Written evidence submitted by Greater Manchester Housing Providers [FSS 027]
The responses below have been developed following a survey of individual GMHP members and a consultation session with GMHP CFO’s on the 28th April 2023. Work is underway with GM Combined Authority with a view to an aligned submission with them. Engagement has taken place with the National Housing Federation, Housing 4 the North, and the Liverpool City Region Housing Partnership.
1) How would you assess the financial resilience of the social housing sector currently? Are increasing pressures and requirements putting financial viability at risk?
Over the previous seven years the various changes to the rent settlement have significantly weakened the social housing sector. The impact of this can been seen in the downgrading of ratings for Registered Providers (RPs) through Credit Rating Agencies assessments, and reduced confidence amongst lenders. The social housing sector is facing an insecure future, in terms of rent settlements, undermining the longer-term financial planning the sector needs to make (40 years). Given the view of the Regulator is that a great many RPs have been reassessed as V2, demonstrating a greater extent of risk that needs managing, and the Credit Rating agencies have been steadily reducing the ratings of providers, it is clear that financial viability is experiencing ever greater risk.
The rent cap, without any correction through rent restructuring in future years, creates a long-term cumulative loss of income in Financial Plans, impacting plans for stock and carbon zero investment and development. As organisations, we are, and will work to ensure we remain financially viable. However, what we have had to do is make difficult decisions in order to remain viable in the long term. The impact of lower rent settlements is felt particularly acutely in areas where rent levels are below target, this particularly impacts those associations who have been unable to reach target rents.
There is a constant cycle of trying to do more for less which is becoming increasingly difficult on the back of the ever-increasing compliance and regulatory regime and requirements for investment in our stock. There is greater pressure on those with ex LA stock in their profiles. Services are at risk in an environment where income is capped below escalating costs, compounded by our rents being significantly below target/formula levels and no mechanism to increase rents in line with our peers in future years.
The sector’s financial resilience is also impacted by increased economic and social risk. This includes the recent rapid and unexpected increases in interest rates, reducing the sectors capacity to service debt exposed to variable rates and continue to invest in services and new supply. The cost of living crisis and its impacts on our residents has seen the sector directly supporting tenants in poverty through direct cash payments or increasing advice and support resources for tenants in debt. The overall impact, alongside the rent factors referred to, is to dilute the resources available to invest in ‘core’ business activities such as asset investment, delivering new homes etc. Whilst these increasing pressures are not going to immediately impact the viability of any well managed Registered Providers, the environment does mean trade off decisions are having to be made between where to invest. Long term this inevitably has a negative impact on sector resilience.
One solution to this would be the re-introduction of rent structuring in both the next rent settlement agreement and in the new Rent Formula.
Case study 1: A GMHP member of 18,000 units has evidenced that should they be allowed rent convergence again, this would increase the rents for 10,090 social rent properties by £6.60 on average. That would generate £3.46M pa of additional rent. If the old +£2 was used as the basis, it would take 3-4 years to get to that full benefit. The re-introduction of CPI+1% would be positive. Over 30 years at CPI only, this example would generate £4.07BN of rent, but at CPI+1%, it would be £4.82BN – so a uplift of £750M in total rent over the 30 year life of our business plan. This would generate sufficient revenue to fund net zero carbon requirements. If CPI+1% was reintroduced for just 5 years, this would fund about one third of expected Net Zero Carbon costs.
Case study 2) A GMHP LSVT member of 18,000 properties was established in 2011. At that time about 17,300 (96%) were still below social rent level due to decisions taken by the Local Authority. Under the rent restructuring regime which ran until April 2015, 7,400 properties reached target rent, either through reletting or through the application of the annual rent increase which included a provision for rents to rise by an additional £2 each April until target rents were reached.
With the end of rent restructuring, the only way for properties to reach target rents is by reletting and as a consequence the numbers of properties reaching target rent each year has reduced to a trickle with the 6 years from 2015 only resulting in an average of just over 300 properties per year reaching target rent.
As a result of the rent cap at 7% applied from April 2023, around 14,500 properties (82%) are now below social rent levels with a total loss in rent per annum of £5.1M.
In order to restore this lost income to the business plan for reinvestment into our stock and to restore a fair pattern of rents some form of rent restructuring provision needs to be included in the next 5 year rent settlement.
2) What pressure has high inflation, increased energy costs and any other additional costs placed on the finances of social housing providers?
High inflation impacts on everyone, both in business and as individuals. The social housing sector is impacted in three ways.
None of the increased costs our sector is facing are under the control of Housing Associations, and none are avoidable. All worsen the key financial metrics. In particular, operating margins and levels of interest cover have fallen over recent years (demonstrated by the RSH Global Accounts). Supply chains have also been restricted so in addition to price increases, there has been a slowing of certain repairs and investment work.
3) To what extent can social housing providers maintain output levels in housing development to provide a counter cyclical balance in otherwise tightening market conditions?
The social housing sector cannot sustain output levels, the links between CPI +1% rent increases to support development activity have now been broken. Whilst there remains a degree of counter cyclicality to social housing development, it is highly unlikely that RPs will be able to step up activity should the housing market decline materially. In addition GMHP members report that they are increasingly experiencing financial scheme appraisals that are not viable as grant rates have remained static yet scheme costs have risen significantly. Additionally there is evidence of impacting the development partners we rely on, with recent high profile developers entering administration.
New development is essential if we are to contribute to tackling the housing crisis and generate rental and sales income from new homes that allow us to meet the financial challenges around our existing homes and replace stock lost through right to buy and right to acquire.
Many boards are also grappling with the strategic trade-off between investment in existing homes and investment in new homes, meaning less capacity is available for new development. This has a long-term impact on the financial resilience of the social housing sector.
Historically, Housing Associations’ business model, supported by high levels of government grant and a secure rental income stream has enabled us to be more resilient during any economic downturns. In 2022 members of the GMHP Partnership developed a third of all new homes in Greater Manchester, completing 2,362 new homes and investing £330M. However, this year’s projections are not as positive with Boards being forced to make difficult decisions on where funding is focused given the external economic environment.
Solution – Further policy initiatives that support the delivery of affordable housing are urgently needed. A wholescale review of affordability and its links to Local Housing Allowances is needed. Policies such as Right To Buy retention by LA’s should be considered.
4) What impact have changes in the housing market in recent years had on the strength of housing associations’ balance sheets?
The primary role of the social housing sector is to provide housing solutions to those who cannot access the housing market. We should be able to act and operate differently to meet the housing needs of people the housing market leaves behind.
The risk of new development has also increased. This is due to the impact of developing homes, especially in an environment where grant rates haven’t increased in line with build cost increases, the cost of funding available to HA’s increasing, and homes are being sold into a more uncertain property market. The reduction in the development of new homes reduces the number of properties available for charging, which reduces the capacity available to take on new debt, which over the long-term limits the ability to achieve higher levels of investment in existing homes as well as the flexibility and capacity to continue to develop.
5) Does the cross-subsidy model, by which market housing helps pay for social and affordable housing, have any continuing viability?
Boards and the Regulator are generally wary of business plans and new build delivery programmes supported by a sales programme; this has traditionally been seen as risky and in the current climate will be considered an even greater risk. We have seen several RSH downgrades on Viability due to a reliance on a large sales programme. The recent significant increase in V2 judgements is evidence of this increased exposure to risk, and social housing providers will find it increasingly difficult to return to V1.
It does have use at scale and is particularly useful on larger sites being delivered by a single HA where a mixed-tenure community is being created. However, unless capital grant levels meet appraisal requirements to develop sustainable new rented social housing this inevitably will lead to fewer affordable homes.
6) To what extent have private equity investors, and in particular international investors, been entering the sector? What challenges does this present?
Private equity investors are seeking high/secure returns in the supported housing market due to exempt rent rules and using housing organisations as vehicles under restrictive lease arrangements. The combination is not helpful or sustainable, from a treasury perspective, covering high levels of development cost by revenue subsidy places significant risk on housing organisations. Low value, poor market areas do not attract the rates of returns that PEI’s seek. There is therefore limited direct impact, apart from opening up the bond market to alternative investors.
Case studies: Two GMHP members have worked with private equity investors. Investors from the Middle East were wanting to invest in green build, which impacts on their decision-making process. Another member, working with a US investor, has reported challenges around the level of sector understanding and a reduced appetite to change requests.
7) 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?
Registered Providers recognise the importance of maintaining homes to a decent standard. GMHP members have a good understanding of property condition and the implications for their business plans.
We also face an increasing challenge in that some property archetypes do not have the residual value in them to produce a business case for investment, for example the scale of the challenges we face with pre 1919 terraced properties and some of the system-built property types for the 1960’s.
There are many conflicting demands on the sector and with costs rising and income not increasing at the same rate it is not entirely feasible to direct any more resources without an impact on services in other areas without further grants.
Therefore, consideration should be given to policy changes that support regeneration through replacement housing as well as investment in existing stock. To be able to meet the increased legal, regulatory and safety standards, as well the anticipated forthcoming Decent Homes Standard 2, and the longer-term requirements to meet carbon zero targets, housing associations will need additional capital funding from Government and a significant reduction in the costs of retrofit technology solutions.
8) 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?
Increasingly our Boards are having to make difficult decisions to balance both investment programmes in existing homes and development, due to the rent cap, high inflation on costs and rising interest rates (see earlier responses). There is evidence that the level of disposals will increase through active asset management to support options appraisals for older and increasingly obsolete stock, that are at risk of failing decent homes standards and are becoming an increasing challenge to fund. The ability to retrofit, as well as build new homes, with green features is also a huge challenge.
Other pressing priorities will compete for the diminishing resources available and new delivery ambitions may have to be curtailed.
9) What issues does the requirement on Housing Associations to carrying out building safety present?
GMHP are pleased that developers have been asked to sign a voluntary agreement with Government to ensure they pay for the fire remedial works, but ongoing negotiation around this is causing further delays for leaseholders and shared owners. Building Safety is a high priority for GMHP members, and therefore any additional future costs may reduce investment and development budgets. As customer focussed organisations, it is imperative that we respond at pace to all health and safety related matters in our buildings.
Ongoing increased revenue and capital requirements to maintain the higher building safety standards under the new legislation and regulations require additional resources to deliver this and there are issues with skills and the supply chain in this area of work.
There is a strong need for robust data, record keeping, qualified and well-trained staff to carry out the work and a strong compliance culture is needed, driven by Boards.
GMHP Member Case Study: A Medium sized member of GMHP operating in multiple areas provided the following. “Building safety remains a key priority for our business; changes to legislation have required us in the last three years to spend over £5M on replacing fire doors which do not have certification. Similarly we plan to spend a further £5M on the same over the next three years. Timber balconies are being replaced with metal at a cost of approximately £1M over the last three years and again we plan to spend in the region of a further £1M on similar requirements over the next three years. We do not have any ACM panels; however, we are required to replace the cladding on four tower blocks at a total cost of £2.5M per block or £10M in total. Additional requirements such as changing systems to more fully demonstrate the “golden thread”, building safety cases and Evac systems will also costs in the region of £0.5M. No additional funding has been provided, and this spend must come from existing budgets.”
10) Has the lifting of the cap on the Housing Revenue Account made a difference to supply or improved housing from Local Authorities?
GMHP has two ALMO’s and two stock retaining Local Authorities in its membership. For those providers that are still Council owned, the hybrid arrangement has increased supply.
GMHP member case study: The Housing Revenue Account (HRA) has delivered 241 new homes since the lifting of the cap, with a further 223 in the pipeline, so 464 in total. Ownership sits within the HRA, but the ALMO has developed and managed the properties.
11) Have for-profit Housing Associations made the sector, as a whole, more financially robust?
It is clear that entrance of for-profit providers to the sector has brought some financial opportunities, but so far it has mainly been limited to commercial propositions. Given the significant financial resources available in this space, exploration about how future collaboration could work is needed. It is notable that the For-Profit business model appears to have minimal traction in northern regions, again implying that low value, poorly performing housing markets do not offer the scale of returns needed by For-Profit providers.
12) Traditionally, struggling Housing Associations have merged with stronger, sometimes complementary, Housing Associations. Will this continue to be possible?
All Registered Providers are impacted by the rent cap, by increased inflation on costs and by increased interest rates. Therefore, the potential for particular providers being able to offer increased resources or investment to a merger partner is reduced, but still there for the financially strongest RP’s. Mergers should be primarily focussed on the benefits and increased quality of services for customers, evidencing a link between savings and efficiencies and service quality.
Three concerns emerge from this question. Firstly that the pool of larger scale Registered Providers willing to enter into mergers to help “rescue” a struggling provider is reducing as increasing demands make it increasingly difficult to create a business plan that evidences financial viability. Secondly that some Registered Providers have become so large that they may themselves succumb to business plan pressures but have become “too big to fail” due to the overall impact on the sector as a whole. Finally there is some tension between the continuing growth in size of organisations and the potential for them to lose focus on service delivery at a place based level.
13) 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?
GMHP recognise the vital role that partnership working plays with Local Authorities and other key stakeholders. GMHP has entered into very high-level partnership working arrangements with GMCA and NHS GM through the Tri-partite Agreement, that set out annual agreed priorities and supports a range of outcomes focussed on strengthening the links between housing and economic growth, as well as our contribution to public service reform and contributing to the GM £.
The new devolution deal between the government and the GMCA offers further opportunities for collaboration which will have a positive impact for the sector and our communities. For example, GMHP are currently working closely with the GMCA on the development of a Good Landlord Charter due to be launched by the end of this calendar year.
Case studies: Some GM local authorities have set up strategic partnerships with housing associations which provides access to local authority land for development opportunities. GMCA help to co-ordinate bids to central Government, for example, Rough Sleepers Accommodation programme, which helped to provide a consistent approach across Greater Manchester to provide accommodation and support for homeless people.
14) 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?
Government policy and planning requirements mean that a shared ownership programme is necessary. In the Northwest there are many areas where lower cost properties can still be purchased, although there are other higher value areas where Shared Ownership remains in demand. Shared Ownership as a product is therefore seen as making an important contribution to supporting our work on meeting housing needs across Greater Manchester, It is a popular product that contributes to housing aspiration, affordability, and regeneration As interest rates have risen more and more customers are finding it more difficult to buy on the open market and Shared Ownership is now becoming an increasingly attractive offer to more and more people seeking new housing for some of our housing market areas.
15) What contribution have council owned housing companies made to increasing social housing supply?
Council owned housing companies have a role to play and work best based on strong partnership working with registered providers in localities to avoid duplication or overlaps.
GMHP member case study: A GMHP member who is an ALMO develops for both the Local Authority within the HRA and in its own right using the Council’s borrowing facility. Over the last 10 years they have delivered in excess of 1,000 new homes owned either by the Council or the ALMO. Access to PWLB borrowing has enabled viability and VFM.
16) Will the introduction of the Infrastructure Levy and changes to section 106 significantly affect the capacity to develop affordable housing?
It is widely believed and recognised that the proposed introduction of the Infrastructure Levy and removal/reduction of Section 106 Agreements will significantly reduce the amount of new affordable housing numbers delivered. Much still remains unclear about how the new levy will work, and there is significant concerns about its detrimental effect.
GMHP member case study: A GMHP member reported that they expect the infrastructure Levy will have a huge detrimental effect on affordable housing, currently c. 20% of their development programme comes from S106 (800 homes over five years) – the Levy will mean that this is lost to affordable housing. S106 also benefits efforts to create mixed communities, ensuring that new build provision is made for all income levels.
17) Is the current Departmental policy on social housing and affordable homes appropriately focused?
There are not enough social homes to meet demand. Over 1.2 million households are on the waiting lists for social homes in England. Almost 100,000 households are living in temporary accommodation, including 121,000 children. The number of Section 21 ‘no fault’ evictions are increasing and the Cost Of Living crisis means more people are presenting as homeless. In addition, during the last decade, there has been a total net loss of 165,000 social homes.
Solution: Setting, supporting and achieving delivery of more affordable homes is something we feel the Department should re-focus on. There needs to be more focus on social and affordable rent and appropriate funding provided for the different tenures. There is also an ageing population that needs to be considered and supported housing provision for people with various care needs.
18) Is Homes England being directed appropriately by the Department, and is it achieving its objectives?
GMHP members feel that Homes England is achieving positive outcomes and is appropriately directed. The Homes England performance across the North West for affordable homes delivery is positive. The stronger focus on place making and regeneration in order to level up communities has been welcomed by the sector.
The new GM Devolution deal offers greater opportunities to work in partnership across the City Region and improved decision-making processes will be required to achieve greater outcomes. There are opportunities to influence and align housing strategies and distribution of AHP, alongside increased flexibilities to achieve greater outcomes. Grant rates remain a concern however, as does the need to scale up our provision to meet the increased demands for housing, in particular, for older persons housing and replacement/remodelling of stock where necessary
Solution: Some GMHP members, and some GM Local Authorities and GMCA have established a joint delivery vehicle, Hive Homes, to maximise opportunities for scaling up developments.
19) Has any evaluation been undertaken of the impact of the additionality guidance on the supply of social housing?
Homes 4 the North (H4N) undertook extensive research work into the challenges being faced by the sector due to the net additionality rule. The net additionality barrier poses a challenge in terms of regenerating areas and tackling obsolete stock and moribund sites. It is unrealistic to expect to demolish and re-build more homes on a development scheme in the same site, and severely hampers developments on brown field sites.
20) Is the current range of grant funding available appropriate to address the issues and challenges that the social housing sector faces?
GMHP members do not think the current range of grant funding available is appropriate to address the issues and challenges that the social housing sector faces. Grant funding needs to increase to cover the increased costs of development schemes (construction costs, inflation and higher building standards) and increased interest rates, which are both significantly impacting the viability of schemes. This at a time of very high demand for affordable housing. In the northwest there is a concern that increasing amounts of housing stock needs remodelling or is reaching the end of its useful life, yet funding is not available for regeneration.
There are particular challenges with meeting the needs for supported housing, these schemes are significantly higher costs and the current funding models do not allow for the additionality that is needed to meet those needs.
In addition there is a concern that financial support may be required to prevent contractors and developers from going into administration and the sector being left with numerous half-built schemes.
21) 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?
GMHP members have no comment on this question.
22) Does the Regulator of Social Housing have sufficient power to ensure that mergers result in a financially viable new organisation?
GMHP members responded that they do feel sufficient powers are available to the regulator. The Boards of organisations, based on their approved mergers and partnerships statements, should have clear oversight and financial controls in place to ensure the key objectives of the merger are fulfilled. It is normal for an IDA to then take place within 12 months of merger.
The objective of the economic standard is to make sure that registered providers are well-managed and financially stable, and has specific expectations are that providers must comply with.
23) 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?
GMHP members responded that they do feel sufficient powers are in place. The economic standards include a value for money standard that RSH seeks assurance against including the requirement for an annual VFM report. Our Boards operate at risk levels based on a well understood risk management framework with agreed risk appetites that will vary between areas.
24) 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?
GMHP members responded that this is felt to be appropriate and noted that some Registered Providers are more complex than others. Given that the sector pays for the RSH, it is important that there is accountability for value for money.
25) How appropriate is the existing regime in respect of regulating for-profit housing associations?
GMHP members had no comment on this question.
26) 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.
Given the issues raised in previous responses GMHP members do expect to see a reduction in the number of affordable housing dwellings at least in the short term. Evidence is already emerging that development is being scaled back due to the conflicting demands on our business plans and the increasing gap between the cost of development and grant rates.
May 2023