Banking & Finance

I have flagged below 10 key differences/similarities that apply to the provision of social housing finance in Scotland when compared to the remainder of the United Kingdom which hopefully will be useful to new finance/investment providers considering the Scottish market for the first time.

1. Housing devolved: Control of housing is devolved to the Scottish Parliament, with separate legislation and regulation applying from the remainder of the UK.

2. Strong regulation: Scotland benefits from a strong regulatory regime, with the Scottish Housing Regulator, created under the Housing (Scotland) Act 2010, regulating the providers of social housing in Scotland (RSLs), both housing associations and local authorities. The objectives of the Regulator are laid down by statute and are safeguarding and promoting the interests of persons who are or who may become homeless, tenants of social landlords or recipients of housing services provided by RSLs.

3. Smaller social landlords: Many of the registered social landlords (equivalent to registered providers) in Scotland are small community-based organisations reflecting the history of the social housing movement in Scotland. There are relatively few mid-sized and larger social housing providers operating in the Scottish market. Most RSLs are constituted as registered societies under the Co-operative and Community Benefit Societies Act 2014, although there are also a small number incorporated as companies limited by guarantee. Almost all RSLs are now registered as charities with the Office of the Scottish Charity Regulator. For-profit RSLs are prohibited by statute in Scotland.

4. Similar financial structures: Many RSLs are multi-banked, with facility agreements tending to be based on a Loan Markets Association format that is consistent with what is used in the remainder of the UK. Representations, undertakings and events of default are similar, with financial covenants generally comprise an interest cover covenants and a gearing covenant. Asset cover covenants reflect similar methodology in relation to application of MV-STT and EUV-SH as applies in the rest of the UK.

A short-term revolver coupled with a term facility is not unusual.

For private placements, the model of the note purchase agreement is the same as used in the remainder of the UK, with limited ‘kilting’ for Scottish technical issues.

5. Different security: Security in Scotland generally comprises the grant of standard securities (a statutory form of legal mortgage) registered at the Land Register of Scotland. Floating charges are very rare and assignations of rents not capable of being granted on an effective basis.

The use of external security trustees is common with the usual providers of such services operating in Scotland.

6. Enforcement of security is subject to statutory control: The methodology of enforcement of a standard is laid down by statute and requires the service of a demand, followed by the passage of a relevant period of time, generally two months, followed by a sale in the open market after advertisement or by auction. There is no requirement for a court order and no ability to appoint the equivalent of a Law of Property Act receiver.

A statutory moratorium of 56 days applies.

7. Generous grant: The current levels of housing association grant applicable in Scotland are very generous compared to the position in England, currently sitting at over £70,000 for each urban unit. This explains to a significant degree as to why a cross subsidy model from private sales has not been adopted in Scotland. The extent to which such grant levels will be maintained in the future is unknown but there is strong cross-party political support for the provision of additional social and affordable housing in Scotland.

8. No rent reduction: There are been no application of a compulsory rent reduction model in Scotland, leading to much less pressure than in England on the financial position of RSLs due to their ability annually to apply rent increases.

9. Planning: The planning regime in Scotland is similar to that in England, with section ’75’ planning agreement applying in substitution for section ‘106’ agreements. The application of restrictions on use under such agreements, or sometimes embedded in planning permissions, is common, impacting on the ability to apply MV-STT on occasion as a valuation methodology. Similar title conditions are also something that needs to be watched for on charging exercises.

10. Independence debate remains live: The debate over Scottish independence remains live, but with the UK government providing no indication of willingness to consider another referendum. A key risk on independence would be currency focused, with the potential for income from tenants’ rents being received in local currency and debt needing to be serviced in Sterling, and no clarity as to the ability to hedge the associated exchange risk. Most lenders and investors appear to be comfortable with the associated risk, but on occasion margin ratchets and similar have been encountered.

Chris Dun
Brodies LLP
25 February 2020

Chris Dun