costs and decarbonisation programmes, RPs are finding more demands on their cash reserves than ever. The capital received from the purchasing investor pursuant to a SORP can help RPs address these cash deficits.
- Continuity of management: Whilst the reversionary interest in the shared ownership products will become vested in the purchasing investor, the RP can continue to manage the units via a Management Agreement that the parties will enter into on the day of completion. This can ensure not only a seamless continuity of service and interface for shared owner residents, but also that an RP's managed unit numbers are maintained.
- Growing number of investors: New investor entrants to the sector are increasingly looking to SORPs as a means of deploying capital. This not only drives up the pricing of the prospective SORP portfolios but allows RPs to be selective about the identity of the investor in which they vest their reversionary interests.
Can SORP's address longer term funding gaps for RPs?
Aside from the initial injection of capital from the first SORP transaction between an RP and investor, there is a real appetite in the market for the formalisation of an ongoing, longer-term, strategic partnership between the parties. Under such agreements, both parties can agree to seek to identify opportunities for the funding, acquisition and development of residential shared ownership property. In the same way that RPs can "bring" to investors development opportunities for forward-funding or forward-purchase, an investor can similarly "bring" to the RP opportunities for management services to portfolios into which the investor has injected its equity. These types of agreements – whilst typically aspirational and flexible in nature – indicate a commonality in desired outcome for both the RP and the investor – being the development of, and investment into, new shared ownership developments.
It is for the parties to decide what this strategic arrangement might look like from a commercial perspective but any such agreement could legislate a set of minimum requirements that must be met including those in respect of:
- geographical scope – to meet any operational needs of the RP;
- gross development value – to ensure the large-scale pipeline of new affordable homes; and
- unit numbers and sales value of such shared ownership units – to reflect any commercial requirements – and the risk appetite – of the purchasing investor.
Such quantitative thresholds can focus minds and drive the parties' targets and ambitions for the benefit of prospective shared owners across the country.
SORPS will not necessarily be a universal panacea for all RPs and the interests of residents must be at the forefront of any exploration as to alternative funding models. That said, it is widely accepted that RPs are encountering more constraints than ever on the allocation of their capital and this challenge is set against a backdrop of a significant under-supply of affordable housing, and one that is well behind the Government's target of 300,000 new homes per annum.
Whilst the notion of a step change in how new developments are funded can be daunting to RPs who historically have relied on "traditional" methods such as grant and debt finance, the scale of new equity investment that is being deployed in the affordable housing sector shows no sign of abating. It follows logically then that long term, strategic partnerships between RPs and investors in respect of shared ownership reversionary portfolios can provide an answer – at least in part – to the funding of new developments. The strategic partnership can create a cyclical, symbiotic relationship whereby institutional capital is deployed at scale into a regulated, established sector, and RPs utilise that cash – in conjunction with their management and operational expertise - to unlock much needed shared ownership development sites.