Regulator warns on risks for RPs over equity partnerships

Mr Perry said that equity partnerships also present different economic challenges, with a return having to be generated somewhere while the rents and the costs of maintaining homes are the same regardless of who the owner is.

This is unless providers can come up with something through the partnership that generates a “much more financially efficient” way of doing things, he said.

Mr Perry said: “There are challenges there in terms of the dynamics of delivery that I think needs to be understood as you enter into any sort of partnership, but particularly one where there is an expectation about the return at some point in the future.

“What happens if that return proves more difficult to generate than perhaps you might have thought? If your contribution in the beginning is some assets, have you thought about the trade-off you’re making by contributing those assets in the first place? They have a position in your business at the moment. 

“What happens now that you’ve passed up some of the control over those assets? How well do you understand your partner? Do you understand their motivations? Do you understand their exit? Do you understand the relationship that you’re going to have to have with them over an extended period? And the honeymoon period could be quite short if things get more difficult, if the delivery pipeline slows down or if your partner gets into financial difficulties.

“Have you got a substitute? Are there alternatives available? What are you going to do in a variety of contingency situations? Because it won’t all be plain sailing. Have you thought all of those things through in terms of the impact on your business as it stands at the moment?"

Mr Perry likened the growing trend of equity partnerships in the sector to when the sector started exploring the capital markets following the financial crisis.

But he added: “There are plenty of providers for which getting involved with equity or getting involved with partnerships would be a very bad idea because it’s just not the right solution to the challenges that they face.

“The important thing is figuring out what your organisation needs to do to deliver its objectives, how they align with potential partners, understanding the economics and the risk/return dynamics of it and the contingencies if it doesn’t all play out quite how you intended.”

John Goodey, chief financial officer at Blackstone-owned for-profit provider Sage Homes, said it is important to choose the right partner.

He said: “If you’re building something together and realising that value in shared ownership, that’s a one to five-year relationship potentially, if you’re looking at owning a very-long term income stream, like a rental portfolio for the long-term or the shared ownership residual fund, that’s a 30-year potential relationship.

“And I think you have to choose that partner knowing what the timeline they have is to realise their investment, and how they realise it. Is it through income, is it through an ultimate exit back to you, back to someone else, is it a mix of those things? If you don’t go in knowing how your partner intends to proceed within that investment profile, it’s really hard to manage that partnership, isn’t it?

“You’re going to end up being surprised, potentially negatively, potentially positively, but knowing what they expect and how they’re expect to evolve over time, I think that clarity, that transparency is super important.”

Similarly, Fiona Hollingsworth, director of growth and partnerships at CHP, said it is important to consider the long-term future of a partnership.

The Essex-based housing association has partnerships with Legal & General Affordable Homes to manage  homes on its behalf, and with Octopus’ for-profit subsidiary NewArch to deliver 100 homes a year, which is due to start next year. It also agreed a deal this month with investment giant M&G. 

“Before entering into a partnership, you should understand your partner’s drivers and understand what their expectations are,” Ms Hollingsworth said.

“We want partnerships that commit to long-term investment in affordable homes, and provides our business with long-term stable partnerships.”

Last month a report from Octopus Real Estate said that equity partnerships represent the “next wave of innovation” for affordable housing, as the research showed a 22 per cent reduction in providers’ development pipelines. Octopus is the owner of for-profit provider NewArch Homes.