Valuers urge funders to adopt ‘lotting’ approach, while lawyers call for more assurance

Mr Petty said that valuing properties for a loan security valuation, for example 1,000 units in a single hypothetical transaction rather than four lots of, say, 250 units each, is not how the market trades. 

 

He said this is not maximising the value of that security and reflecting how the lender would actually realise its security if there was a default.

 

Lotting can also help housing associations facing “really challenging problems” about the level of capital expenditure that is necessary to fund decarbonisation, Mr Petty said.

 

And putting these decarbonisation costs into valuations takes a huge amount out of the value, which providers cannot get around, he said.

 

Mr Petty said: “The only cure I’m aware of for that problem is to allow valuers to reflect how the market actually works and to say, ‘OK, value the security that you have in lots, using the valuer’s intelligence of how the market works and using their professional judgement of what the appropriate lots would be’.

 

“That way, in most cases, but not all, you should be able to produce a higher value that is reflective of how a funder will actually realise its security and should allow us to deal with a large part of the decarbonisation problem.

 

“Otherwise, I think, partly we are denying the market and partly we’re facing a really big problem in how we deal with decarbonisation.”

 

Mr Petty said that not being allowed to do lotting for loan security valuations is “wrong in principle and becoming very hard to defend”.

 

He said that decarbonisation is the factor that now “compels us to really have a look at it and say ‘look, lotting is the answer’”.

 

“At the moment, we’re doing valuations effectively with shackles around our ankles that mean that we’re not providing the most accurate advice,” Mr Petty said.

 

“And it’s now gone from ‘it can’t be right’ to ‘it is actively unhelpful’, because we are grappling with capex around decarbonisation.”

 

Similarly, Catherine Wilson, a director in Savills’ affordable housing valuation team, said that through modelling, Savills and JLL have found that lotting could offset the “huge costs” to make homes more energy efficient.

 

Ms Wilson said that while it is not a given, lotting could go “some way to mitigate some of the additional spend” that associations have for decarbonisation.

 

She said: “Often associations raise concerns with us such as, ‘what am I going to do, I’m going to have a huge hole when I’ve got to spend all this money on my stock’.

 

“Our suggestion, and we’ve talked about it with various funders, was to perhaps consider lotting as a mechanism in valuations, but we can’t do anything while our hands are tied until the funders change their instructions.”

 

Social Housing understands that lotting has been included in the Regulator of Social Housing’s regular conversations with lenders and valuers.

 

In addition, the National Housing Federation’s Property Finance Working Group has told Social Housing that the group is discussing lotting among its members.

 

Meanwhile, JLL is talking to funders about lotting, but largely on a private, one-on-one basis, according to Mr Petty.

 

Ms Wilson said that Savills has had discussions with funding lawyers and some funders about the concept.

 

She said that when conducting valuations for funders she gives them an example of what the value would look like using lotting, to help them understand it.

 

“At the moment we’re still in that education phase with funders and associations,” Ms Wilson said.

 

Anna Wallace, group treasurer at Hyde, said the G15 landlord would welcome lotting for loan security valuations.

 

“None of our valuations are based on lotting because some of our lenders don’t use this approach,” she said. “However, we believe the sector would benefit from this approach and would be comfortable in incorporating lotting into our valuations.”

The view from funding lawyers

 

However, funding lawyers have set out several reasons for being reticent about taking up lotting and have called for more assurance on the practice.

 

Ruby Giblin, partner at Winckworth Sherwood, said it would "present challenges” for funders to change the method of valuation approved by their credit committees.

 

She said funders would want to see overall sector acceptance that the same properties could be worth more and highlighted that a move to lotting would be a “big change”.

  

Ms Giblin said there is an argument about whether some funders may receive better lots than others on enforcement, as well as the problem of a cross-default.

 

“If one funder goes for lotting, and then the housing association goes under, it will trigger the loans being called for all of them,” she said.

 

“Some funders will have lotting, because that’s what they’ve agreed in their loan agreements and signed up for, and some funders won’t.

 

“And then is it a problem if there’s a perceived advantage, or disadvantage? How do we divide the pot if some funders have lotting, possibly giving them higher values than those that did not sign up? Who gets what, first? How do they distribute?”

 

Ms Giblin said more assurance is needed, and the whole sector would need to buy into lotting because it will affect all the other funders.

 

“All stakeholders will need to get together and work out whether lotting is the future,” she said.

 

“Nobody has rejected it, but it’s all very new. And it’s the first time we’ve had a change for 30, 40 years. I am sure there will be some resolution once all parties fully understand it.”

 

Richard Stirk, partner at Bevan Brittan, also raised concerns about what would happen in a default scenario. He added that lotting presents potential risks for funders, and if a new system is put in place, there could be a change in how asset cover is applied.

 

“Instructions are agreed between the lender and the valuer, so any change in approach is going to require buy-in from the lenders to the sector and may also result in changes to the way the asset cover is applied to the whole portfolio, if different assumptions are used,” Mr Stirk said.

 

However, Mr Petty said that there have been scores of transactions over the past 20 years and therefore a “considerable body of evidence” has been built up. 

 

He referred to the fact that funders already rely on MV-T valuations as well as the more traditional EUV-SH approach. In these cases, there is no transactional evidence of social housing being sold to unregulated purchasers by a funder following a default.

 

“Both these points outweigh any challenges around the amount of evidence – some is surely better than none,” Mr Petty said.

 

Mr Petty also disagreed that the whole sector would need to get on board.

 

“I cannot see any reason why that is true, and it would only need one funder to be brave enough to take the first step, and then others could make up their own minds, based on their competitive positions,” he said.

 

“They are all trying to lend to the same pool of customers. Just because one funder accepts MV-T and another does not, does not negate the working of the market.”

 

Mr Petty also dismissed concerns about some providers having better lots than others when selling assets in a default scenario. Mr Petty said if the loan is bilateral, then the security is the security, and how it is divided into lots should not make any difference to that one funder. 

 

“If the loan is syndicated, then every funder in the syndicate should have a proportionate claim to each lot, rather than having lots allocated to them,” he said.  

 

“And if the arrangement were one of numerical rather than specific apportionment under a security trustee, then again one would expect a fair numeric proportion of each lot relative to one share of the debt.”

 

While selling lots of properties in the event of a default would always be difficult, Mr Petty made the case that it would be quicker and easier to realise one’s security in the way that the market actually trades.

 

Jennie Chilton, partner at Addleshaw Goddard, raised a point about how EUV-SH and MV-T properties are lotted.

 

She said: “One point which isn’t clear currently (and what funders would need to know) is whether those portfolio sales that have transacted at EUV-SH plus c20 per cent are in fact all EUV-SH properties (in the sense that they cannot be disposed of out of sector or used other than for social housing) or are in fact a mix of EUV-SH and MV-T properties, in which case security values would already be greater than EUV-SH in most cases.”

 

According to JLL’s Mr Petty, lotting can be applied to the two valuation bases, but they need to be kept completely separate.

 

He said that everything transacted between providers on an EUV-SH basis would remain in the sector. Mr Petty said that would have influenced transactional prices, but not to a large extent as most buyers acquire stock to hold rather than to trade.

 

“Whether there are properties in there which could be charged on an MV-T basis is, I agree, an unknown quantity. But there is likely to be quite a bit in the stock which has changed hands, particularly the more modern,” he said.

 

“I agree that affects the borrowing capability of the stock, but it should not in any sense indicate realisable value in the hands of an RP, for the simple reason that they would never sell stock to be ‘worked’ in the way assumed in an MV-T valuation – ie, rents raised swiftly to market levels and numerous voids sold.”