Written evidence submitted by GreenSquareAccord [FSS 028]
GreenSquareAccord
This paper responds to the DLUHC inquiry into the finances and sustainability of the social housing sector.
2.1. How would you assess the financial resilience of the social housing sector currently?
Are increasing pressures and requirements putting financial viability at risk?
Multiple pressures on housing providers have emerged over the past year. In particular, we have seen the impact of rising build costs which mean that new development requires even more subsidy from provider balance sheets than was previously the case, and the ‘true’ scale of costs required to decarbonise social housing stock, which have the potential to double long term investment costs. Against this backdrop, the resilience of the sector must be reduced compared to this point 12 months ago.
More generally, the increased requirement to invest in existing homes, coupled with tightening operating margins due to inflation, rising build and interest costs, means that interest cover for the sector, a key measure of resilience, is coming under significant pressure. GSA has renegotiated its funding agreements with all lenders as of 31 March 2023 to remove all but the widest EBITDA MRI covenants, and replace these with EBITDA-only tests. This means that the costs of capital investment in existing homes are excluded from interest cover calculations, dramatically increasing headroom. GSA would not have been able to accommodate the required works to existing properties under the EBITDA-MRI basis for interest cover.
When subjecting our business plan to stress tests, and seeking to pull financial levers to promote sustainable recovery, there are fewer options available. Ordinarily, reducing development, rephasing major works to existing homes and reducing overheads would be among the first options considered to create financial capacity in a crisis. All of these have been deployed already in managing the current environment, which must suggest that financial resilience is reduced going forward.
2.2. What pressure has high inflation, increased energy costs and any other additional costs placed on the finances of social housing providers?
In the last two years, inflation has:
- increased the wage bill at GSA by over 9%
- increased the cost to build a home by 22%
- increased the costs of key repair and maintenance components by c.10%
- increased the costs of insurance premiums by 16%
In the same period, most social housing rents have risen by 11%. Inflation in other income streams, particularly in care & support, has been much lower.
High interest rates have meant that borrowing costs have risen substantially. Weighted average cost of capital is up from 3.75% to 4.66% in the last 12 months. Borrowing costs are up from 15% of turnover in 2021/22 to 21% of turnover in 2023/24. This is a substantial change in the financial balance of the organisation.
2.3. 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 environment housing providers now work in severely challenges the historic counter-cyclical role played by the sector. Previous downturns have seen pressure from one or perhaps two of the key factors affecting housing association finances, but this current environment presents all of the following:
- Upward pressure on costs due to inflation which is not matched by increases in income;
- rising expectations and demand requiring a significant increase in spend in relation to the quality, safety and environmental standard of existing stock; and
- increased costs of borrowing due to rising interest costs
Together these factors mean that, if anything, there is pressure to reduce development targets, not increase them. The further possibility of a downturn in the housing market adds to this downward pressure.
In addition to the above factors, uncertainty around the costs required to decarbonise social housing stock mean that GSA is assuming a significant investment is required over the coming period in both EPC C and net zero carbon works. The GSA Financial Plan assumes close to £0.5bn (uninflated) over the course of the next 30 years, which is a significant increase on previous plans and remains subject to validation. These are funds which could be redirected to new development if they were to be released or reduced. It is possible that as markets develop, government policy evolves and major projects e.g. the decarbonisation of the grid move forward, these costs could be significantly recalibrated and reduced, regaining some ground in terms of viability and development capacity. But for now, our working assumption is that development aspirations are reduced in favour of the works needed on existing homes.
2.4. What impact have changes in the housing market in recent years had on the strength of housing associations’ balance sheets?
No response submitted
2.5. Does the cross-subsidy model, by which market housing helps pay for social and affordable housing, have any continuing viability?
Yes, in the short term. There is evidence in some areas of our geography that demand for open market sale homes remains strong despite mortgage rates and demand concerns. Oxford, Wiltshire, Gloucestershire and city centre locations remain popular. However, site delays, material shortages and upward pressure on costs is eating into margins, and open market sale margins are reduced from a norm of c. 16% to as low as 4% over the coming year. Margins at this level cannot sustainably support the risk taken by Boards on open market sale, and we will be considering the longevity of this activity actively at GSA this year.
2.6. To what extent have private equity investors, and in particular international investors, been entering the sector? What challenges does this present?
These investors are typically funding for profit providers who target quite a different market. While there’s room for both not-for-profit and for-profits in the market, it does risk driving up competition and, in particular, the price of s106 properties.
3.1. 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?
There are some significant hurdles to diverting spend towards the improvement of existing stock. The act of spending more on existing properties requires:
- Better stock information that is as close to real-time as possible. The standard sector approach of a periodic stock condition survey which is updated for a portion of stock annually and then cloned will not be sufficient. The sector does not have the technology in place for this level of stock intelligence to be quickly gained, and expertise around data collection, management and analytics will need significant improvement to meet the requirement
- Invest/dispose/regenerate strategy: Better stock information is needed to drive better decisions on asset management strategy. It will be the case that disposal or demolition and regeneration of some stock will be the right answer, rather than continuing to plough programme investment into existing units which can only be improved so far. The former solutions take long to arrive at and implement, meaning that spend might not happen quickly.
- Building and managing a supply chain to deliver: One of our key risks this year is the availability of reliable and competent contractors to deliver what are significant programmes of work. Procurement for works of this size also takes significant time. We are seeing a lack of surveying skills to evaluate and commission works, and contractors who are struggling to recruit and retain skilled staff.
- Funding the works required: as discussed elsewhere, the rebalancing of spend towards new homes means for GSA slowing spend on new development. This takes time as we continue to complete committed projects.
- Renegotiation of loan covenants: As noted above, until 31 March 2023, GSA’s funding covenants would have included major repairs to existing homes in the definition of interest cover. This would have meant that the value of works to existing homes was limited by this threshold.
3.2. 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 have finite financial capacity. New development, whilst a core aim of GreenSquareAccord, comes second to ensuring the safety and satisfaction of existing customers. Using updated stock condition information and expert advice we are planning a 5 year investment programme for existing homes, and considering what capacity remains for new development thereafter. The majority of business plans will be able to materially fund either decarbonisation or development but not both.
We are considering the alternative funding options and models available to continue increasing new development without using the balance sheet capacity of GSA.
3.3. 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?
No response submitted
3.4. What issues does the requirement on Housing Associations to carrying out building safety present?
No response submitted
3.5. Has the lifting of the cap on the Housing Revenue Account made a difference to supply or improved housing from Local Authorities?
No response submitted
3.6. Have for-profit Housing Associations made the sector, as a whole, more financially robust?
No response submitted
3.7. Traditionally, struggling Housing Associations have merged with stronger, sometimes complementary, Housing Associations. Will this continue to be possible?
A key route to dealing with stretched resources is via economies of scale that can be gained from mergers. Logically therefore, a level of continued consolidation feels inevitable.
There will always be a range of financial strength across the sector reflecting its diversity and the various routes via which housing providers came into being. However, the current operating environment has meant that almost all providers are weaker than they once were – as reflected in the broad regulatory and credit downgrades in recent months. The number of stronger organisations, and their ability to perform ‘rescue’ mergers must therefore be reduced as their capacity is absorbed with the requirement to invest in existing homes, and the risk appetite of boards to take on further potential issues is lower in the current climate.
Past mergers and acquisitions have meant that there are now providers in the sector with such scale and reach that an organisational failure of one of those would have severe implications for the sector. Given their scale though, the ability of any other provider to step in to rescue them is limited.
3.8. To what extent can mergers result in the creation of an umbrella group too large to discharge its duties and responsibilities to its tenants?
No response submitted
3.9. 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?
No response submitted
3.10. To what extent do local authorities and Housing Associations collaborate when considering development plans for housing locally?
No response submitted
3.11. 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?
Demand for low cost home ownership remains strong, helped by the ending of Help to Buy which means it is the only affordable home ownership tenure left in the market. Shared ownership returns to GSA are positive and it is a product that we intend to continue building over the long term subject to market changes.
3.12. What contribution have council owned housing companies made to increasing social housing supply?
No response submitted
3.13. Is the collapse of Brick by Brick – wholly owned by the London Borough of Croydon – a one off or the tip of the iceberg?
No response submitted
3.14. Will the introduction of the Infrastructure Levy and changes to section 106 significantly affect the capacity to develop affordable housing?
No response submitted
4.1. Is the current Departmental policy on social housing and affordable homes appropriately focused?
No response submitted
4.2. Is Homes England being directed appropriately by the Department, and is it achieving its objectives?
No response submitted
4.3. Has any evaluation been undertaken of the impact of the additionality guidance on the supply of social housing?
No response submitted
4.4. Is the current range of grant funding available appropriate to address the issues and challenges that the social housing sector faces?
Funding for the development of new affordable homes recognised that this activity is fundamentally loss-making for housing providers and therefore needs subsidy. Without a more comprehensive plan to support investment in existing stock for EPC C and net zero carbon, the sector will be forced to consider relatively significant portions of stock for disposal as it will not be viable to invest the sums needed in poorly performing stock. GSA achieved £5m of funding via the existing Social Housing Decarbonsiation Fund, which is a tiny proportion of the actual cost of close to £0.5bn in the financial plan required for the decarbonisation of the wider stock holding.
4.5. 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?
No response submitted
4.6. Does the Regulator of Social Housing have sufficient power to ensure that mergers result in a financially viable new organisation?
No response submitted
4.7. Does the Regulator of Social Housing have adequate powers to ensure:
4.7.1. value for money; and
4.7.2. low risk
from new sources of finance such as private equity
No response submitted
4.8. 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?
No response submitted
4.9. How appropriate is the existing regime in respect of regulating for-profit housing associations?
No response submitted
4.10. 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?
Possibly. Our development ambitions are reduced from the merger business case specifically owing to the need to invest in existing homes and due to the rising cost of borrowing.
May 2023