Written evidence submitted by MORhomes PLC [FSS 008]

Introduction to MORhomes PLC

MORhomes specialises in lending only to registered not-for-profit UK Housing Associations.  It is a major funder to the sector, with over £0.5bn lent to 22 registered not-for-profit UK Housing Associations.  It has credit-rated 54 Housing Associations using its own proprietary credit model.  It is also wholly owned by the sector, with all 67 shareholders being registered not-for-profit UK Housing Associations.  As such MORhomes has deep insight into the finances of Housing Associations, and a keen interest in the Committee’s review.

Therefore, further to the call for written evidence on the terms of reference, we make the following observations:

The current state of financial resilience of social housing providers

To date the social housing sector has shown financial resilience in the face of multiple pressures facing the sector.  We undertook a review of our borrowers’ financial position following the imposition of the 7% rent cap in England for 2023/24.  What that showed is that:

• At a headline level our borrowers have maintained their financial strength.
• However a significant proportion have been adversely impacted by both cost inflation and the rent cap.
• Therefore in order to maintain their financial strength they have needed to take mitigating actions.  Those mitigating actions include:
• Reducing the scale of plans for the development of new affordable housing – since the rent cap was imposed, our borrowers are expecting almost a 30% drop in the net increase in stock between 2023 and 2027.  They now expect a net increase in stock of just over 5%.
• Asset sales – this might include a loss of some existing social rent homes, for example where required decarbonisation work might be unaffordable for a Housing Association.
• Managing the pace of spend on major repairs – this might include slower delivery of plans to decarbonise the housing stock.

Some Housing Associations develop market housing for sale to help pay for social and affordable housing.  The nature of the returns from market housing development and sale is different and far less predictable than that from social and affordable housing.  The revenue from market housing for sale is a one-off at a point in time, with the return depending on the state of the housing market at the point at which the development is completed and the level of construction risk taken by the Housing Association during the development.  On average through the cycle it could be expected that market housing for sale should generate profits to support social and affordable housing, yet there may be times in the cycle when losses occur.  This might then require further mitigating actions to be taken in relation to social and affordable housing activities in order to cover losses in market housing for sale activity.  The scope for mitigating actions will not be unlimited, and therefore providers will need to consider carefully the risks of developing market housing for sale.

New challenges to the social housing sector

As above, with all other things being equal, in order to maintain their financial strength it is to be expected that a need for greater spend in one area (e.g. maintaining and improving the existing stock) will necessarily result in reductions in spend in other areas.  So while it might theoretically be possible for social housing providers to direct more resources towards maintaining and improving the existing stock, it would likely have a knock-on impact in other areas.  When developing policy, it is therefore important for government to consider the full range of different objectives and desired outcomes, and create an approach to funding which is cohesive and holistic in order to avoid unintended consequences.

Housing Associations are undertaking a continuous juggling act in order to deliver on a range of different competing objectives.  They will consider the resource requirements of the investment, they will consider potential delivery risks for different activities, and they will consider the resultant risk and financial profile from different activity mixes, seeking to strike a balance to deliver on their strategic objectives.

There continues to be merger activity in the sector.  Merger activity can enable economies of scale to be secured, and in turn the savings achieved can be applied across the range of different competing objectives.  As with any organisation, when growth occurs it is important to maintain and embed a culture and a structure which enables Boards and senior leaders to remain connected to the needs and experiences of its customers (in the case of Housing Associations, its tenants) in order to continue to deliver to the required standard.

Shared ownership can enable some potential house purchasers to get a foot on the property ladder when they might not otherwise be able to afford to do so.  Some will therefore consider this to be a very desirable tenure.  Social housing providers are able to share in the increase in property value over time with a different risk profile to developing market housing for sale, though need to manage the administration of partial increases in ownership.  One consideration for social housing providers is whether and to what extent shared ownership properties can be used as security for future borrowing.  Many funders might only accept 15% of security to come from shared ownership properties.  MORhomes supports the sector accepting up to 50% of security coming from non-general needs housing including shared ownership properties.

What are the policy and regulatory challenges to the Department and the Regulator?

There is an opportunity to enhance significantly current Departmental policy on social housing and affordable homes.  Rather than consideration of individual elements of policy and funding, the sector will benefit from a comprehensive, all-encompassing integrated policy and funding structure which assesses and funds the range of different objectives.

The work we have undertaken with our borrowers shows that, all else being equal, decisions on rent-setting and increased regulatory requirements will impact on the scale of delivery of new social and affordable housing and on the pace with which decarbonisation of the housing stock occurs.  So an adjustment of funding / income in one area will need adjustments of funding / income in other areas if all of the same objectives are to be achieved, or will need reconsideration of the targets and objectives.  Similarly, the introduction of new / additional targets and objectives without the introduction of new / additional funding will inevitably result in a shortfall in delivery of pre-existing targets and objectives.

Policy and funding also needs to be set for the long-term as housing is a long-term asset and Housing Associations need certainty in order to be able to undertake their planning over an extended period of 20-30 years.  For example, while the 7% rent cap only capped the increase in rent for a single year, that year then forms the base for all future years.  So while double digit increases in social rent would not have been appropriate, that cap has reduced income for Housing Associations in perpetuity in the absence of an approach which allows them to average out the increases over a period of time.

As a specialist lender focused solely on the sector, MORhomes is happy to work with the Department and / or Homes England to help provide a multiplier effect to government funding, including by routing funding to small and medium sized Housing Associations.

May 2023