Regulation Committee of the Homes and Communities Agency

Written evidence from the Hyde Group (HCA 05)

The Hyde Group is a leading provider of affordable housing and makes a significant contribution to meeting housing needs and improving people’s quality of life. The Hyde Group has close to 49,000 homes and houses over 95,000 residents. Hyde provides a range of social housing products ranging from general needs, intermediate housing products and supported housing.

Hyde is one of the largest housing association groups working in England, owning or managing homes in London, Kent, Surrey, Sussex, Hampshire, the East of England and East Midlands.

We welcome the opportunity to respond to this inquiry into ‘The Regulation of Social Housing in England.’ We have responded to questions 1-4 and 6. We would be happy to discuss our response with the Committee in more detail.

In summary our response covers:

· The current threats to the social housing sector in England.

· Our views on the Regulatory Framework for social housing and how it could be enhanced.

· We believe that the Regulator’s oversight of the Regulatory Framework should be strengthened.

· The impact that the proposals in the HCA’s recent discussion paper about protecting social housing assets would have on the sector.

1.1 What has the Regulation Committee has been doing since it was set up in 2012? How well has it done? Are there other things it should have been doing? What impact has it had on the social housing sector since its establishment?

1.2 The new regulatory arrangements have not been operational for very long, and as such it is difficult to be certain how effective these will be. However, the Regulation Committee has successfully managed the transition from the TSA and has also successfully implemented the new Regulatory standards, including the model of co-regulation, which we welcome.

1.3 We believe that the Regulator ultimately managed the Cosmopolitan collapse well. However, the length of time it took for the Regulator to secure a settlement to the crisis caused some external stakeholders to conclude that the regulator was not as effective at dealing with these matters as had been the case previously. This in part led to weakened confidence in the sector by lenders and ratings agencies which may lead to increases in borrowing costs and restricted access to new debt.

1.4 A separate issue is the recently published discussion document, Protecting Social Housing Assets. The purpose of this document appears to be an attempt to finesse the current regulatory standards so as to protect social housing assets from being liquidated and distributed as profits to the owners of the new small cohort of ‘for profit providers’. We welcome the intent but are concerned that that the proposed one size all approach which, if implemented, will treat not-for-profit and for profit providers in the same way will serve to restrict the agility of those traditional RP’s who have established a track record of managing risks in a way to ensure both the protection of existing assets and the development of new supply.  We believe that the Regulator should look to treat for-profit providers and not-for-profit providers as separate entities when looking at such risks.

2 What are the major risks facing Housing Associations and the social housing sector? Are the standards set by the Regulation Committee on governance and financial viability adequate to mitigate those risks? Are the established arrangements providing self-regulation of the sector being adequately supervised and tested? What effect are EU procurement rules having on the financial stability of the sector?

We believe that Housing Associations and the social housing sector face the following risks:

Future support for social housing development

2.1 To develop social and affordable housing on a large scale there is a need for support from government either in the form grant or discounted land . It is anticipated that post 2015 there will be no or very little grant available to develop social housing.

2.2 This expected reduction in grant means that the sector overall will not have the capacity to develop as many social housing properties. In addition more finance will need to be raised through loans and diversification of our business.

Welfare reform

2.3 Welfare reform poses one of the biggest challenges to the social housing sector. We have anticipated that the changes will have an administrative and financial impact on our business.

2.4 Welfare reform will lead to an increase in rent arrears, bad debts, management costs and staff costs. Ultimately, this will adversely affect the sectors ability to reinvest in services and new homes.

2.5 We are also concerned that welfare reform will have an impact on our residents’ ability to manage their household income. We are concerned about a consequential increase in evictions and homelessness.

Borrowing capacity and financial climate

2.6 The expected reduction in grant post 2015 means that we will need to increase borrowing to support the development of homes of all tenures. At present every £1 of grant must be matched with £6 of borrowing, with reduced grant we expect to see an increase in the level of borrowing required.

2.7 The sectors borrowing capacity is also impacted by the confidence that lenders have in the sector. The sector is seen as financially strong due to a secure revenue stream, asset base and government support. Uncertainty about rents from 2015 – 2025 and grant funding may impact on the sectors ability to borrow on favourable terms. We are awaiting the announcement on rents in the Spending Review on 26th June and hope for a favourable rent settlement of at least an annual increase of RPI on rents.

Diversification

2.8 One of the strengths of the social housing sector is its ability to diversify in reaction to changing circumstances. Diversification to more profit making activities, allows providers to reinvest in their social housing activities.

2.9 We believe that diversification can be well managed, but if it is poorly managed it poses a huge risk to the sector in terms of finance and reputation.

2.10 We are also concerned how the proposals in the HCA discussion paper may impact on the ability of the sector to diversify.

Do the standards mitigate the risks?

2.11 We believe that if the existing regulatory framework were applied and monitored with an adequate level of scrutiny, it would offer protection to social housing assets for not-for-profit providers.

2.12 We believe that the regulatory framework should distinguish between the risks profiled of for-profit providers and not-for-profit providers.

2.13 We believe one of the strengths of the current regime is co-regulation, we believe that it is important that boards are empowered to monitor and manage governance and financial risk.

2.14 We believe that the Regulator’s oversight of financial risk and governance should be strengthened.

Self regulation/co-regulation

2.15 We agree with and support the principles of co-regulation set out by the Regulator.

2.16 We are concerned that the Regulator’s oversight of provider governance arrangements and financial risk management is not robust enough and does not place enough emphasis on the responsibilities of the boards around governance and financial risk management.

2.17 We are concerned about the capacity of the Regulator to undertake co-regulation in regards to financial viability and governance.

EU Procurement

2.18 The introduction of public procurement legislation has been largely beneficial to the social housing sector. The regulations have encouraged use of procurement best practices and focus on value for money.

2.19 The current EU procurement process encourages the housing sector to move towards greater transparency, stakeholder participation, as well as a more robust and non-discriminatory decision making. 

2.20 Negative impacts of EU procurement have been in regard to process, namely the cost incurred and the often lengthy timeframes. Furthermore, the understanding and application of the process can vary considerably between contracting bodies

2.21 Finally we find in some circumstances only large contractors can compete on tenders which can make it more difficult to offer opportunities to SMEs. For SMEs a barrier taking part in some tenders relates to the costs of tendering, in both time and developing the skills to engage in the complicated process.

3 Is the Regulation Committee policing the financial regulatory regime adequately to address both the risks of the failure of individual registered providers and systemic failure? Has it the power and resources needed to regulate effectively?

3.1 We believe that as it stands, the Regulatory Framework offers protection to social housing assets for not-for-profit providers, and this is ensured through the co-regulatory approach. However, it lacks any form of direct oversight of financial arrangements and complex financial deals. Much of the oversight provided is on an exceptions basis as opposed to it being part of the regulatory process.

3.2 We are concerned that the Regulator cannot enforce this oversight due to capacity limitations. In light of this, we feel that the Regulator is not sufficiently equipped to foresee and prevent events where organisations may fail; meaning social assets may be put at risk.

3.3 We are concerned that the Regulator’s limited resources mean that it lacks the level of scrutiny to prevent such failures, hence the proposed blanket mechanisms.

3.4 We believe that the Regulator could strengthen the current framework by taking a more active interest in overseeing provider governance arrangement and financial risk management. This is provided for in the Regulatory Framework, but only on an exception basis. We believe this should be more routinely part of the regulatory process.

4 In April the HCA published a consultation document, "Protecting Social Housing Assets in a More Diverse Sector: a discussion paper on the principles for amending the Regulatory Framework for social housing in England". Why are changes needed, and are those proposed adequate? Would the proposed changes have any adverse consequences?

4.1 We believe that the changes the Regulatory Standards suggested by the Regulator are not necessary for not-for-profit providers and could be damaging in several ways. We do believe that there should be stronger oversight of the governance and financial risk management arrangements of providers by the Regulator.

4.2 We feel that the comparison the Regulator has made with the utilities sector is not useful and would suggest a more similar sector is the charitable sector.

4.3 We believe that the Regulator’s proposals concerning recovery plans/living wills are good practice and support them.

4.4 We support the Regulator’s call to protect social housing assets from disposal by for-profit providers.

4.5 We believe that the Regulator’s focus should be on for-profit providers.

The proposed ring-fencing changes will have the following adverse consequences:

Financial

4.6 Loan Covenants: the proposals as they are currently envisaged may impact on loan covenants with lenders. We are unclear as to how providers would ring-fence social housing assets on loans that have been made available to organisations for general use.

4.7 We are concerned that the ring fencing proposals may act as a disincentive to institutional investors who see the balanced mix of returns offered by housing associations as attractive. In light of current and anticipated future levels of subsidy, institutional investment ought to be viewed by the sector and the government as an essential component of future funding.

Development

4.8 The proposals would impact on our ability to develop additional social housing and do not take into account current policy around innovation in increasing housing supply and developing mixed communities.

4.9 Planning and section 106 agreements: Like any other developer, we are subject to section 106 agreements on new schemes. These agreements may mean the provision of non social housing assets such as commercial units. Planning requirements may also mean that we are required to develop a mix of tenures on site which may mean non social housing assets – we have developed both student and extra care schemes via such arrangements. Current planning policy and government policy continue to encourage such mixes; the Regulators proposals do not recognise this tension.

4.10 Restrictions in borrowing and development of new social housing: We are concerned that the proposals put forward by the Regulator may adversely impact on our borrowing capacity and thus our ability to develop new homes. Reduction in grant has meant that we have had to rely on more debt to develop homes of all tenures. The proposed ring fence would severely limit providers borrowing capacity. Furthermore, with the possibility of nil grant post 2015, providers need to use their assets more effectively to raise finance to develop new homes.

4.11 Reinvestment in social housing: the ring-fencing restrictions proposed by the Regulator would severely limit the level of non-social activity providers are able to undertake, this activity often supports reinvestment in social housing. Most large housing associations already operate businesses where more than 5% of turnover links to activities other than social housing e.g. private sale developments. This activity is integral to our business and is managed so that it does not risk the social housing assets. Imposing a ring-fence would stifle innovation in the sector and the ability for the sector to deliver the new homes that are being encouraged by the Department for Communities and Local Government (DCLG) and the Greater London Authority (GLA).

Housing Management

4.12 Defining social housing – we agree with the Regulator that a definition of social housing would be useful and would urge that any definition should take into account the charitable objective of social housing. However developing this definition is not simple and we are concerned that classification could become a bureaucratic burden which does little to protect assets. As such, any future definition needs clarity whilst allowing some flexibility to allow for changes in the funding regime and product innovation. We are happy to work with the Regulator to unpick these issues and ensure that there is clarity around the definitions of different types of assets.

4.13 Mixed tenure communities - some assets which would not be viewed as social housing assets are integral to financing and delivering developments. For example our award-winning Packington Estate regeneration scheme in Islington required both commercial and private sale properties to be developed. Without the financial benefits of these commercial elements, we would not have been able to carry out this regeneration. We believe that creating mixed tenure developments served by suitable local commercial outlets is crucial to creating sustainable communities.

4.14 Community and social investment - The discussion paper does not make it clear how community and social investment services would be defined. We believe that our community investment services are core to the delivery of our social housing services and we invest significantly in them. The investment we make supports our wider vision of not just providing people with homes, but also supporting them in their homes and communities. Therefore we believe that such services should be regarded as part of our core business and would urge the Regulator to recognise this in the final proposals.

6. Are the standards set by the Regulation Committee relating to consumer regulation adequate and are the monitoring arrangements sufficient?

6.1 The current consumer standards are high level and allow for provider innovation.

6.2 The consumer standards as they currently stand place little emphasis on continuous improvement and good practice, we would recommend that there is more of a focus on such areas through non statutory guidance

6.3 The Hyde Group has a robust resident engagement and accountability structure which we are proud of. We however are unclear how other organisations implement similar arrangements in relation to the consumer standards. We would be keen to share our good practice in this area.

June 2013