Getting security charging right

16-08-23

Getting security charging right

Security charging is one of those processes that is all too easy for housing associations (HA) to neglect as they work to solve the range of other sector-wide issues. With the growing list of challenges facing HAs, it can be difficult for organisations to find the time to ensure they get this process right. Many landlords are understandably preoccupied with development constraints, economic challenges, sustainability work, and ever-changing regulation.

To raise funding, whether through capital markets or banks, HAs typically put forward properties as security on these transactions. This is a well-established process in the sector, and many landlords are familiar with valuers and lenders. That being said, as we continue to battle strong economic headwinds, it is more important than ever that HAs are able to maximise value during the security charging process.

THFC speaks to the experts to understand how HAs can best approach security charging for a smooth, pain-free process.

Data

The key word on the lips of security experts is “data,” which often forms the basis of a smooth and efficient charging process.

“One key aspect in a security exercise is that borrowers are prepared and have their properties ready for charging, with all the necessary data in place,” says Melissa Gheerawo Skilbeck, Security Asset Manager at THFC.

She adds: “This can be done by constantly updating your asset management databases and ensuring that specific related property information, such as the retained equity percentages of shared ownership properties, is correct and as up-to-date as possible, as this can affect the value placed on the properties as part of the security exercise.”

Mel also highlights the ever-changing suite of information that borrowers need to be on top of. This includes post-Grenfell aspects such as the height of buildings and information about external cladding, but also details on EPCs, whether the registered provider is actually the freeholder of the building, and planning permission sign offs.

She says: “Make sure you have your planning permission sign offs in place prior to putting properties forward for a security exercise, especially if there are any conditions that relate to financial payments or affordable housing provisions. Without these sign offs in place, this could potentially impact the value ascribed to the properties and can increase the time taken to put the properties into charge if sign offs are requested during the security exercise.”

A recent addition to potential security portfolios is properties constructed using modern methods of construction (MMC). THFC announced in 2020 that it would begin accepting modular homes as security and completed its first MMC charging exercise in 2022.

“If modular units are being charged, then housing associations will need to have available to them various information and documentation in respect of these units,” Mel says. She notes that both Savills and JLL have launched a joint MMC standard guidance note, which lists all of the required information that HAs need to provide when charging MMC units.

Generally, without the necessary information in place, Mel explains, the timeline for the charging process can become protracted. THFC usually expects a charging process to take around three months to complete, on average, from the instruction of the lawyers/valuers. But Mel notes that these exercises can take longer depending on how much data and information a borrower has to hand and whether third party information or consents are required.

Jennie Chilton, Partner at Addleshaw Goddard LLP, also highlights the importance of good data and notes how challenging it can be to achieve this.

She says: “There’s a huge differential in the sector. Some RPs are really good at this and others are not, sometimes through no fault of their own. They may have inherited stock that they have no historic knowledge of via things like mergers.

“The more data you have, the better an RP can present their portfolio which will mean they will receive less questions, so data is key.”

Marc Burns, Director – valuation advisory at JLL, says that gaps in the data can be avoided through “rolling charging programmes.”

Marc explains: “What we are seeing is large organisations with these programmes where properties roll off the development pipeline and are handed over to the treasury or security team, who in turn get those properties ready to charge. They are not allocated to a specific funder, but it means they have a pot of security ready to secure a new transaction very quickly.”

It is important to note that not all HAs have the resources to manage this level of organisation and coordination.

Environmental factors

As well as the standard factors mentioned above, valuers are now also requesting more detailed information on environmental risks. The UK has experienced severe flooding in recent years, as well as extreme heatwaves, all of which have a bearing on the process of valuing properties.

Andy Garrett, Director at Savills, says: “The Royal Institute of Chartered Surveyors (RICS) and lenders generally are asking that we take more detail into our valuation, for example, things like flood risk. There’s a need for more data, particularly when we are dealing with portfolios.”

Jennie says: “What we are seeing now and what we are keeping an eye on is a requirement to report on climate change. It hasn’t been made a requirement yet, but we know the Law Society is going to bring out guidance on it, so we are expecting that to be a requirement fairly soon.”

In 2019, UK Government set a legally binding target to achieve net zero by 2050. As part of this overall drive for net zero, the government has also set a target to bring all social homes to a minimum of EPC (Energy Performance Certificate) C by 2030.

Issues of damp and mould are also a consideration for valuers. A recent report from the Regulator of Social Housing (RSH) revealed that too many social landlords are relying on out-of-date information to identify and fix damp and mould problems, an issue that can become costly when it comes to taking those properties into charge.

Catherine Wilson, Director at Savills – Affordable Housing Valuation, notes that a lack of information in these areas can have a direct impact on valuations of properties.

She explains: “If we have some unanswered questions, and we have to make our own assumptions, then that means more risk which can impact the discount rate. We might push the discount rate up by 0.25% because they’re not actually sure how many high-rise units they have or what works need to be undertaken.”

The issue of damp and mould is tightly linked to the conversation around energy efficiency of social homes, which is measured using EPCs. While the usefulness of EPCs has come under scrutiny in recent times, they still remain a valuable tool in understanding the general energy efficiency of homes.

Mel explains that when it comes to security charging, EPC data is currently not essential, but that the direction of travel is that this information will become expected as part of the security charging process. This is especially true if there is a sustainability requirement as part of the lending criteria.

She says: “We have a valuation schedule that we send out to our valuers for charging exercises, and we now ask housing associations for EPC information to be provided where they are able to.”

Indeed, as more and more lenders are looking to clean up their investment portfolio, it is more likely that those investing in social housing will want to know more about the efficiency of these properties.

This is something that Marc Burns has noticed on more and more transactions he has worked on. He says: “Lenders want to see EPC data on most transactions because a lot of them have signed up to some form of green lending or other measures that they need to adhere to on their net zero journey. There’s more demand on information from borrowers and they do that by asking the valuers to collect it.”

Working closely with partners

The wide range of information required in the security charging process means that the necessary data likely sits within various departments of any given organisation. Depending on the size of the HA, whoever is in charge of security may need to gather information from the development, treasury and sustainability teams. With that in mind, the importance of cross-organisation communication cannot be understated.

Mel explains that a successful security charging process involves open and ongoing conversations between the borrower, lender, and valuers.  All parties are seeking the same outcome, and, therefore, working together will enable that outcome to be achieved in the most time-efficient manner possible.

She says: “It can be daunting to have so many queries thrown at you, especially if you have to seek out the information from other parts of the organisation, but we can help simplify those questions and minimise delay. I am always happy to have conversations with borrowers and assist in answering their questions wherever possible, especially if it is not obviously clear why the query is being raised.”

Jennie echoes the need for constant communication between the various stakeholders involved in the charging process.

She says: “We are all trying to collaborate to get this done in as pain-free a way as possible. Talk to us early because we can try and find a way to resolve any issue you have and that’s what we want to do.”

The view is the same from valuers, too. Marc says: “We certainly encourage treasury teams and security teams that are responsible for this element of the work to have really close working relationships with the development team and to be part of the approvals process.

“Some of the more sophisticated organisations that we work with have that as part of their policy: that a treasury team has to either get a valuation, review section 106 agreements, have all the information ready so when that property is handed over it can be put into charge with minimum fuss.”

Andy suggests that there has been somewhat of a reset in the relationship between valuers and lenders over the last few years He says: “I think this relationship has been revisited over the last year or so as we’ve realised we need to get closer to the lenders and understand them better. I think the borrowers will need to understand that more as well.”

In particular, Andy highlights the importance of the RICS Gray Review of Real Estate Investment Valuations, which he says has helped define who the valuer works for. Following issues around independence and conflicts, the Gray Review set out 13 recommendations which will lead to a reset of governance structures within the valuation profession.

Andy says: “We’re now going into a period where there’s more focus on the lender being the client and that’s difficult in a world where the borrower has often paid the invoice. So the approach to that is something that needs to be thought through.”

From a THFC point of view, Mel is clear that any questions she puts forward are to help facilitate the security charging process, rather than slow it down.

She says: “The security charging process doesn’t exist to create a barrier to the borrower having their money. As properties are charged directly to THFC, my role is to mitigate risk as much as possible when taking properties into charge. I will assist the borrower as much as I can in trying to complete the security exercises as quickly as possible because, at the end of the day, we all want the borrower to access their loan monies in order to continue to build more affordable housing.”

A smooth security charging process can make all the difference to the speed and ease with which HAs are able to access their funding, allowing them to focus their attention on building new homes and reinvesting in their existing ones. So perhaps now is the perfect time for organisations to take another look at their security charging processes to make sure they are as optimised as possible for when they become active in the markets again.

Below are Mel’s top tips for borrowers to reference in order to optimise the security charging process and make it as pain-free as possible:

1. Data Management – Make sure all data relating to properties that you own are accurate and up-to-date. This will ensure that the correct data is used by the valuers when it comes to valuing units for a security exercise.
2. Development/Planning Agreements – When negotiating any agreements relating to the development of new schemes, make sure that the Mortgagee Exclusion Clause is in the NHF or GLA sector standard format to ensure that you maximise the value of the unit for security charging. An ineffective Mortgagee Exclusion Clause will automatically restrict the value to EUV-SH. Once you have completed the construction of new developments, make sure that all s106 planning obligations (especially financial) and pre-commencement/conditional planning conditions are signed off by the relevant local authority in advance of any security exercise – otherwise, this may also have an impact on value.
3. Rolling Charging Programme – Make sure you have charging packs for schemes that are ready to be charged. Your solicitors/in-house legal teams can go through these packs and obtain any missing information from third parties early on to avoid delays during the security charging exercise. Anything required from third parties will largely be out of the control of the borrower and lender, so the potential for the transaction to be delayed is increased. In particular, if there are historic planning documents that include ineffective Mortgagee Exclusion Clauses, then it is worth contacting the relevant Local Authority to see if they will amend this via a Deed of Variation to the NHF/GLA sector standard in advance of charging the units.
4. Valuations – Engage in valuers at an early stage of the security charging process so that they can provide indicative values for the proposed property list for the security exercise and identify if there are any potential issues that might restrict values. This will also enable you to ascertain whether there is enough value in the property list in order to deal with any asset and net income cover requirements.
5. Communication and Engagement – Make sure that all of the relevant contacts on the valuer, lender, and borrower side are engaged and open in their communication. If there are specific deadlines that need to be met, for example, if loan monies are being used to repay other loan facilities, then it is important that all parties know this. This will enable everyone to work together toward the same deadline to achieve this. Open communication will also allow any issues to be identified and resolved at an earlier stage.