Written evidence submitted by Peabody [FSS 023]

About Peabody   

160 years after it was established, Peabody is one of the oldest not-for-profit housing associations in the UK.   

The Peabody Group is responsible for more than 104,000 homes, with around 220,000 residents across London and the Home Counties. We also have around 20,000 care and support customers.  

Our purpose is to help people flourish, and we are getting closer to residents by taking a local approach.  We are committed to delivering a responsive and easily accessible repairs service and investing in our existing homes so they are safe and well maintained. Our retrofit projects will make thousands of homes more energy efficient.  

We work with councils and communities to promote economic inclusion, tackle inequality and poverty, and prioritise wellbeing.  Our rents were £679m lower than the market in 2021/22. With an average rent of £122 per week in London and the south-east, we offer significant value for residents and communities. 

We are also committed to building much needed affordable homes.   

Introduction

We welcome the Select Committee’s focus on the sustainability of the social housing sector. This is a vitally important issue for the millions of people in housing need in England.

Everyone should have access to a good, safe affordable home. This is the foundation for good health and wellbeing and doing well in life. But since 2010, when public capital investment to fund new affordable homes reduced by 63%[1], not-for-profit housing associations have taken on much of the responsibility for new supply. The funding of new social homes continues to be heavily dependent on developing housing associations’ ability to borrow and cross-subsidise from sales. 

Not-for-profit housing associations like Peabody are financially resilient and continue to be a strong investment proposition. Over the last 12 years we have used our ability to raise debt funding and cross-subsidise to deliver thousands of new homes, regenerate places and invest in communities in partnership with local authorities and others.

However, the scale of the current housing challenges in England shows that this model alone cannot adequately meet housing need. There are approximately 4.4m households in the social housing sector, with well over one million households on local authority waiting lists and 100,000 families in temporary accommodation[2]. Recent research by the National Housing Federation has revealed that over 740,000 families are living in overcrowded homes, unsuitable for their needs[3]. 

The under supply of social rented homes is getting worse each year, with more social rented homes being sold under Right to Buy than are being built. At the same time housebuilding has halved in 50 years and home ownership is increasingly unaffordable to most people[4].

Without the investment of not-for-profit housing associations in the last decade the problem would be even worse. But there is no question that despite our efforts and delivery there is a growing housing emergency.

Executive summary

The multiple housing crises of safety, quality and supply which are affecting people in England show the importance of this inquiry.  The current funding model and policy environment is unsustainable.

But in recognising the challenges facing housing associations and local councils, and the limitations and effects of current housing funding and policies, it is possible for government to deliver transformative change for the country. 

The provision of social homes fit for the 21st century and beyond can generate good sustainable growth for the country. Not only by improving the lives of residents, but it can help create wider social and economic prosperity and create jobs and value in supply chains. 

With support, the housing sector can be part of the solution to many of society’s challenges. Underpinned by a partnership approach to housing funding and policy, government could boost growth and social mobility and alleviate pressure on the NHS. This would also progress the transition to net-zero whilst creating a new deal for communities across the country.

The positive impact of not-for-profit housing associations is significant. Lower rents in housing association homes save residents £9bn a year across England. Managing and maintaining existing homes directly adds £11bn to the national economy annually supporting 148,000 jobs all over the country. And building new homes added over £2bn to the economy and supported tens of thousands of jobs in 2021.[5]  

But not-for-profit providers are facing several competing demands for investment. These include meeting the (increasing) costs of building safety, improving the condition and energy efficiency of homes, and developing much needed new social rented homes. In a high inflation, high interest rate environment, with rising costs and limited rental income, we need to prioritise and adopt a prudent approach to financial planning and budgeting.

We want to work with government, local councils and partners to keep delivering and maximise the positive impact we can make. We would welcome the opportunity of giving evidence to the Committee on how this can be achieved.

The current state of financial resilience of social housing providers:

How would you assess the financial resilience of the social housing sector currently? Are increasing pressures and requirements putting financial viability at risk?

What pressure has high inflation, increased energy costs and any other additional costs placed on the finances of social housing providers?

Peabody is financially strong and resilient. Our financial plan enables us to invest our rental income in our homes and services for residents for the long term. However, this is put under significant strain by competing investment demands, rising costs and limits on our income. This pressure has been exacerbated by uncertainty and public policy changes in recent years. Our financial viability is not at risk, but our ability to deliver everything needed at pace is under huge pressure. 

We are investing in building safety as a top priority and have spent more than £200m on this up to 2021/22. Many of our ageing properties require substantial planned maintenance, and demand for responsive repairs was already increasing before the pandemic. We are still catching up with work that had to be curtailed by Covid and have put more resource into this.

Skilled labour shortages, rising material costs post Brexit, and subsequent economic shocks following the war in Ukraine have added to the challenges and reduce our headroom further. We are making our homes fit for the future environmentally and are committed to getting to net-zero by 2050. Our current cost estimate of bringing all our homes up to EPC B by 2050 is over £1bn,

Our capacity to deliver has also been affected by a longer-term divergence between costs and rents. The current high inflation, high interest rate environment is challenging, and follows a four-year one percent rent reduction imposed by government which reduced our re-investable income by over £90m. Our rental income is how we reinvest in existing homes and services but our rents only returned to 2016 levels in 2020/21. Peabody rents were already £25m a year lower than regulated levels and the policy has had a significant impact on our capacity to invest.

The lack of long-term rent certainty also leads to increased borrowing costs through weakened credit rating agency metrics. We supported the rent cap for 2023/24 as a short-term measure to help people through the cost-of-living crisis. Indeed, we voluntarily capped our non-regulated rents and shared ownership rents this year at 7%. But the need for long-term rent certainty from government cannot be overstated. The future rent settlement needs to properly balance the need to reinvest as well as keep rents at an affordable level.

To what extent can social housing providers maintain output levels in housing development to provide a counter cyclical balance in otherwise tightening market conditions?

Does the cross-subsidy model, by which market housing helps pay for social and affordable housing, have any continuing viability?

Our strategic partnership with the Mayor of London is successful and has delivered over 9,000 affordable homes in recent years. But due to lower investment from central government we have lost our ability to deliver new homes counter-cyclically. 

We use our balance sheet, partnerships, cross-subsidy from sales and some public investment to do it. In tightening market conditions in high-cost areas, however, the cross-subsidy element will simply not deliver enough genuinely social rented homes.  

Cross-subsidy can continue to work as part of a balanced funding mix, particularly in parts of the country where land and build costs are lower. But in London and the South-East, where land and other costs are higher, it cannot be relied on. It will not work during economic downturns. An overreliance on it undermines the debt funding contribution by affecting housing association credit ratings and borrowing costs. 

Public investment, or grant funding, currently contributes an average of around £43,000 to the cost of building and subsidising each affordable home Peabody builds. But after all other funding is accounted for, we still take on £220,000 of additional debt to deliver that home. This is an imbalance which shows the limits not just of cross-subsidy but of the whole funding model for social housing in England. 

This challenge is compounded when the market is uncertain and made increasingly difficult with rising costs of building and maintaining homes. The limits of cross subsidy even with high sales revenues are clear – while it can be part of the mix and help deliver mixed tenure communities with a strong market, it cannot possibly deliver the socially rented homes that are required.

Government could help to ensure the model has some viability in the future by:

• Providing higher levels of capital investment per home (reducing the level of cross-subsidy needed)
• Devolving more flexibility and resources to the Metro Mayors including the Mayor of London
• Underwriting some market sale risk
• Backing purchase support schemes for buyers in not-for-profit housing association schemes
• Joining consortiums as an investor partner through Homes England or other agencies
• Further grant funding to support decarbonisation of existing homes (Peabody was awarded £25m from SHDF wave 2), Without this investment capacity for new supply will be reduced
• Further VAT relief on economically productive remediation/refurbishment/retrofitting work
• Flexibility in application of Recycled Capital Grant Fund

What impact have changes in the housing market in recent years had on the strength of housing associations’ balance sheets?

The rising cost of securing new land and the cost of bringing forward complex mixed-use developments have reduced margins on sales. Against a backdrop of market uncertainty, we have had to measure our exposure to the property market and ensure that we only take on a level of market risk that is proportionate. To preserve balance sheet strength we have had to reduce new supply.

Surpluses generated through open market sales finance social homes over many years. Although the revenue generated from a property sale is received as soon as it is sold, this is typically three years after the initial investment. And since our average rent is £122 a week it takes at least 60 years to recover the cost of building and managing each social rented home even with cross subsidy from sales. Those 60 years must be funded alongside the ongoing management and maintenance costs once the home is completed. As noted above, we take on an average of £220,000 of new debt to pay for every affordable home that is provided.

With that context, our borrowing is now at £4.5bn. This represents a significant commitment to providing desperately needed homes. The requirement to generate sufficient cash to cover our interest bill and ensure covenant compliance constrains our capacity to take on new debt.

To what extent have private equity investors, and in particular international investors, been entering the sector? What challenges does this present?

Rather than posing a challenge, equity investors could be part of the answer in scaling up delivery of new low-cost homes to rent and buy. However, we have not seen evidence that this is going to make up the subsidy gap to provide sub-market homes to rent in high value areas - where the greatest need for the social subsidy provided by affordable rented homes is. This subsidy still needs to be met. Neither is there evidence of significant appetite to cover the retrofit challenge.

Increased public investment would help unlock new institutional finance, scaling up delivery. There are important questions and red lines to establish in terms of ongoing ownership and management splits. But if there is alignment on long-term stewardship, agreement on timescales and level of return, and a commitment to ESG objectives there is potential to make a difference. The principle of public/private/not-for-profit partnerships which utilises debt, equity and public investment to deliver genuinely affordable homes and regeneration is an opportunity. 

Whether institutional investors support the sector through the traditional bond debt or through equity investment, their appetite for investment will be impacted by certainty over the link between the income from rents and cost inflation.

The Secretary of State has specified that more resources need to be directed towards maintaining and improving the existing stock. How feasible is this for social housing providers?

We have invested over £400m in maintaining and improving our existing homes over the last three years. Making sure our homes are safe, comfortable and in good condition is a top priority.

We support a reformed Decent Homes Standard and will always prioritise investment to meet that. This is funded through our rental income, and we would reiterate the importance of long-term rent setting in this context. It is impossible to properly plan and account for investment programmes if our future rental income cannot be relied on.

We are accelerating investment and putting additional people resources into dealing effectively with damp and mould in our homes. We are strengthening our dedicated team and proactively contacting people whose properties may be at risk of damp. We’re committed to finding temporary accommodation for people whose living conditions are unacceptable and piloting new approaches and technologies to prevent recurring problems where possible. While the recommendations in the Better Social Housing Review carry cost implications, we are strong supporters and advocates of the initiative. 

We are also taking a fabric first approach to environmental sustainability, aligning our planned maintenance and retrofit programmes. This creates economies of scale and should help accelerate the programme. 

We are match-funding £25m allocated from the Social Housing Decarbonisation Fund to upgrade around 6,500 homes to EPC C standard in a £50m project. This will improve the energy efficiency of homes, improve ventilation, and cut residents’ bills alongside work to replace windows, kitchens, bathrooms on a cyclical basis. 

The most effective, cost-efficient, and valuable approach to make progress on decarbonisation and decent homes would be to apply matched funding principles to align cyclical improvements with retrofitting work. Whilst around 74% of our homes are at least EPC C we estimate that to bring our estate up to EPC B by 2050 would cost more than £1bn.

Recent research has shown how retrofitting the UK’s historic buildings would lead to substantial carbon savings and an additional £35bn of output annually, supporting around 290,000 jobs. In the same way that low rents help, reduced bills through better energy efficiency also provide additional long-term savings for government.

There is significant value, therefore, in exploring how an expanded and combined capital investment programme to match our own funding can accelerate the upgrading of existing homes. Funding to match our own on decent homes and sustainability will help align policy objectives, and relieve headroom, capacity and covenant pressure experienced by housing associations. 

How do social housing providers choose whether to undertake new development or to focus on maintenance and upkeep of existing stock? Is it currently possible to achieve both objectives?

We prioritise investment in existing homes, but it is not a binary choice between development or maintenance. Many people are living in overcrowded unsuitable conditions and there are homes which need regeneration or redevelopment. Fundamentally, more investment in maintenance, retrofitting and new homes is needed if we are to tackle the challenge of unsuitable homes and chronic under-supply.

Regeneration and densification of existing estates can address all these issues, but the finances involved make it extremely challenging to deliver. The redevelopment of estates can provide people with brand new, modern homes and amenities and can transform lives for the better by improving living conditions, but the financial appraisal for redevelopment of existing estates is often the most challenging.

What issues does the requirement on Housing Associations to carrying out building safety present?

We have spent significant sums to protect residents from additional costs, and the costs of remediation will continue to increase.  Our estate now incorporates almost 300 high-rise buildings, housing around 10,000 people, which requires a major cash outflow (over £200m so far) and substantially increased insurance costs. Banks are also unwilling to use impacted properties as security for borrowing.

To support not-for-profit providers government could expand access to an enlarged Building Safety Fund, which is currently restricted on the basis of tenure of the building that needs remediation.

This penalises social housing providers in favour of private providers. Removing VAT from remediation (and retrofitting) work would maximise the value and impact of the money being spent, freeing up capacity for investment. 

Traditionally, struggling Housing Associations have merged with stronger, sometimes complementary, Housing Associations. Will this continue to be possible?

There will be a limit in the extent to which stronger housing associations can accommodate financially weaker associations and remain financially strong or retain an existing credit rating.

To what extent can mergers result in the creation of an umbrella group too large to discharge its duties and responsibilities to its tenants?

One of the founding objectives of our recent merger with Catalyst was to get closer to residents through local service delivery. We are not putting two large organisations together and doing things the same way, we are breaking our structures down to regional and local levels. We believe we will demonstrate in time that it is possible to be large and resilient but with locally focused services and a strong connection with residents and the communities we serve. Scale in itself is not related to quality of services.

This is our direction of travel, and it will be the key to improving our relationships with our grassroots stakeholders. We have already divided the organisation into regions, with Managing Directors overseeing every aspect of our activity in local areas. We are reducing patch sizes, investing in resident facing roles, and breaking down internal silos. Together with residents we’ll be creating local plans to drive operational improvement, tenant engagement, community investment and partnerships.

Has the emergence of partnership working between councils and housing associations in local areas made the sector more resilient? What encouragement has the Department given to such partnerships?

To what extent do local authorities and Housing Associations collaborate when considering development plans for housing locally?

We work with councils on housing matters and to promote economic inclusion, good health and wellbeing and on projects to tackle inequality and poverty in our communities. We act as an anchor institution in our local areas.

These collaborations enable us to work effectively with a network of partners across sectors within a local area. Together we can strategically pool resources, share good practice and respond to local social and economic challenges. Our scale also means we can successfully work across local authority borders to support regional growth and change. We welcome collaboration with local councils and believe that by co-ordinating our efforts on shared objectives we can achieve more. Our community focus, commitment to affordability and expertise in regeneration and new homes allows us to add significant value in local council areas. We would like to expand this in future as an important part of what Peabody does.

The Affordable Homes Programme includes a high proportion of shared ownership properties. To what extent is this form of tenure desirable for potential purchasers and for social housing providers?

Shared ownership is an important part of our programme and can be an effective route into home ownership. Offering people low deposits and the ability to staircase, shared ownership can make homeownership a reality for lower earners who would typically be priced out of the open market.

Will the introduction of the Infrastructure Levy and changes to section 106 significantly affect the capacity to develop affordable housing.

We are extremely concerned that the proposed Infrastructure Levy will not raise enough money to meet affordable and social housing needs. It is not clear how the levy would facilitate mixed tenure communities.

May 2023