CT Partner, David Williams, outlines the golden rules for organisations seeking to purchase stock.
The regal appearance of Noel Edmonds in I’m a Celebrity Get Me Out of Here! and his links to the late 1970s TV programme, Swap Shop, provided a tenuous reminder to write my latest article on stock purchase and disposal (I can hear the groaning from here!)
Stock transfer
The market for the sale and purchase of housing association assets shows no sign of running out of steam. In the past 12 months there have been transactions involving nearly 4,000 homes, with varying motivations for engagement.
Some housing associations are looking to release capital to fund other priorities; others want to rationalise the geographic spread of their homes to achieve greater efficiency; and others are seeking to offload assets which are deemed to be beyond the limitations of investment plans. Most stock sales occur through open market competition but off-market deals can make sense if the price is right and there are overwhelming strategic factors. So-called ‘stock swaps’ form a small but important minority of transactions.
The regulation of transactions has become easier and the prior consent of the regulator no longer required. Also, there are no current requirements for tenants to be balloted prior to transfer – although appropriate consultation is expected.
In the past two years, we have also seen a plethora of new players bolstering competition – including for-profit registered providers. With access to funds they are seeking to dominate the market. Out-of-sector sales are increasing with more than 150 registered providers selling homes out of sector over the past three years. Such sales will inevitably attract regulatory interest.
Golden rules
So, to be the jungle winner, what are the golden rules for organisations seeking to purchase stock?
1. Quality of decision-making
If you are seeking to purchase stock, this will reduce the finance available to spend on development. Make sure you decide how best to use your resources and that your growth strategy provides for stock purchase options. Quality of decision making at board level supported by an appropriate risk appetite analysis is vital to facilitate transactions.
2. Understand pricing
Most transactions are based on an estimation of EUV-SH, with a value addition driven by many factors including location, type, risk appetite, and future use. When you have decided on your approach, use a bespoke financial model (and not a development appraisal system) which can accurately appraise long-term value.
3. Ensure funds are in place
If you are bidding for stock, ensure you have funds in place to transact quickly. Some sellers will attach a premium to cash-backed bids which demonstrate they can complete within a tight timescale.
4. Prepare for complexity
The perfect portfolio may be hard to find, so you may need to work through exit strategies for elements which do not align with your ideal requirements. Most portfolios will have a variety of tenure and property types, and can also occasionally include commercial elements (such as offices, shops, garages, and even long leases on medical facilities).
5. Due diligence
This is important, especially if you have priced a bid based on a creative approach to the portfolio to drive value. Legal and financial due diligence are the norm, together with due diligence on the asset condition. Many portfolios come to market with incomplete or outdated stock condition data, encouraging the prudent bidder to commission separate full or sample surveys.
6. Budget appropriately
To transact, most will need support, especially those who are new to the market. The larger and more complex the portfolio, the larger the provision.
Our experience
Campbell Tickell’s experience in this market is growing. We have advised on several portfolios, including the two largest transactions completed in the sector to date. These were the acquisition by Karbon Homes of around 1,300 properties from Guinness Partnership and around 500 homes from Hyde Housing to Southern Housing.
To discuss how we might support your organisation through stock purchase or disposal, contact David Williams: david.williams@campbelltickell.com
This article appears in: CT Brief – Issue 40
