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The COVID-19 pandemic has perpetuated many challenges faced by organisations across the globe, and now the looming energy crisis, coupled with the ‘Green’ agenda, and an increased focus on customer service is placing further pressure on already stretched resources in the social housing sector.
As these financial and performance pressures continue to mount up, registered providers (“RPs”) are increasingly needing to find greater efficiency within their portfolio and services. One approach which is becoming more commonplace among RPs, is stock rationalisation.
What is a stock rationalisation?
Stock rationalisation is, for the most part, a cost management tool. It involves a strategic restructuring of the ownership and/or management of a stock portfolio in order to raise finance and/ or to reduce outgoings, which consequently improve the RP’s ability to deliver on performance and its financial objectives.
Ultimately, the core brief for RPs has always been to invest in the sustainability of communities and there are often easy and tangible gains to be made by embracing rationalisation.
How is rationalisation implemented?
There are various ways to implement rationalisation and these include stock transfers, stock swaps and sales on the open market. As with all projects, proper planning is essential to ensure material considerations are explored and the correct structures or mechanisms used. For example, the value of the portfolio in question is typically the key driver and negotiating tool in a rationalisation project. It is therefore important to ensure the correct valuation methodology is applied, as there are various independent valuation methodologies that can be used to calculate the net worth of the stock and each with potentially differing outcomes.
Additionally, the requirement for tenant consultation is sometimes viewed by RPs with a degree of trepidation, but it needn’t be prohibitive to rationalisation. Addressing concerns from both the residents and providers’ perspectives are key to engagement and a smooth process, and many rationalisation deals simply include a condition for consultations to be completed prior to completion.
Why should RPs consider rationalising their stock?
The benefits are many and registered providers typically consider rationalisation in order to improve their ability to meet financial and/or performance objectives. Reasons will vary from RP to RP, depending on both the condition of their stock and its geographic location, and this will likely reflect the RPs overall strategy.
A rationalisation programme will sit within the RP’s asset management strategy (and may in some cases form a specific aim within the overarching corporate plan), but the overriding aim is usually one or more of the following:
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An RP may find that it has inherited ageing or underperforming stock. This is especially true of many RPs whose portfolio consists of a large number of units inherited from a large scale voluntary transfer from a local authority. This can result in the RP experiencing escalating repair and service costs, especially in the current carbon reduction push. It may be that it is much more effective for the RP to sell these assets in order to improve the reporting of its carbon mitigations, as well as reduce the costs of periodic maintenance and repairs.
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The terms and conditions in lenders’ finance packages are not always necessarily appealing to the balance sheet. Rationalisation can help raise finance outside the standard lenders’ requirements and process, and this is of course desirable when a certain part of the registered provider's stock is underperforming due to a variety of factors which might include, for example, increased management and service costs.
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Concentrating stock to a specific geographical area brings numerous benefits, through boosting the RP’s footprint in an area it wishes to gain or extend visibility and presence. Invariably, the main drive for this is due to cost efficiencies as it costs more to manage a dispersed stock portfolio and by concentrating the housing stock to a smaller (and perhaps more strategic) geographical location, RPs are able to reduce maintenance expenses while also improving service response times by reducing travel time and distance.
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A strategically reviewed portfolio can also go a long way towards improving tenant and community engagement, resulting in empowered and involved residents - an especially important focus area for the regulator currently.
The cost efficiencies brought by rationalisation are often experienced within a relatively short period of time, and so the effectiveness of using rationalisation as a tool toward a healthier balance sheet is not to be underestimated.
It is of course not just the selling RP who may look to rationalisation to assist with wider issues. Many providers can find real value for money in gaining additional stock in their area if they identify an opportunity with a selling provider. This can be a real boon for the purchasing RP looking to increase their housing provision in a local area, especially given the current high levels of competition for section 106 sites (which is the usual source of new properties for many smaller RPs).
What we can do for you
The rationalisation process isn’t necessarily complex, but there are numerous considerations to address, ranging from the structure of the proposed acquisition and/or disposal programme to avoiding the many pitfalls rationalisation can bring.
There are various predictable surprises in a rationalisation project which can be avoided through careful planning. These include the examples mentioned above, as well as operational, tax and accounting issues that can occur as a result of the rationalisation programme, as well as TUPE and data protection considerations.
At Shakespeare Martineau, our advisors will engage with you and your team at the outset to ensure the appropriate structure is established and material considerations properly explored. We will work collaboratively with your intermediaries and professional team through every step of the rationalisation journey, and by sharing our experience from previous transactions, we will ensure that you benefit from the strength and breadth of our expertise.
If your organisation is interested in pursuing a rationalisation programme or would like further information regarding the above, please call any of our advisors for an informal chat.
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Joanna’s expertise encompasses advising on social housing development transactions, from site assemblies to larger scale phased sales and purchases.
