Written evidence submitted by Inclusion Group [FSS 007]
Inclusion Group is the parent company of a group developing, providing and funding health and social care housing for vulnerable adults across the UK.
Their vision is to be a leading ethical investment company to provide flexible, innovative housing and service solutions and life opportunities in partnership.
Inclusion Group is designed to facilitate private investment aimed at delivering the development of housing stock, a financial return to investors and a surplus which may be distributed for the Groups purpose.
The Company aim is to utilise private (as well as public) investment for public benefit, in particular the social purpose of providing flexible, innovative housing solutions and life opportunities in collaboration with like-minded and trusted organisations.
1. At the heart of social housing crisis is the mediocrity of Group think, regulation and protectionism; the clarion call has been ‘mitigation’ when adaptation is what is required to respond positively to the dynamic financial, social, economic, technological and environmental opportunities of the wider social housing sector. An epoch defining ‘big bang’ approach is required and possible as opposed to the ‘big whinge or dependency culture that characterises this sector. There is a chance to embrace what is possible for the sector through emancipation from old, traditional protectionism of an inward-looking, passive sector that is now rightly challenged by the ‘for profits’ and billions of international financial investment.
2. Unlocking the value inherent within the majority of Housing Associations (HA’s) through a more traditional shareholder company structure allows for the release of monies without call for public spending. The sector is experiencing an array of joint venture arrangements between RP’s and investors and there are significant domestic and international funds seeking deployment of funds within the sector. Government should simplify the company structure arrangements through its stakeholder interest to aid further investment into the market (see link below) and open up routes for direct shareholding investment into Housing Associations.
https://www.insidehousing.co.uk/home/who-is-behind-the-nations-for-profit-housing-providers-80968
3. Converting social housing grant that sits idle on HA’s balance sheet into an equity stake could potentially be floated/sold into market to generate funds for Homes England as an Investment fund (a la sovereign investment fund) to generate the following advantages: -
4. The conversion of grant (debt) subsidy into equity would also provide for new and innovative models and partnerships between the private sector and Registered Providers to stimulate and encourage more growth, housing provision and investment. This is the ‘adaptation’ that will drive innovation as opposed to the mitigations of retreat into more subsidy and less house building. Such an arrangement could potentially release tens of billions (£) and would require the restructuring of shareholding across the sector with the involvement of the UK Treasury. This is not new money from a public source but the release of taxpayer value to bring private sector impetus to a staid, inefficient, tired and unaccountable model. A staged roll out of subsidy to equity is recommended.
https://www.gov.uk/government/publications/2022-global-accounts-of-private-registered-providers
5. More traditional shareholding would also open up the market for further institutional investment directly into RP’s for the purpose of delivering more housing. Thus the unlocking of value has a rollover effect of more investment and economic growth beyond the initial ‘floatation.’ Inherently ‘unlocking value’ is the progressive, adaptive approach as opposed to passive mitigation.
6. This shareholding float would also allow and provide for the democratisation of Registered Providers whose Board and Directors are accountable to no one; certainly not tenants, councillors or shareholders. It would be a pre-requisite to issue a meaningful % of shares to tenants (collectively through community ownership, a la Football Club supporter share ownership) to provide tenants with a meaningful tenant voice to hold executive and non-executive leader to account through resolutions, annual meetings and votes (including votes to remove senior Directors and Managers). At the moment Executive Management is only accountable to themselves and as such have no motivation to cut costs, deliver more for less or drive value.
7. It should be remembered that HA’s are not public entities therefore this is not privatisation but emancipation/entrepreneurialism to attract new investment into the sector at an accelerated rate alongside greater accountability and democratisation; compare this to the closed model of HA’s. Therefore there is no cost to the public purse nor loss of social assets as they are already in private ownership.
8. Freeing up markets has proven the dynamism, progress and accelerated economic activity that liberation brings; the current social housing market is 60 years behind and losing more time in a fast-changing world as it relies on the next piece of legislation to be issued through Government and its Regulator; we need to be more progressive as the ‘for profits’ and international money will drive forward while traditional RP’s influence swiftly and decisively diminishes.
9. HA’s should also not be able to claim charitable status and its associated tax evasion unless they rely solely/majority on voluntary contributions. HA’s income is substantively derived from housing benefit/ public subsidy the same route as many private landlords. These HA’s have demonstrated over the decades their unwillingness to cut costs and deliver value; they should be required to do so and also to pay Corporation Tax. These tax revenues should then be invested into the Homes England to deliver more homes and drive growth.
10. Tax loophole (evasion) should be closed and charitable registration be reformed. In 2022 the RSH Global finances reported £22.8Bn sector turnover; generating a pre tax profit of £4Bn upon which Housing Associations paid only £0.1Bn tax or a 2.5% tax rate. The payment of a comparable corporation tax (circa £1Bn) would provide annual income for investment into the social housing sector through Homes England without the need for additional public grant or subsidy.
https://www.gov.uk/government/publications/2022-global-accounts-of-private-registered-providers
11. Sector costs of management have remained high throughout the decade with waste prevalent across the sector and economies of scale not realised. Active regulation should be deployed to address and drive down costs of management to release more funds to pay down debt and increase the liquidity strength and competitive advantage of the sector. The Regulator of Social Housing has singularly failed to address this vital liquidity requirement; in part due to the insularity and regulatory interdependency of parties to co-exist rather than to adapt to the environment.
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12. HA’s have substantive cash flow that is regular, certain and stable; they should be encouraged to pool cash capacity to collectively invest in a Social Housing Bank to lend into the sector in order to retain, sweat and circulate funds, drive growth and increase margins for more investment. The sector has locked itself into an external fund-raising model/ strait jacket when it has the funds and capacity to generate a significant proportion of self - investment funding. Blending of external investment and lending with the substantive utilisation of sector cash flow can deliver the ‘big bang’ without the need for more money from the public purse (something that will be called for by the protectionist social housing establishment).
13. Note the Social Housing Bank (owned and funded primarily by HA’s of all sizes utilising their cash and balance sheet capacity to invest through lending) is different from Homes England Investment Fund (Government owned and funded through equity flotation of historic RP subsidy and corporation tax revenues); the Social Housing Bank would able to attract and expertly manage excess funds/capacity for smaller HA’s that have under-utilised balance sheet capacity but lack the capability to invest.
14. Through the Homes England it should be possible to generate billions of additional sector investment and capacity for the benefit of the composite RP investors without public subsidy whilst generating further economic activity. The sector does not need more subsidy system it needs to unleash its value, deploy capacity, drive economies and retain/distribute lending benefits through new models of ownership and investment that are inherent and expanding across the world.
15. Subsidy for public housing should end but Homes England (as an investment fund) would be legally required to enter into innovative and new forms of structure/model to deliver new housing, regeneration and public investment, enabling new homes and social housing. This could include Homes England directly building/refurbishing new homes/communities at a discounted rate then selling them onto HA’s or retaining an income generating shareholding as part of its investment portfolio.
16. These assets could be potentially leased within the sector by Homes England to retain their ‘purpose’ while being placed with the optimum/best RP agent to manage and deliver the benefits of the accommodation. However, the Regulator of Social Housing would fundamentally have to repair its negative view of lease models and overhaul its woeful and incoherent ability to regulate it. This would maintain an income stream within the sector with profits recycled through further Homes England investment.
17.Tenants should also be awarded the Right to Lease provision so that they can lease their home over a variable lease term to maintain and improve their home (major external repairs and insurance still responsibility of superior landlord) in order to exit from the poor service of their landlord at a reduced weekly lease rent (HB qualified) and without having to purchase the unit through right to buy.
18. HA’s should be encouraged to enter into partnership companies and enterprises to bid for land/properties/regeneration opportunities auctioned by the Home England. This would be a competitive process led by Homes England (in part but not totality) to encourage value (including rental values), high architectural and environmental standards with covenant protections to ensure the continued purpose of the properties. The development consortia or individual HA’s operating in partnership with their new private sector shareholders/investors could also potentially be backed by the Social Housing Bank.
19. Just because an RP or consortia develop accommodation/communities does not mean that they are best placed to manage the accommodation; there is sufficient evidence that the biggest RP developers in the country deliver unsatisfactory services whilst being distant and accountable. Therefore developers/consortia should not be an indication of future management. Therefore accommodation should be subject to competitive management arrangements so that for example larger, national HA’s could develop accommodation across the country but allow for it to be leased/ managed by local/regional management providers. This would require VAT exemption for management services but be compensated through corporation taxes being paid into the Treasury.
20. The sector/Homes England as a future investment fund should also be more ‘savvy’ in regard to investment and purchase in the second-hand market; to bring under performing lower value assets into ownership to provide immediate letting capacity in the social housing market and raise standards. This would undoubtedly lead to property and land assimilation to drive regeneration and new brownfield/environment projects. Leasehold reform to ensure flats all have very long leases is also a necessity to ensure they are considered to be an attractive investment.
21. As such, HA’s should actively split their development and management functions; each should prosper or otherwise on their ability, reputation and outcomes rather than be determined by the monopolistic lock-in of the current model. Mergers have been historically determined by the motivations of individual Chief Executives incentivised by early retirement, pay offs and more perks, inexpertly presided over by the Regulator of Social Housing that has produced distant, unaccountable and mediocre monoliths. Sector success and direction should in future be determined by merit success, high standards, value and service, not by the size of your portfolio.
22. This would enable for the further democratisation of the sector to allow for schemes, communities and potentially individual tenants ‘to shop around’ and swap from poor performing management landlord to other better alternatives. Only through giving power to tenants to take their business somewhere else and get a better deal will standards be revolutionised and accountability be real as opposed to empty words/gestures. Regulation is no substitute for the empowerment of the tenant/customer; if HA’s deliver poor services then they should suffer the economic consequence rather than Regulatory indifference.
https://www.insidehousing.co.uk/news/ombudsman-improvement-orders-to-landlords-up-54-80735
23. It should also be conceivable that tenants of former council stock can return to their council landlords to provide management services or potentially ownership; more certain than purchasing shopping centres. Tenant democracy and landlord accountability through regulation has failed and will continue to do so; allow tenants to vote with their feet and standards will improve alongside meaningful tenant shareholding that could include a Board position.
24. The mediocrity of the existing social housing model that is now in crisis reflects the mediocrity of the Regulator of the Social Housing with its abject, inappropriate over regulation. Their ‘Bingo Regulation’ of reliance on ticking boxes and hoping for a line or four corners but never a full house has restricted sector innovation; indeed they have perpetuated and ‘baked in’ mediocrity of poor service, high costs, low productivity, lack of accountability, unhealthy relationships and stifled growth. They are not fit for purpose to regulate in a ‘big bang’ social housing environment unless Artificial Intelligence is introduced to substantially compensate for their lack of sophistication and organisational intelligence to properly forecast and respond appropriately.
25. The inability of the RSH to anticipate the obvious challenges of property investment (especially 20-30 years after major stock transfer), an increase in interest rates (to a level well below historic high standards) and a period of inflation (which does impact on cycles) highlights their porous, unsophisticated and narrow ability to forecast, anticipate and respond intelligently. This scenario was foreseeable but the Regulator has allowed a situation where HA’s now seek covenant waivers; abject failure of regulation which is promoted as standard across the sector without meaningful challenge or accountability.
26. The closed, inward looking, partial sector of protectionism and perpetuation of Group Think is evidenced by the limited influential consultants and legal representatives that the RSH and sector actors have traditionally relied upon to inform and coerce their crude and blinkered view. Through the new forms of RP structures, shareholding and investment routes then the sub-market of advisors and experts would expand to attract a higher quality and more diverse calibre of individual and company.
27. This limited, closed and insular sector has resulted in larger, unaccountable, inefficient and poor service monopolistic HA’s as they merge without consequence with the blessing of the RSH. No wonder complaints to the Ombudsman increase year on year as no regard has been given to local accountability or service delivery. These HA’s should be made to open up competition for local management through empowering tenants to swich suppliers. The RSH has had the power to intervene but simply chose passive acceptance and the reassurance of ‘trusted faces’ who provide the comforting words they want to hear rather than to hold incompetence, mediocrity and inefficiency to account. This ‘comfort blanket’ or regulatory protection of the ‘Group Think’ view has to end.
28. Protectionism should end for HA’s but be retained for tenants. Too many poor performing HA’s have been propped up by their accountability to no one (including MP’s and Ministers) proxy protection of the RSH, tax evasion and monopoly of income through housing benefit. Poor performing HA’s should be able to lose their disaffected tenants, pay their taxes and to fail if they do not mend their ways. The ‘big bang’ will allow for other HA’s to step in and takeover (such as in the utility markets) with protection for tenants. This does not require more regulation but less regulation and clarity of Regulatory purpose rather than obfuscation and protectionism.
29. The current mantra that HA’s should not be allowed to fail as it undermines investor confidence must be abandoned; without consequence it only bakes in the bad management, high costs, mediocre services, innovation deficiency and dependency culture associated with the current insular and closed sector. Tenants should be protected and excellence allowed to flourish through effort rather than innovation being dependent upon the accident of property ownership and mediocre Regulation.
30. Regulation going forward should be primarily concerned with the following points below. This will require a completely different more specialised, sophisticated and intelligent personnel to fundamentally oversee (intervention only by exception) a new social housing market; not coercing and only intervening when legal obligations are not met or HA’s fail.
31. Ticking boxes of ‘Regulation Bingo’ must end and the explosion of ‘for profit housing associations’ should inform and drive deregulation to deliver smarter intelligence, a legal framework, tenant protection and choice/market driven growth to address the housing crisis in the country. I do not comment on planning restrictions and barriers to growth except to state that this is another worse example of how mediocre/ over regulation stifles and creates the unintended consequence of a crisis. Regulating our way out of a crisis is not the answer, you have to innovate, clarify, act and learn.
32. Voluntary registration should be maintained however the two barriers to encourage registration must be addressed; these are:
33. The sector has been regulated since 1964 and we now arrive at a time of crisis due to over regulation; this tells you a great deal. The select committee should also look at itself as it will no doubt invite along the usual establishment regulators, trade bodies and self- interested actors operating comfortably and without much competition in the social housing sector (Note: not a market) to deliver evidence, whilst ignoring the disruptor contribution such as Inclusion Group. Ours may very much be a minority voice against the tide of Group Think but we have the big idea whilst delivering economic growth, new homes, lower costs, success, economic activity and accredited services for the most vulnerable in society without the need for public subsidy based very much on the formula set out above, albeit on a smaller scale.
34. This ‘big bang approach’ needs to extend to the approaches of local authorities who need to (and do in some cases) look beyond Housing Associations to provide new social housing as part of development plans. There is great interest from other investors to deliver/ invest in social housing and it is evident that they have much greater resource and capability to provide development and social homes (but not to manage them). Housing Associations should be a management consideration in regard to the tenancy, estate and property services delivered to tenants and the community; councils should in the future be partnering with the array of new and innovative social housing development companies and Homes England (in its role as an investment fund) to negotiate and deliver local development plans. Housing Associations are too limited and meagre in their ability to respond to the opportunities in the market and are thus being overtaken by for-profit providers.
35. In summary, the notion that incremental improvement, more regulation, more subsidy and bigger HA’s to continue to endorse what has happened in the past as a remedy to the social housing crisis is naïve and wrong. Fundamental ‘big bang’ reform is required to:
36. Undoubtedly HM Treasury and Department of Business & Trade aided by finance/company restructure experts would have to review such proposal to understand the potential extent of impact of such market restructuring; however the essence of these principals do provide the basis of a positive response to the opportunities of the UK social housing market as opposed to the dependency of more subsidy and more regulation.
May 2023