Written evidence submitted by St Arthur Homes [FSS 024]
Frame: The Levelling Up, Housing and Communities (LUHC) Committee has launched an inquiry into the finances and sustainability of the social housing sector in England, examining the financial pressures facing social landlords and the resources needed to meet a variety of challenges, including the need to build thousands of new homes for social rent and the task of improving social housing stock.
Well known financial challenges face the robustness of the charitable housing sector’s finances, such as the cost of retrofitting for fire safety, damp and mould, and meeting net zero. There are also well over one million households in need of permanent housing who can’t otherwise afford it. Thus, delivering the 145,000₁ affordable homes needed per year in England is not possible under the current regime (which has delivered around 50,000 per year over the last ten years). Many not-for-profit housing associations operate highly geared finances, and they cannot raise equity. It has been estimated that the maximum number of homes (depending on tenure) that associations can build is close to 65,000₂ homes per year.
Full, publicly grant-funded ‘council’ homes were replaced by mixed models, including private debt finance, in the 1980s, which was aided subsequently by cross-subsidy. As reactive as this evolution has been, this mixed arrangement will not allow the nation to reach – by tripling – its social housing output year on year. Cross-subsidy is now falling due to weakened lender appetite for plot sales (in part due to downgraded credit ratings). It cannot be left to higher rents together with housing benefit to fund new development. Although grant rates are presently not high enough to deliver even 50,000 homes a year, further public subsidy without equity to support it will result in massive public borrowing set against low political will to do so. The grant requirement to triple output has been valued at around 15bn per year₃, 6.5 times more than the total AHP 2021 -2026 programme per year.
The Savills publication₄ dated May 2023 stated that “For Profit Registered Providers (FPRPs) now own more than 28,150 affordable homes…….This represents growth of 35% since March 2022”.
This equity-supported exponential growth is growing similarity to Build to Rent (BTR) or student housing, which are operating on similar models of capital. The difference is that structural demand is far greater for social housing. The potential is huge, and for each £1 spent on construction, the nation receives £2.92 back in value to the UK₅.
Given that social housing is a regulated sector, with greater regulatory scrutiny on the horizon, it is a perfect to time to acknowledge that equity is making the sector more financially robust – and should be welcomed. From our perspective, we are providing additionality to section 106 housing and our tenants are living in safe, well-maintained homes, on model leases or tenancy agreements. Our constitutions (particularly agreements with shareholders) are consistent with the requirements of the Financial Governance and Viability standard. We do not operate lease-based models of social housing. Therefore, because of the regulatory standards, and cross-pollination from the housing sector and vice versa, it is sustainable.
Evidenced, perhaps, by not-for-profit RPS now registering their own for-profit RPs.
This enhanced capacity for growth, by way of either newbuild homes, acquisition of tenanted portfolios from other burdened associations, or working in partnership with providers, is undoubtedly making the sector more financially robust. It can be seen as a similar predicament that councils were in which sparked the Large Scale Voluntary Transfers of the 1990s to new and privately-funded housing associations. That created capital for major reinvestment works to tenants’ homes - which is the pressing need again.
Sources:
₂BPF - Delivering a Step Change in Affordable Housing Supply
₃grant_modelling_report_june_2019.pdf (housing.org.uk)
₄Savills UK | Spotlight: Private Capital and Affordable Housing – Spring 2023
₅Fine Margins: delivering financial sustainability in UK construction | CBI
It is appropriate, especially as it is a framework of co-regulation. Additionally, the regulatory framework and powers give comfort to funders.
We do support the recommendations of the report “Delivering a Step Change in Affordable Housing Supply” (March 2022) by L&G and the British Property Federation, when it calls for parity on the housing grant uplift treatment with not-for-profit providers. Parity means removing the uplift payment and would therefore allow for-profits to acquire and dispose of grant funded stock without a discount being applied by the buyer.
The grant uplift repayment weakens the business model of for-profits and, like sudden changes in the rent review regimes, scares off capital because of the unknown repayments to the grant funder (Homes England, the GLA) down the line. Instead, governance and viability, rent setting, customer satisfaction, and safety should be the focus – amid stronger growth.
The report also calls for the removal of the SDLT requirement on section 106 homes for for-profits.
We supported the consultation on 17th December 2021 (letter from Nick Burkitt, Deputy Director, Affordable Housing Regulation and Investment, DLUHC) on bringing the same powers for the restriction of dealings, removal or suspension of officers, appointment of new officers, during or after an inquiry, as it is for not-for-profits.
May 2023