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

Whilst the Global Accounts show a resilient sector with capacity to do more, the reality feels very different. The sector is still reeling from 4 years of rent reduction, the impact of which resulted in a deferral or reduction in investment programmes in many cases which have stored up issues in stock condition which will need to be addressed in the future.

Given the view of the Regulator that a great many providers have been reassessed as V2, demonstrating a greater extent of risk which needs managing, and the steady reduction of ratings from the Credit Ratings Agencies, it is clear that financial viability is experiencing ever greater risk. However, if the Government were to offer a rent settlement which the sector could rely on for a fixed period, this would go some way to addressing the risks that the Credit Agencies perceive.

Whilst organisations are largely managing to weather the financial storm that we are experiencing at the moment, this is largely down to difficult decisions being made across the sector which are impacting on customer service in many cases.

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

The factors identified, together with a rent cap which means that income is rising by significantly less that the operating cost base, is putting sustained pressure on RP finances and leading to a halt on development in some cases.

Construction costs are increasing – land, contractor costs, and supply chain – which has an impact on the costs of the development programme, and the outputs that the sector are able to deliver. This is exacerbated by the need to balance the affordability of our core social and affordable rented homes to customers who are disproportionately impacted by high levels of inflation for food and energy. This is an area which many RP’s are subsidising service charges rather than pass on all costs to customers.

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

Maintaining current levels of output is not sustainable in the current market conditions without putting significant pressure on financial golden rules and banking covenants which are unacceptable to Boards and Lenders alike. Whilst there remains a degree of counter cyclicality in social housing development (and housing associations have historically been able to build through downturns and capitalise on depressed land values and construction costs), it is highly unlikely that providers will be able to step up activity should the housing market decline materially. Momentum through market cycles requires grant funding support over the medium to long term if we are to see consistency in development – particularly in light of the increasingly challenges conditions relating to the availability of viable contractors, and construction risks associated with high density urban living models.

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

The growth of the build to rent / private rented sector has created additional competition for land, inevitably pushing up values which impacts the balance sheet and the point at which a development scheme will break even. The current strong housing market, and increasing property values that we continue to see across much of our geography still ensure that our balance sheets look strong – however, the risk remains that the strong market will not last.

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

Even at the height of the cross-subsidy era, the profits generated by providers from market sale activity formed a relatively small proportion of the overall sector surplus and are distorted to some extent by Greater London market factors. Market sale activity (even including shared ownership) is seen as inherently risky by credit ratings agencies and by the Regulator of Social Housing, who also perceives joint venture activity and other similar approaches to market sale activity as risky too. This model was always primarily a Southern activity.

It is unlikely that the cross subsidy model will support any material volume of social or affordable housing going ahead.

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

There is little doubt that for-profit providers and a growing private rented sector have increased competition for land. The for-profit providers have been largely focussed on acquiring section 106 shared ownership homes from volume housebuilders, which has done little in terms of additionality of new homes. The institutional investors typically outsource management and maintenance of their homes to third parties, including housing associations, which does little to support the placemaking, community development and wider initiatives that are generally part of the housing association offer. The recent spate of G3 and 4 ratings issued to for-profit providers do not help in terms of sector confidence in their offer.

However, on the positive side, this is new money contributing to addressing the housing crisis when demand is huge, and brings about interesting partnering opportunities.

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?

Ensuring that existing property portfolios are of a high standard, and are appealing to customers in an increasingly competitive rental market, has to be top priority for registered providers. Existing rental streams alone may not be sufficient to fund enhancements to standards and quality, whilst also meeting the commitments that we have to communities and customers in a cost of living crisis, irrespective of any desire to help tackle the housing crisis by building new homes.

The high volume of pre war terraced stock in many RP portfolios – particularly in many northern towns – poses an additional challenge, particularly when the standards and goal posts that we are working towards (Decent Homes, EPC ratings, Future Homes Standard) are continuing to shift in many cases.

The sector needs additional resource – and clarity from the Department – in order to meet the challenges around maintenance and improvement of existing stock.

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?

• Where social housing providers are undertaking new developments, what consideration has been given to the types of homes they are building? For example, houses versus flats?

For many organisations, there is no “either / or” choice between new development and investment in existing stock – but it is an extremely difficult balancing act and will become increasingly difficult if maintenance requirements absorb a growing proportions of financial capacity.

Local housing need, agreed with local authorities, will always be a key factor in determining the scale and mix of new development. Quality of design, specification and construction type are also key to our models with a driver being to maximise output in many cases. Geography and market conditions influence decisions on house versus flats, alongside management and maintenance capacity into the future – for example, bedroom tax drove a need for smaller flats, as do land values which drive density and make flats more achievable than houses.

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

There is a very substantial challenge in terms of financial resources on the sector with the bill for addressing building safety requirements far exceeding what many housing associations had planned for – but further to that, the challenges linked to skills, experience and capacity (both internal and external) are even more difficult to address.

Whilst the physical activity progresses in relation to building safety, the need to manage relationships and safety concerns with customers increases pressure on customer-facing colleagues, and removes capacity from teams to address other neighbourhood and tenancy management issues.

Has the lifting of the cap on the Housing Revenue Account made a difference to supply or improved housing from Local Authorities?

Not applicable.

Have for-profit Housing Associations made the sector, as a whole, more financially robust?

For-profit providers have profit to make and shareholders to satisfy. They may not be able to take the long terms view that non-for-profit registered providers can. Whilst the for-profit providers have unlocked the opportunity for institutional investment, it remains to be seen whether that commitment will continue if there is any material decline in the sector or the housing market, or if others sectors will become more attractive. As such, it is difficult to conclude at this point whether they have made the sector more financially robust.

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

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

Whilst it will be possible, and is likely to continue for organisations who are just too small to survive on their own footing, it is likely that there will eventually be a housing association who’s struggles are so great that there are no “white knight” organisations willing to come forward as part of a rescue plan – despite the interventions of the Regulator. The question should also be posed about “how big is too big?” when it comes to an RP – are some organisations too big to rescue?

The size of an organisation – or its umbrella group structure – does not implicitly mean that it is incapable of discharging its duties and responsibilities to its tenants. Operating models are the key to maintaining a local and responsive presence and service offer. Where a large umbrella group structure actually creates greater stock density in certain geographies, this can drive efficiencies alongside a better service in areas like repairs.

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?

Partnership working in its broadest sense is to be encouraged in order to make the sector more resilient, and the role of the Greater Manchester Combined Authority in co-ordinating bids to central Government for initiatives such as Housing First and the Rough Sleepers Accommodation Project is a positive example of this.

However, if we look specifically at development partnerships, in many ways this has created more competition for sites. Focus locally has been on Councils delivering more themselves but conditioning that this is done on sites already secured by RP’s – thereby not achieving additionality. There is clearly room for more partnership working and more encouragement of collaboration would be welcome.

The extent of collaboration varies substantially, and some Local Authorities clearly value the input of RP’s more than others – we always seek to collaborate to ensure that development plans comply with the aspirations locally and meet housing need. Many of the larger local authorities welcome this, however, others struggle to resource this level of collaboration.

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?

The shared ownership product is in high demand, a strong mortgage market has returned after a temporary blip, customers engage well with the product’s offer, and the new product is gaining momentum in the market and benefiting customers in terms of the enhancements to repairs obligations. The product also helps to create mixed and sustainable communities. For providers, this enables that a range of tenures can be achieved on sites which are purely affordable, helps to navigate the planning system, and supports achievement of sustainable communities.

Staircasing up creates funds for RP’s to recycle into additional developments. It is a product which has existed since the 1980’s and is well understood by lawyers and lenders alike – it can been considered a mainstream product these days.

We consider shared ownership to be a good product which benefits both customers and providers, but believe we should be delivering more social rent products.

What contribution have council owned housing companies made to increasing social housing supply?

• Is the collapse of Brick by Brick – wholly owned by the London Borough of Croydon – a one off or the tip of the iceberg?

Council owned housing companies have had a positive impact on the supply of social housing in some areas – for example Sheffield (Sheffield Housing Company) where for some years this was one of the only sources of new supply in the city – but little impact in others where they don’t have the capacity to build at the scale that RPs do.

We believe that the collapse of Brick by Brick was down to poor governance and not a systemic failure of council owned housing companies – if the governance is robust, then there is no reason why it should be the tip of the iceberg.

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

The commonly held view in the sector is that the Infrastructure Levy and the changes to section 106 will negatively impact affordable housing delivery volumes into the future, especially in the North.

Is the current Departmental policy on social housing and affordable homes appropriately focused?

The policy position is still shifting on a regular basis leading to a lack of clarity – particularly in relation to issues such as regeneration (which we are pleased to see back on the agenda) and the prioritisation of different tenures. There are not enough social rented homes to meet demand in England with over 1.2 million households on waiting lists, and a total net loss of over 165,000 social homes over the last decade. The ongoing focus on Right to Buy and Right to Acquire takes affordable rented homes out of the system at a time when providers are struggling to meet future development targets due to rising costs. As such, we feel that the sector would benefit from more focus from the Government on social renting.

Is Homes England being directed appropriately by the Department, and is it achieving its objectives?

Homes England is enabling the delivery of new homes at volume based on its direction from the Department, however, there are still challenges in relation to how this is achieved in many cases. More thought could be given around low carbon and modern methods of construction. The approach to both of these areas is limited at present as there is not a strong direction from the Department in relation to these priorities.

Treasury rules on net additionality could be seen to hinder Homes England objectives.

Has any evaluation been undertaken of the impact of the additionality guidance on the supply of social housing?

The additionality guidance has curtailed a number of opportunities across the North West which would have been deliverable under previous grant funding regimes. RP’s are being forced down a path of unsustainable investment in existing stock when the best economical action in some cases may be clearance and new build.

Is the current range of grant funding available appropriate to address the issues and challenges that the social housing sector faces?

Given the multi-variate challenges facing the sector, the grant funding available does not feel sufficient – although we welcome the recent renegotiation of Strategic Partnership funding which was unprecedented. Although the Social Housing Decarbonisation Fund is a step in the right direction in relation to net zero, there is acknowledgement that this will not be sufficient to address the scale of improvement required to social housing stock across the country. In addition, if the terraced housing problem is to be tackled nationally, we need a solution to the net gain issue.

On our inquiry into Exempt Accommodation we found that issues have arisen when providers are not registered with the Regulator. How does the Regulator of Social Housing engage with Housing Associations whose registration is voluntary?

The threshold for voluntary registration could be reviewed to reduce the number of Housing Associations who meet this criteria thereby giving the Regulator of Social Housing greater oversight.

Does the Regulator of Social Housing have sufficient power to ensure that mergers result in a financially viable new organisation?

Unless merger rules change to require RSH sign off, it is hard to see how the Regulator can enforce financial metrics on the viability of a new organisation.

Does the Regulator of Social Housing have adequate powers to ensure:

• value for money; and
• low risk from new sources of finance such as private equity?

We consider that Boards are primarily responsible for ensuring value for money and low risk from new sources of finance rather than the Regulator – however, the powers to downgrade an organisation to a G3 or 4 position is quite powerful, albeit reacting to a situation rather than preventing it.

Does the Regulator of Social Housing have the resources and skills necessary to regulate the increasingly complex financial and corporate structures proliferating in the social housing sector?

Given that the sector is constantly evolving and increasing in complexity, the Regulator cannot afford to become complacent in relation to skills and resources and must remain alert to the needs to adapt to the operating environment.

How appropriate is the existing regime in respect of regulating for-profit housing associations?

We feel that the existing regime needs to adapt in relation to the regulation of for-profit housing associations in order to address the more complex operations of these organisations.

It is already accepted that the numbers of dwellings likely to be produced under the 2021 Affordable Homes Programme will be less than initially forecast. Will the financial challenges that the sector faces reduce these numbers even further?

The financial challenges facing the sector – tackling zero carbon, addressing damp and mould, improving existing stock condition, etc. – all detract from the ability of providers to achieve the development targets that many have previously forecast. Ongoing discussions and renegotiations with Homes England need to be reflective of these pressures whilst still challenging the sector to meet the housing crisis.

However, a new rent settlement which allowed for rent convergence and a CPI+1% increase would enable organisations to generate a significant additional amount of rent over the life of a business plan which would ensure that net zero carbon targets would be much more achievable without huge amounts of Government funding.