Memorandum by G15 (CRED 05)
1. INTRODUCTION
G15 is a group of the 15 largest housing associations
in London. We are social businesses, operating not-for-profit
to deliver social and economic improvements into London communities.
We house around 1 in 10 Londoners—some 700,000 people, and
manage around 410,000 homes. G15 develops most of London's new
affordable housing each year.
This paper considers:
— Achievement of the Government's house
building targets.
— The financial viability of housing
associations.
— Further measures to help existing
and prospective homeowners.
Consideration is given in the context of the
housing association sector's unique place in the housing market
and our significant achievements to date. Our submission ends
with G15's vision for maintaining supply through new models and
new partnerships.
2. EXECUTIVE
SUMMARY
— Housing associations have a unique
place in the housing market—trusted partners of Government,
committed for the long term, not for profit, able to take advantage
of market uncertainty and attractive to investors.
— Housing associations have achieved
tremendous success over the last 20 years—investing £65
billion of non government money in new supply, trebling government's
own investment of £30 billion and reducing grant rates by
providing cross subsidy from surpluses on shared ownership and
outright sale.
— The cross subsidy model has run its
course—sales income, currently a vital source of income,
has reduced, causing associations to refocus on management of
their current exposure.
— Housing supply will reduce unless
bold measures are taken.
— New partnerships should be encouraged
between house builders, housing associations, local authorities
and the Homes and Communities Agency, sharing land cost, sales
risk and supply chain efficiencies; and providing an integrated
management service across all tenures.
— A new model is needed using government
money to kick start a national house building programme—moving
from mixed tenure to mixed income, retaining the home ownership
aspiration, transferring public land to trusted partners, bringing
forward planned Government investment through grant and public
equity, and encouraging private investment once the model has
been proven and market confidence is restored.
3. HOUSING ASSOCIATIONS'
PLACE IN
THE HOUSING
MARKET
As social businesses housing associations have
a unique place in the housing market compared with other providers:
— We are trusted partners of Government
with shared objectives, shared values and a track record of delivery.
— We are committed for the long term—as
housing associations are funded through capital grant and long
term debt they are not vulnerable to short term stock market volatility.
This enables associations to focus on the long term needs of the
communities where they operate, and take a long term view of the
property market.
— We are not for profit distribution—our
surplus is continually recycled and reinvested into our social
objectives.
— We are able to switch between tenures
and take advantage of market uncertainty—when house prices
rise associations are able to provide cross subsidy from their
outright sale and shared ownership operations. When prices fall
associations can increase investment in their core affordable
rented operations.
— We are attractive to investors—despite
current uncertainty, investors see associations as a strong credit,
with strong asset backing, government support and solid future
cashflow.
4. HISTORIC CONTEXT
The independence of housing associations, enshrined
in our rules and memorandum/articles of agreement, was further
underpinned by the 1988 Housing Act which granted the ability
to raise private finance to invest in the provision of new affordable
homes.
During the 1990s housing market crash the sector
used its new found borrowing powers to undertake a significant
programme of countercyclical investment in new homes, boosted
by Government assistance through the Housing Market Package.
Over the last 20 years the sector has raised
£50 billion in private loans and accumulated surpluses of
almost £15 billion, together some £65 billion of non
government investment into affordable housing. Government's own
capital grant investment in housing associations totals £30
billion, so independent borrowing and surplus generation by housing
associations has trebled the amount invested.
Over the same period Grant rates for new affordable
housing have reduced, partly through competition and partly through
Government efficiency drives.
Housing associations have delivered reduced
grant rates by cross subsidising new affordable rented provision
with surpluses on shared ownership sales, and more recently through
expansion into the outright sale market.
The credit crunch has brought to a standstill
housing associations' ability to cross subsidise new homes. This
calls into question the ability to meet Government supply targets
without increased Government assistance.
5. THE FINANCIAL
VIABILITY OF
HOUSING ASSOCIATIONS
Over the last 20 years housing associations
have borrowed significant sums and reduced dependence on government
grant, in the case of some G15 members to as low as 30% of our
total investment, but this has been achieved by increasing dependence
on market sales.
The financial impact of this change is illustrated
in the Housing Corporation's Global Accounts 2007—the consolidated
accounts of the sector, which report:
— Reducing surpluses for traditional
associations—down 30% in three years. Our surpluses are
used to provide cross subsidy for new homes, so lower surpluses
will lead to lower output.
— Increasing pressure on large associations—interest
cover down from 107% to 92%, gearing up from 51% to 59%. Tighter
lenders ratios will restrict sector borrowing capability going
forward.
— A mismatch between capacity and growth—almost
a quarter of the sector's surplus is produced by small, non developing
associations. Access to this capacity could be encouraged through
partnership working and further consolidation.
— Capacity in the South, none in the
North—a surplus of £335 million in the South and a
deficit of £64 million in the North. This will drive Northern
associations Southward and limit development in the North unless
a different funding model is developed or consolidation is encouraged.
— Increasing capitalisation, increasing
sales—the sector's overall surplus of £271 million
becomes a deficit of £1.1 billion adjusting for sales and
capitalised major repairs. In the current market, sales and capitalisation
dependency is high risk, and failure to realise sales could lead
to covenant breach.
— The overall capacity of the sector
is negative, with 47% of associations reporting positive capacity
and 53% reporting negative capacity. For those associations who
have positive capacity, continued investment in new homes is likely
to remain a key social objective. Those with negative capacity
are likely to have other priorities.
6. CURRENT FINANCIAL
AND ECONOMIC
OUTLOOK
The current outlook for associations, given
the pre credit crunch position reported in the 2007 Global Accounts
and the current economic climate, can be summarised as follows:
— Corporate lenders are exercising
caution—some continued lender appetite remains, but only
to existing partners, not unlimited in amount and not on the terms
associations have enjoyed previously. The bond markets are a potential
source of new finance, but uncertainty exists regarding availability
and price.
— Increased sales exposure—a
significant percentage of housing associations' development pipeline
has been built for shared ownership and outright sale, further
increasing sales dependence since 2007.
— Limited ability to cross subsidise—a
marked slowdown in sales means no cross subsidy for the current
development pipeline or new supply.
— Short term focus on annual budgets
and lenders covenants—budgets for this year will have been
set in less challenging times. Between now and the end of this
financial year, associations could face some difficult decisions
to ensure that expenditure is covered by income; they will be
reluctant to invest in new housing starts and further consolidation
is likely to be necessary.
— Use of balance sheet capacity for
tenure conversion—homes which were originally built for
outright sale or shared ownership are being converted into market/intermediate
rent. As a consequence they will consume balance sheet capacity
which would otherwise have been used for new development.
— Impact on lenders ratios—retention
of homes which were built for full or part sale will increase
the sector's gearing, reduce its interest cover and reduce borrowing
and investment capability.
— Reluctance to invest in mixed tenure
development—where associations have spare capacity they
will be cautious about investing in new mixed tenure development
where homes will be offered for sale in a falling market. Instead,
building long term land banks will be seen as a safer investment.
— Slowdown in Section 106 development—as
house builders hold back on new starts, Section 106 opportunities
will reduce.
In summary, housing supply will reduce in the
medium term unless new models are found and new partnerships developed.
To ensure the greatest chance of success, urgent action is required.
7. FURTHER MEASURES
TO HELP
EXISTING AND
PROSPECTIVE HOMEOWNERS—THE
G15 VISION
G15 shares Government's vision of delivering
three million new homes by 2020. The current economic climate
demands a courageous but coordinated response. With the support
of trusted housing association partners, government should take
the first step, bringing forward planned investment to kick start
a national programme of house building.
G15 believes that new partnerships and new models
are needed. New models should be sufficiently flexible to be applied
to new and existing stock across all tenures.
7.1 New Partnerships
New partnerships between house builders, housing
associations, local authorities and the Homes and Communities
Agency should be encouraged. New partnerships should:
— Pave the way for an upturn. The credit
crunch creates an opportunity for housing associations to work
with the HCA and local authorities on key regeneration projects,
developing the masterplans, building the physical and social infrastructure,
making a start with social rented and intermediate market homes
and creating serviced land available for sale to house builders,
housing associations or joint venture companies. By creating serviced
land with appropriate infrastructure land will be de-risked, which
will make it more attractive to house builders and create greater
long term value for investors.
— Share the carrying cost of land.
A joint venture approach to existing land holdings could allow
house builders to reduce their exposure, realise some value and
maintain short term shareholder confidence. It will also release
land for development.
— Share sales risk. Joint venture partners
should decide together when to build and when to sell.
— Share supply chain efficiencies—a
considerable benefit to affordable housing providers and the public
purse if extended across all tenures.
— Provide an integrated management
service across all tenures with a long term commitment to service
quality and sustainable communities.
— Develop new models which benefit
and protect all parties.
7.2 New Models
A new housing model should have the following
features:
— It should take advantage of reducing
land values to create long term public/private partnerships.
— It should create mixed communities
by stimulating a new intermediate rented sector and offering a
range of rents (affordable, intermediate and full market) to people
on a range of incomes.
— It should not encourage home ownership
for those who can barely afford it, or create personal or institutional
dependency on profits from short term house price inflation.
— It should refocus on providing those
homes which are currently in short supply—family housing
for low cost and intermediate rent.
— It should offer people the option
but not the obligation to buy some or all of their home when it
suits them, and the option to move from ownership into rent if
circumstances change for the worse.
— It should see government taking the
lead by investing first and transferring public sector land to
trusted partners, with greater volume and efficiency being delivered
as economic conditions improve, investor confidence returns and
people exercise their option to move into full or part ownership.
— It should be accompanied by a re-examination
of the nature of government investment, separating future investment
into two elements—grant subsidy, which is needed to deliver
affordable rents, and equity, which is needed to fund the product.
Once spent, subsidy cannot be returned, but it can be continually
reviewed and adapted to suit changing individual circumstances.
Equity can anticipate a share in future gains and losses, it can
be repaid, it can be recycled and reinvested, and it can be sold.
— In the longer term, government equity
could be replaced or enhanced with tax credits to encourage private
investment, but the first step needs to be taken by a patient
investor with a commitment to increasing housing supply across
all income groups.
Housing associations should play a critical
role in delivering new models and partnerships as we can deliver
without the costs falling on the PSBR, and we have the track record
of managing affordable rented housing alongside other tenures.
8. SUMMARY
Housing associations have been the trusted partners
of Government for many decades. We have a track record of delivery
and innovation, with £65 billion of non Government money
being invested into new affordable homes. We have a unique place
in a challenging market, but the current cross subsidy model for
affordable housing supply has run its course, and new partnerships
and new models are needed to replace it.
New partnerships and a new model will offer
a wider group of people greater hope, greater choice and greater
mobility. The housing association "third sector" is
ready to deliver a fourth way, but the fundamentals need to be
challenged first.
October 2008
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