Written evidence submitted by Thirteen Housing Group [FSS 029]
1.1 Thirteen is the largest housing association in the North East and among the biggest 25 nationally. We own and manage some 35,000 properties in the North East region, 30,000 of them in the Tees Valley.
1.2 We’re more than just a landlord. Our service provision extends to supporting people with thoughtful and effective services, improving our homes and neighbourhoods, and building new places for people to live.
1.3 We believe that the main factors impacting the financial sustainability of the sector are:
2.1 Our Tees Valley location and history of growth through stock transfer means that many of our properties are aging. They are former council owned homes in some of the most deprived neighbourhoods in the UK.
2.2 Low rental incomes in our operating areas make financial viability challenging. Average market rents have been broadly flat over the last decade, whereas costs have increased substantially.
2.3 In 2022/23 we delivered £35m of investment works in our existing homes and we have plans to spend £286m improving our homes in the next five years.
2.4 We are yet to see the detail around requirements of the new Decent Homes Standard, however we know from our work to tackle issues with damp and mould that improving ventilation is a key requirement of resolving concerns. The thermal efficiency of homes is also likely to be a key part of future standards.
2.5 Whilst 65% of our homes are already at EPC C or above, work in the future to reach net zero targets by 2050 is estimated at £600m, and this is not currently built into our financial plan. When we build decarbonisation estimates into our plan (from 2028/29) we start to breach our interest cover Golden Rules, and in some years we breach our current interest cover covenant (EBITA-MRI based). We are in negotiations with our lenders to move to an EBITDA only interest cover covenant to mitigate this risk.
2.6 New requirements around building safety have added another layer of pressure to our business plans. A lot of activity relating to building safety remediation doesn’t qualify for funding due to the materials involved, buildings being out of scope or where works are classed as improvement as opposed to statutory remediation. Nevertheless, we are in a strong position with a strong building safety compliance record. We have no outstanding remediation works associated with fire safety and we’re on track with our preparations for future building safety regulation. We have plans to decommission some less sustainable tower blocks to maintain levels of safety and carry out regeneration in these areas.
3.1 We believe that balance sheets across the sector generally remain healthy, but in recent years we have seen more registered providers slipping into a V2 rating for viability, and retaining a V1 rating has become more challenging. Credit rating agencies are indicating that more associations will be BBB rated. Since 2015, our income base has not kept up with inflation on a cumulative level. This, along with increased building and fire safety costs, will weaken financial resilience overall. Many housing associations have moved away from investment in market facing companies. This is often high risk and does not generate the returns to subsidise expenditure on core services.
3.2 At Thirteen, we are not undertaking any joint ventures at the present time and are focusing on longer term frameworks with key partners. This is to help us build new homes and invest in our existing homes. Our strategy is to move away from market sale once homes currently being developed are complete. We are also more cautious in our appraisal methodology, which may limit future placemaking and regeneration activity.
3.3 Our 2023/24 financial plan has a tight point in 2028/29 due to increased major investment works and ensuring all of our homes reach EPC level C by 2030. Thirteen has very low gearing so could raise more borrowings to fund investment and new supply. However, we would need to change our covenants, which would weaken our financial position.
3.4 Whilst mergers can bring economies of scale and financial assurance, it is important that housing associations maintain levels of control. This is to ensure they know their stock and have a connection with the communities they serve.
4.1 With the current pressures we are facing and the regulatory framework placing emphasis on existing stock, our Board has agreed a hierarchy of trade-offs. We are not yet having to make these decisions, but we are clear that our priority is existing customers. Building and fire safety costs and investment in existing homes will always take precedence before investment in new homes.
4.2 Notwithstanding the impact of inflation (development costs have risen by 46%), the key headwind for development viability has been the increase in interest rates and rise in associated funding costs due to inflation. For example, in plans approved by our Board in May 2021, average borrowing cost for the new homes we planned to build through our Homes England Strategic Partnership was modelled at 3.4%. This has now increased to 5.4% for the same period.
4.3 The long-term value of delivering new homes is understood, but competing short term demands over the next 5 years has restricted our development activity. We could continue to invest in both our existing stock and new homes if we can change our interest cover covenants. Whilst this will ensure compliance with covenants, we will operate on lower margins and overall financial position will be weakened.
4.4 Our current business plan allows us to actively balance increased investment in our customers' homes with a development programme that delivers around 500 homes per year over the next five years. Our Homes England Strategic Partnership 2 programme has been reduced from 3270 to 1631 new homes because of reduced financial capacity.
4.5 Our new homes delivery programme includes a proportion of shared ownership homes. This product is a good way to help people to get on the housing ladder, particularly in the current financial crisis. Customers are now more aware of shared ownership as a product and it is easier for customers to access than previous forms of subsidy around home ownership, which have now stopped.
4.6 However, we do have issues with some shared ownership units. The resale of older persons shared ownership housing is often difficult and can cause problems for customers. We also have an issue with the financial viability of shared ownership in low value areas. For example, at a regeneration scheme in Middlesbrough build costs are £220k per unit, and the sale price is £200k.
4.7 Cross subsidy through the development of market sale homes is not always financially beneficial in the North East due to low property values. It also detracts too much from our core purpose and stretches the limited supply chain.
4.8 Given the wider economic picture, the need for affordable housing is increasing and as a country we should be investing in new affordable or social rented homes, as we did during the last financial crisis. We would welcome any opportunity to access additional funding to accelerate the delivery of new homes with a social and affordable tenure.
5. Support and resources needed
5.1 Existing Homes
5.1.1 Historically housing policy has prioritised investment in new homes over existing homes, and the impact has been seen in recent events.
5.1.2 Whilst we have included plans to spend £286m over the next five years on investment in our existing housing stock, we will need to find further significant financial capacity to carry out the c.£600m worth of work to meet net zero targets by 2050. Targets set by the government around net zero and Decent Homes 2 will help to drive forward improvements in the quality of existing homes. However, this work should be supported with sufficient grant funding.
5.1.3 We are also concerned that the current way of investing in stock based on component replacement, driven by the Decent Homes Standard, is not providing the level of quality that we want to provide, or that our customers expect. It is not making our most deprived neighbourhoods desirable places where people want to live.
5.1.4 We need to question whether it is sensible to invest in these existing homes, or to demolish and rebuild better quality homes. The latter option would require affordable housing grant to be used for replacement homes, which is currently difficult to secure (more detail on this further on).
5.1.5 We would also question the sense in investing in our high-rise blocks that have low levels of demand and are financially unviable. We need policy and funding support to enable these areas to be regenerated instead. Placemaking and regeneration is also crucial to support the economic growth and levelling up of the Tees Valley.
5.2 Regeneration and placemaking
5.2.1 As mentioned above, social and physical regeneration is crucial to achieve the quality homes and places we should be offering customers. This is challenging without a targeted estate regeneration programme and dedicated source of funding.
5.2.2 In partnership with the Tees Valley Combined Authority (TVCA) and local authorities, we are delivering large scale housing led regeneration in numerous low demand demolished sites. This is high risk for our Board due to low property values, but essential to support the longer-term economic regeneration of the Tees Valley. Brownfield Housing Funding from TVCA made schemes viable but these types of developments are severely restricted by Benefit Cost Ratio and land value uplift requirements, due to the extremely low value sites involved. Demolished, housing-led regeneration schemes are in traditional low demand areas and the ability to deliver land value uplift is often impossible in areas that need public funding the most.
5.2.3 Where grant funding is available, the competing requirements and differing timescales attached to funding for housing and decarbonisation make it challenging to deliver placemaking and regeneration.
5.2.4 The current policy around affordable housing grant is that the funding should deliver additional homes. In areas where existing homes are being demolished, this means that this funding cannot normally be used for the homes built in their place.
5.2.5 To carry out transformational regeneration we need a single pot of funding with a revised Green Book appraisal methodology and net additionality should not always be a prerequisite.
5.3 New homes
5.3.1 To meet the increasing need for affordable housing, investment in new delivery is crucial, but grant funding programmes need to change to accommodate the delivery of more social rent homes rather than prioritising affordable rent.
5.3.2 Even though Thirteen operates in an area of low rents, people still fail affordability checks when applying to live in our properties. This means they need to access homes at a lower rent level. In Stockton a typical 1 bed flat at social rent costs £81.26 a week but an affordable rent product costs £104.93. A typical 2 bed house costs £89.60 a week at social rent, an affordable rent 2 bed house costs £108.69. The difference is almost £1,000 per year.
5.3.3 There were just under 60,000 new affordable homes last year, including 53,500 new build but only just over 7,500 homes were built or acquired for social rent. The vast majority were affordable rent and shared ownership. Investing in more homes that could be let at lower rents would also result in a reduction in the housing benefit bill.
5.3.4 Whilst local authorities have been developing social housing, this has been in small numbers, we haven’t seen any activity at scale.
5.3.5 Where we have worked with local government on development and regeneration schemes, we are still required to take a large proportion of risk and lack assurance of programme and plans.
5.3.6 We have concerns about how the proposed infrastructure levy may reduce affordable housing supply but will need to see the emerging policy detail.
5.4 Regulation
5.4.1 A key factor that impacts on the social housing sector’s financial capacity is rent policy. Ensuring that we have sufficient income to provide quality homes and services, whilst ensuring rents remain affordable for our customers is important. However, the lack of certainty around rent income causes the biggest problem for the sector in terms of financial planning. We are currently waiting for details of the Rent Standard for 2025 onwards, therefore our current plans are based on current assumptions.
5.4.2 In terms of the Regulator’s capacity, previous levels of resource have been adequate. It is important however, that the new responsibilities around consumer regulation do not detract from the oversight of financial and governance compliance.
5.4.3 We believe that all providers of social housing should have to be registered with the Regulator, particularly those providing exempt accommodation which generally houses the most vulnerable groups and involves the highest costs. We welcome the proposals in the Supported Housing Regulatory Oversight Bill which will hopefully improve conditions and services for these customers.
May 2023