By Charlotte Sawyer and Elad Yasdi, partners in the Real Estate and Projects Team at Devonshires

A ‘perfect storm’ of economic and compliance challenges for the social housing sector has resulted in a high volume of stock rationalisation activity and registered providers (RPs) are continuing to rebalance portfolios. Yet from this surge of activity, deals are now often getting longer, pricier and more contingent. So, what’s changed and what does the landscape look like for the new year?

Comprehending compliance

Compliance is now, more than ever, centre-stage, and important for all organisations from not-for-profit and for-profit providers, to local authorities and other operators.

Five years ago, stock transfer diligence meant gas safety checks, fire risk assessment (FRA) actions and rent accuracy reviews. Today, these items don’t just matter – they drive pricing, timing and even deal viability. Building safety requirements, Awaab’s Law and greater tenant visibility across landlord performance have pushed safety, repairs and damp/mould compliance to the very top of the data room.

Where portfolios are occupied (which is almost always), everything becomes material: the certification position, ‘no access’ records, completion of C1/C2 electrical actions, and high risk FRA actions in both common parts and any ancillary commercial premises.

Add the basics that never went away – correct rent setting, statutory Section 20 major works consultations, and robust tenant/leaseholder consultation under regulatory standards – and it’s clear why transfers are slower and costlier, despite all parties working on efficiencies, including technology-driven transaction solutions.

Sellers often come to market because of historic under investment but squaring that with a buyer’s need for a clean and future-proofed compliance position can feel like walking a tightrope.

To be or not to be – for profit or not for profit?

Most activity in the market still occurs between not-for-profits, in terms of transaction size and value. In some quarters, the dynamic between for-profit providers and not-for-profits is viewed as a ‘divide’, though more and more traditional RP groups are now contemplating for-profit subsidiaries and/or also transacting with (third-party) for-profit providers. It’s also true to say that the increased interest from for-profit providers has made the stock transfer market more buoyant – this is the case notwithstanding that there are significant hurdles for such entities, which we unpack further below.

The compliance, rent setting and consultation challenges apply to both types of provider.  However, deal architecture often diverges in three key areas.

The first point of divergence is in regard to grants and consents. Where social housing grant (SHG) liabilities transfer, formal consent is required.  For-profit buyers contend with a higher bar: typically, full valuations are needed and grant liability carries an uplift payment that sits on the balance sheet, crystallising if the asset leaves the sector.

“Five years ago, stock transfer diligence meant gas safety checks, fire risk assessment (FRA) actions and rent accuracy reviews. Today, these items don’t just matter – they drive pricing, timing and even deal viability”

There are also significant challenges presented by the planning process and Section 106 obligations. Many portfolios include homes that were secured under s.106 obligations that were drafted when for-profit RPs weren’t envisaged. Some local planning authorities remain cautious about for-profits serving as affordable housing owners and operators. There are also hard constraints, such as nomination agreements blocking sales of void units out of the sector, recycling clauses for shared ownership capital receipts that don’t match investor models or planning agreements naming a specific type (or group of RPs).

Ensuring local planning authorities (LPAs) and strategic partners are more comfortable is possible, but that might require time, clear management, and early consultation. This constellation of issues has come to the fore as a result of the increased for-profit trading activity – which is a positive thing – and, in practice, LPAs are now developing a wider knowledge of for-profits and how they operate, together with pathways through the issues identified on a case-by-case basis.

While stamp duty is typically straightforward for not-for-profit providers, because of the reliefs available, for for-profit providers the SDLT position has to be modelled carefully, as the available reliefs will be more limited. In particular, where there’s no social housing grant (or other public subsidy) involved. Relief can be available where a grant is present and conditions are met, but the analysis is technical and fact-sensitive – especially for mixed portfolios with different completion tranches.

Management – identity and capacity

A recurring friction point is management. There are few private or third-party managers with the scale and depth to take on large, complex portfolios at pace. Where a for-profit registered provider owns the asset, but a third-party manages in practice, sellers will often hardwire conditions requiring the incoming RP to appoint a specified manager for continuity and reputational reasons. All of this is likely to be of benefit to residents, but it can constrain the buyer’s operating model.

Stock transfer choreography

The sector is embracing new deal structures like never before. Developers and RPs increasingly collaborate on a multi site (not just multi-phased) basis, and RPs deliberately exit portfolios as part of their corporate strategy.

In the s106 context we’re seeing transactions, and disposals, happening earlier in the development life cycle, with forward funding on the rise and organisations having to manage different transactional risk profiles. Careful stewardship of such matters, from knowledgeable client teams and their advisors, is therefore essential.

ESG, EPCs and portfolio selection

EPC expectations (commonly B or better) and broader ESG filters are now front of house. Buyers are increasingly selective, triaging portfolios to mitigate balance sheet impact. Conversely, a portfolio sitting squarely in an established organisation’s patch may justify a heavier lift.

From the perspective of for-profit providers, the focus is often on achieving sustainable returns within the regulatory framework, while also highlighting the positive impact of delivering social outcomes. For not-for-profits, the outlook post transaction typically spans a longer horizon, with decisions framed by long-term stewardship and missions.

What does this mean for the wider property industry?

Stock transfers represent a small slice of the overall market, but the ripple effects are real. Longer or abortive transactions delay capital receipts for sellers, pushing some to borrow instead of dispose – reducing capacity to invest in existing homes.

For-profits are now bringing in new capital, but, where traditional affordable housing portfolios don’t clear compliance and other hurdles at viable pricing, some organisations may pivot away towards PRS or temporary accommodation.

New year’s resolutions?

Stock trading continues to be on the up, but the bar has also risen. Where sellers invest in compliance and data readiness, and where buyers are realistic on price, programme and management expectations, deals progress at pace.

For all those involved, therefore, a remaining constant is how fast they can undertake the relevant transaction legwork whilst crafting a deal that balances, robustly, commercial aspects, regulation and compliance.

This must all be done in a way that meets with the continued delivery of a social purpose. Deals approached in this manner usually deliver success, meeting the needs of residents and other key stakeholders, as well as the transaction parties and their investors/funders.