Banking & Finance

For Profit Providers of Social Housing: Good or Bad?

One of the fundamental legislative requirements to be a registered social landlord in Scotland is that the relevant entity must not ‘trade for profit’. On its face this is an odd requirement in that it seems to prevent RSLs from creating surpluses – surely a good thing. Perhaps a more appropriate restriction would have been against profit distribution. Be that as it may, it means that there is no current equivalent in Scotland to the ‘for profit’ registered providers that have recently being growing in prominence in England. Should we be retaining such a restriction or is it outdated and leading to a lack of otherwise available investment to deliver much needed additional social rented and affordable housing in Scotland?

There are over 40 for profit registered providers active in England. Currently they own only about 2,500 homes (out of a total of about 2.8m). Their importance is however growing as investors seek to target yields from alternative asset classes such as social housing. Such investment is based on a financial imperative arising from traditional real estate backed income streams struggling to provide long-term returns to meet investor demand.

A common knee-jerk reaction to the concept of for profit providers is that there is no place for such entities in the social housing sector, and that all social housing is best provided by charitable or non-profit distributing organisations. This however ignores current reality. The sector already recognises the importance played by investors, either via bank or other debt or via investment by way of private or public bonds. Both banks and capital market investors are only investing their debt or funds in the sector with a view to a long term financial return. The precedent has therefore already been set.
Investment via a ‘for profit’ provider is simply an alternative form of investment under which the shareholders or investors in the for profit provider seek to make a long term financial return underpinned by a secure income stream. In principle this is exactly the same position as bank debt or investment taken via a private placement or public bond.

There is no reason in principle why ownership and operation of social housing cannot not be split, with ownership being held in a ‘for profit’ entity and operation being conducted via a non-profit distributing entity. In practice, this is likely to be the model adopted by most for profit entities with them outsourcing operation of their housing to a housing association with the expertise required to deliver the relevant services. Indeed there is a strong argument to the effect that housing associations should concentrate on care and service delivery and are not ideal entities to hold underlying property assets.
In terms of regulation, there is no reason in principle why a ‘for profit’ provider cannot be regulated in exactly the same way as a traditional RSL. Both should need to meet the same regulatory standards. As said, most for profit entities will seek to do this by outsourcing to a more experienced and appropriate entity.

Of course if for profit entities are simply competing with traditional RSLs, via section 75 allowances or otherwise, for the same housing supply, there is little to advocate their benefit. However, if they are actively adding to the supply of good quality social or affordable housing, then there is a strong argument that it would be contrary to the interests of the sector to not seek to accommodate them.

In terms of affordability, this can be controlled in part through long-term leasing deals with traditional RSLs, with rents being appropriately capped by reference to CPI or other relevant inflationary factor. However, it has to be recognised that investors into ‘for profit’ providers are investing for financial reasons (often to support pension funds and similar vehicles) so this has to be modelled in to any arrangement.

So in answer to the question whether for ‘for profit’ providers of social housing are good or bad, the position is open to debate. It would be disappointing, however, to find in a few years that such entities had resulted in significant new investment and new housing supply in the remainder of the UK and elsewhere, with Scotland missing out on the opportunity to attract such needed investment, particularly if this results in a continuing social housing shortfall.

Chris Dun
Brodies LLP
22 March 2019

Chris Dun

Chris Dun

Partner at Brodies LLP
Chris Dun is a lawyer who specialises in real estate finance. He has a particular interest in housing finance, including build for sale, build for rent and social and affordable housing.
Chris Dun