It is no secret that the environmental, social and governance (ESG) agenda will be one of the dominant themes for the built environment. And whilst the social housing sector has led the UK property industry in defining the ESG landscape, there is much registered providers will need to embrace this year. Winckworth Sherwood’s Charlie Proddow points to seven things social housing providers will need to consider in the year ahead.
1. Sustainable finance – affordable housing first
Rishi Sunak at COP26 set out his vision for the UK to be the first “net-zero-aligned financial centre”. Financial institutions and investors will need to deploy capital in a way to help the UK meet its net-zero commitments.
There are natural synergies between affordable housing and sustainable finance, but upcoming regulations will need careful consideration to avoid discussions about greenwashing. All social housing providers, their funders and asset managers will soon be required by law to make ‘sustainability disclosures’ at some level. They will need to understand changes to legislation in 2022.
These disclosures will be confirmations about their business and its impact on climate change and other sustainability issues. Any RP seeking funding will ultimately need to show that they are having a positive impact on the UK’s sustainability agenda in a measurable and quantifiable way.
2. ESG – governance in the spotlight
The ‘G’ in ESG will be a new focus for senior executives throughout 2022. A series of consultations on the implementation of ‘E’, ‘S’ and ‘G’ will exercise minds as organisations work out how to implement, measure and report on ESG initiatives. It is important for organisations to participate in this process, rather than rely solely on industry sector representative bodies, as the ESG system is designed to encourage bespoke ESG programmes for each organisation rather than treating ESG as another top-down accounting standard or the adoption of existing sector approved governance models.
The challenge for housing associations will be to imbed organisational year-on-year ESG improvements through new vertical governance models. This includes the governance of joint ventures as well.
In 2022, this will involve how governance issues will be scoped, adopted and reported to deliver environmental and social outcomes beyond financial sustainability compliance.
3. ESG – retrofitting and stock swaps
Retrofitting housing stock is likely to prove expensive and challenging for many housing associations fuelling a wave of stock rationalisation programmes.
Stock disposal and swap programmes have been largely driven by geographic considerations allowing housing associations to better manage homes, often as a result of mergers. That will undoubtedly continue in 2022.
However, housing associations are facing significant costs in meeting building safety requirements and the looming decarbonisation agenda. Housing associations will have homes that are just too expensive to adapt and that will drive further rationalisation in the new year and beyond.
4. Building safety
2021 was another huge year for fire and building safety, with a raft of primary and secondary legislation being enacted or proposed, the most recent being further changes to the Building Regulations.
Michael Gove, the Secretary of State for Levelling Up, Housing & Communities, has promised to look at the issue of building safety with ‘fresh eyes’ in 2022. Indications are that he intends to be much tougher on the construction parties deemed responsible for cladding and external wall defects.
Gove has just excluded Rydon Homes from the Help to Buy scheme and shot a warning across the bows of the wider industry stating that: “The development and construction industry should be in no doubt: I will continue to go after those who put lives at risk, are responsible for the building safety crisis and are failing to play their part in fixing it.”
With that and the further passage of the Building Safety Bill, 2022 is bound to be an even bigger year for construction safety and regulation.”
5. Greater regulation of exempt accommodation
Greater and tighter regulation is needed to protect vulnerable tenants in 2022. Exempt accommodation is often used to house those most vulnerable in society and with few alternative options – rough sleepers, prison leavers and those troubled by substance abuse. As landlords provide care and support services, such accommodation can fall outside of the ‘normal’ housing benefit rules. This has seen this provision attract less scrupulous providers, often operating under long chains of leases or even rolling short-term leases.
Whilst the regulator has now picked up on these issues, we would like to see the sector subject to greater and tighter regulation to ensure those who are at their most vulnerable receive the care and support they need.
More widely, Government should in 2022 take steps to recognise the enormous contribution the assisted living, the care sector and the staff it employs has made (and especially over the past two years). It is a sector struggling to recruit and retain staff and steps need to be taken to address this.
6. New for-profit entrants in 2022
2022 will see new for-profit social housing providers enter the market. They will be a welcome addition offering new partnership opportunities.
In November, we advised Optivo on its ground-breaking partnership with the for-profit provider Sage Housing. Sage will develop 420 homes across London and the South East with Optivo managing them.
We are expecting new for-profit entrants into the market backed by major investors and with more partnership agreements to follow. They facilitate new homes and greater access to affordable homes, opening up new revenue streams for traditional providers that, in turn, will enable them to develop and deliver new homes.
7. Regulator’s Rent Policy Statement – rent caps removed
The four-year policy requiring registered providers (RPs) to cap rent for their tenants finally expired in March 2020 in the depths of the pandemic leaving RPs the ability to return to raising rents at CPI plus 1%. But will they take advantage? Registered providers need to decide if they are to raise the yearly rent to offset the rising costs of retrofitting and building safety work, subsequently adding to the tenant’s cost of living crisis?
With a background of reduced housebuilding and fewer surplus sales due to the pandemic, social housing providers are finding less in the coffers. Tenants are also struggling with the removal of coronavirus financial assistance, less universal credit, increased energy bills and now an unexpected rise in inflation to 5.2% pa.
Early anecdotal evidence and announcements from the regulators suggest providers are reluctantly increasing rents, generating an additional £0.2bn surplus in the first year across the sector. However, as registered providers spend less on maintenance, capital investment in properties and major repairs, 2022 will be a balance between rent increases and cheap finance, with RPs borrowing a solid £15.1bn in the last financial year. How will this play out for all concerned if further lockdowns follow and bills keep rising remains to be seen?
Charlie Proddow is a Partner in the Social Housing and Real Estate Team at Winckworth Sherwood.