Written evidence submitted by Eastlight Community Homes [FSS 022]
Response to Inquiry into the Finances and Sustainability of the Social Housing Sector
Eastlight Community Homes is a vibrant, forward-thinking resident-led housing association. We are committed to playing a full and engaged role in driving up the standards in our sector and improving reputation and trust across housing organisations. We own and manage over 12k homes in the East of England. We are a G1V1 registered provider of affordable homes. Thank you for the opportunity to contribute to this Inquiry and please get in contact with any queries.
The financial resilience of the social housing sector has been damaged over a period of time by Government policy and more recently, economic volatility. The RSH show cash interest cover has fallen to 80% from 150% (RSH Q3 2021) in 2011 demonstrating the dramatic fall in financial performance.
Current pressures and requirements to improve our stock, decarbonise and contribute to meeting the country’s urgent need for new affordable housing certainly place significant pressure on our finances. The volatility in the economy at the current time means that operating costs continue to rise at a higher rate than providers’ income. A large number of providers have been regraded by RSH to V2, reflecting the significant risks that need to be robustly managed.
Our ability to plan our finances have been undermined by
The risk to the financial viability of RPs has generally increased. For individual RPs, the level of risk depends on their underlying characteristics, headroom against lenders’ covenants and the extent to which their activities give them scope to manage their costs.
High inflation including increased staffing, interest, energy and other costs has had a material impact on the underlying cash generated from the business and puts pressure on interest cover covenants in loan agreements.
Cost pressures also impact on our ability to recruit and retain staff, especially since we pay less than the private sector, are heavily regulated, and are under intense scrutiny. We estimate the wage inflation on new hires in 2022-23 to exceed 5% and we assume we will need to make additional 5% payments to stay competitive in the market and recruit and retain talent in 2023-24.
Interest costs are a large portion of Eastlight’s budget ~30% and the recent increases cause significant cost increases, notably:-
Maintenance costs have risen substantially with higher subcontractor rates and fuel costs. Reported cases of mould have increased by 267% in the year to April 2023. We have increased our service offer and resource to ensure we respond appropriately and increased our tenancy support fund.
Our insurance costs, most of which relate to property, increased by around 60% in 2023 compared to 2022.
Energy costs to run our offices have significantly increased by £0.25m during the year. Challenges with increased energy costs have impacted on our customers most and no doubt impacted on their ability to heat their homes. Our service charges costs nearly doubled year-on-year, adding around £1.9m, driven largely by soaring energy costs and managing agents’ fees. We have had to absorb most of this increase ourselves and we will need to work out how much we can recover from residents in future years, taking affordability into account.
If housing associations continue to trend towards weaker financial performance, we would expect a further pressure to come from weaker appetite from lenders and investors to provide capital, and for there to be an adverse pricing impact as credit ratings weaken.
The sector overall cannot maintain output levels of new affordable homes in tightening market conditions. It has been well documented that providers will continue to shift resources from new development to invest in their existing homes to meet building safety, decency, decarbonisation and other pressures.
The increased costs of debt funding and construction further damage providers’ capacity to deliver new homes. Volatility in the housing market has also seen developing organisations cutting the numbers of open market sale homes they build, reducing a key source of cross-subsidy for affordable home production. In a tightening housing market, providers may be able to negotiate the bulk acquisition of market homes, to be repurposed for affordable tenures. However, this relies on housebuilders agreeing viable levels of discount and requires support from grant subsidy.
Tightening market conditions can also bring opportunities as the private sector look to RPs to de-risk private sale schemes. Falling land values present further opportunities. Both occurring at a point where our own finances are squeezed means a lost opportunity for more new affordable homes.
While demand for social housing does offer some counter-cyclical balance when the rest of the residential property market tightens, we are still exposed to the same pressures on the cost of labour, materials, energy and interest as housebuilders. Where we build for shared ownership or for sale, the people who want to buy our homes will still be affected by the cost and availability of mortgages, and this is can dampen sales rates and prices.
The ability to maintain output levels is also hindered by a perceived lack of clarity about the rent control regime which has been in operation since 2015 and has resulted in real rent reductions across the sector. This is now being exacerbated by the Government freezing Local Authority Allowances, which results in wider gaps in affordability. Clearly there are two sides to this expenditures discussion and the market can adjust in many ways but it is difficult to adjust to straight cuts in revenue after investment decisions have been made. A lack of confidence in future rent increases will translate to higher risk premia being factored into feasibility assessments for developing social and affordable rental homes, which ultimately means that fewer homes will be built.
Due to the pressures outline above, our Business Plan has been revised to reduce our development programme by 20%.
Eastlight has benefited from increases in shared ownership income, due to increases in house prices between the point of approval and contract and the point of sale. However, most RPs hold their social housing properties on the balance sheet at their historic cost, meaning that any increase in their market value is not recognised until such time as the homes are sold. Therefore, there is a lag between market values rising and balance sheets improving. We could argue that in some ways the rising property market actually puts more pressure on housing association balance sheets: rising house prices push up the price of land and can mean we have to bid higher and borrow more to build affordable homes.
Cross-subsidy continues to offer scope for additionality in certain market conditions, and this will form part of a strategy for some providers. However, it cannot be relied upon as the main route for delivery of the country’s housing needs. Land-led development and open market sale exposes the business to significant risk. The current economic situation has made this area of work particularly risky as the cost of materials and labour has increased, mortgages have become more expensive and house prices have dropped. Anecdotally, we know that a number of housing associations who were undertaking open market sale have reappraised their position and are reining back on this. The sector needs far more significant and consistent levels of subsidy to pave the way for us to provide affordable housing at sub-market rates every year, regardless of market cycles.
Eastlight has reconfirmed its commitment to delivering affordable homes, although the significant increase in build costs (our experience is ~10%) and interest costs have directly impacted our planned programme. We expect our affordable homes programme to reduce by 20% so that we can maintain our financial resilience. Our market exposure is limited to shared ownership homes only, which comprises 30% of our development programme.
We have been courted by several private equity investment vehicles, seeking partners to manage portfolios of affordable homes. Eastlight has a stated objective to own all its homes, so we have not sought any management agreements. For profit providers are increasingly active in our area of operation. We have seen instances where for profit providers have significantly outbid competitors for Section 106 homes. This serves to increase competition, leading to increased income for housebuilders but reducing the capacity for providers to secure new opportunities.
We have some concerns over the long-term commitment of private investment backed provision. Traditional RPs have a track record of commitment to our residents built up over many years, and this should give confidence that we intend to stay committed in the long-term. It remains to be seen whether we can say the same about for-profit providers and it will take decades to answer this question.
Eastlight is committed to maintaining and improving our existing housing and fully funds the expected costs internally. These annual average expenditures amount to:
Eastlight expects to meet all current expectations within existing resources and asset management strategies.
Eastlight is currently evaluating the impact of Zero Carbon Housing on the future expenditure plans, and we believe this will greatly strain the organisation and sector’s financial resilience. The costs are very significant and will add further pressure to interest cover metrics. There is no material uplift to revenue as a result of the investment because we do not have the scope or ability to increase the rents we charge beyond what Government allows us to do.
It will be difficult to achieve Government aims fully without clear policy frameworks and some forms of indirect subsidy though, e.g. VAT reductions on heating products and installations, current and new rent controls reflecting investment requirements, as well has huge wider investment by Government to create a competitive infrastructure and capacity to carry out the massive amount of work required across the country to hit the 2050 target.
Eastlight is committed to maintaining the existing stock to a good quality and is committed to upgrading our this stock to ensure it is all at EPC C by 2030. Our priorities thereafter are to undertake new development and investment in our communities. We don’t think it’s possible, given our current financial capacity and cost estimates, to achieve both objectives at all times. If we attempted to do this, we would put our financial resilience at risk. Therefore we have to make trade-offs in our business plan and budgets.
We use intelligence about the investment needs of our current homes to inform our Business Plan. We have an aspiration for new development of circa 400 new affordable home completions annually. The types of homes we build are informed by local need, demand and planning policies. Generally, this means that we deliver circa 70% houses and 30% flats. We do not consider schemes which are exclusively/predominantly flatted and build low-rise homes only (<six storey). We are building all of our new homes to the Eastlight design standard, which is set with future standards in mind.
We do not have high-rise high-risk buildings in our stock. Moreover, we invest heavily in property standards and compliance.
Yes, lifting the cap has enabled local authorities to undertake development but in our experience in the East of England this has enabled small sites within their ownership to be developed. Examples include small garage sites or redundant scrubland. Whilst these provide a worthy contribution of new affordable homes to the communities in question they are very limited in scale and impact.
It is positive to allow LAs to retain RTB receipts for three years and we would welcome this.
One of the emerging constraints is the freezing of Local Authority Allowance (LHA) which is effectively another method of capping rents. This reduces the capacity of the local authorities to respond to local needs and circumstances.
So long as the necessary regulatory provisions are in place to ensure that the homes provided by for profit providers are genuinely affordable and well managed then their contribution to the sector is welcomed. However, experience suggests that they are willing to pay significantly higher prices for S106 new affordable home schemes, which drives up the offers to housebuilders, rather than adding to supply. It also remains to be seen how responsible and committed to the sector the for-profit HAs will be in the long-term.
The failures of Boards to discharge their duties and responsibilities is a failure of governance rather than scale. There will always be a difficulty with the delivery of services in a larger organisation which should be complemented by enhanced investment in skilled staff and IT.
Some of the most egregious high profile failures are in locally based medium sized organisations.
Housing associations and local authorities have for many years worked in partnership, especially in respect of allocations, homelessness and development. In our experience within the East of England these arrangements work well. A spirit of cooperation and shared objectives exist between housing associations and local authorities. In turn this makes the sector more resilient but this is due to individual relationships and not due to intervention from the Department.
Partnership working needs to become better as we move to a more regenerative space with our portfolio. We will be looking for co-operation from Councils to support placemaking ambitions.
In general, collaboration is good but we would suggest this could be improved somewhat. Housing associations are usually one of the few long-term stakeholders in housing developments, owning and managing homes and green spaces long after the developers and house builders have moved on. Yet we are rarely round the table at concept and outline design stage. This would be helpful going forwards. Often, no account is taken of the social value delivered by 100%/predominantly affordable developments, with LPAs insisting on maximising other S106/CIL contributions. Market developers are more inclined and better resourced to seek reductions to contributions, based on viability assessments.
We would support the ongoing inclusion of shared ownership within the AHP, as part of a balanced range of affordable housing tenures. This provides a worthy option for aspiring first time buyers, and supports a balanced housing market and mixed tenure developments. This is a desirable option and we experience high demand for the shared ownership we build.
Shared ownership remains an attractive tenure for housing associations due to the mix of tenures and the potential uplift in value over time.
Please see answer to Q10 above.
Yes. we are concerned that changes to the s106 regime will result in detriment to affordable housing since such a large % is delivered via this route. The levy as proposed is a complicated regime and risks slowing down the system and does not seem to support the Government’s aims from 2020’s Planning White Paper to make the system faster and more transparent.
We lack a coherent national housing strategy. We note that there is little spotlight on homelessness or the number of people living in temporary accommodation at the current time. We are concerned that Council housing targets in Local Plans have been watered down and that the levy and potential changes to the NPPF will add complication and delay at a time when we need house building and public sector investment in new housing to boost economic activity.
We cannot comment on the direction from the Department to Homes England, but we note that Homes England is now failing to meet its targets for the development of new homes in this country. This is clearly not just the responsibility of the Department or Homes England.
No. Sub-market housing needs subsidy. If government invested more in housing then housing associations would be able to increase outputs. The increase in numbers needing housing for all categories have spiralled to new highs. Due to the life-cycle of new development, our sector needs certainty across a policy framework and a longer-term view.
The range of products (affordable rent, social rent and shared ownership) is appropriate for the majority of general housing needs. There is insufficient combination of capital and revenue for specialist housing including supported housing.
The more subsidy invested, the greater proportion of social rent, leading to greater access for those in greatest housing need/with the lowest incomes which in turn reduces their reliance on the PRS and that produces a reduction in the housing benefit bill. Capital investment produces much larger savings in revenue costs for the public purse.
We also believe there needs to be more transparency and clearer ground-rules for around how grant is allocated to different RPs. The grant rates per unit that have been awarded to different RPs under recent strategic partnership agreements have varied significantly, with no obvious reason for why this should be the case. The current system is opaque and, in our view, open to gaming and potential waste. If Organisation A is awarded £20k more grant per unit than Organisation B to deliver the same product, this this also distorts competition.
Greater support for decarbonisation will be needed to support providers’ efforts to achieve net zero.
We do not have experience of RSH activity with exempt providers. However we would note that Government focus on supported housing has been weak in recent years since the demise of Supporting People revenue and the related commissioning framework that was put in place at that time.
Once the Supporting People ring fence was removed, County Councils took the opportunity to redirect supported housing investment towards higher end services and costs.
Yes. We are not aware of any evidence to the contrary and our experience of Regulator involvement in the merger process are positive.
Yes although they may not have the skills as outlined in our response to Q24
No. We believe the Regulator, like all other regulators, will struggle to keep up with innovative and complex financial structures. The principles of co-regulation along with a continued focus on protecting the interests of residents and the public purse will serve well.
We are not aware of any loss on default for lenders to housing associations within the Regulators remit. This is important and positive for new and existing lenders and the regulator should be sufficiently skilled to manage the expectations of these investors.
We will not really know unless some get into financial difficulties. This is a moving target and the challenges of regulating for-profit housing associations will only become clearer over time.
Yes, our estimate is the numbers will reduce by at least 20%. It is inevitable that the economic impact coupled with the redirection of housing associations’ funding towards existing stock will reduce output unless the Government invest more in new affordable homes.
May 2023