Written evidence submitted by the Guinness Partnership [FSS 036]
About the Guinness Partnership
The Guinness Partnership is a 64,000-home housing association delivering housing and care services to 140,000 residents across England. We were founded in 1890 to improve people’s lives and create possibilities for them. That mission continues today.
Our vision is for Guinness to:
We welcome the opportunity to respond to this important inquiry.
Summary
Guinness, along with most of the social housing sector, remains financially resilient, this is reflected in our regulatory gradings with the Regulator for Social Housing (RSH) and our external credit ratings. We continue to be able to secure new borrowings and investment from private sector investors through the debt capital markets, but our resources and capacity are under pressure.
Meeting the cost of building safety, improving the quality of existing homes, and working towards achieving EPC-C and net zero carbon, all place additional demands on finite resources. The impact of inflation and rising energy costs on the sector’s investment capacity exacerbates the strain created by low levels of grant funding for the building of new affordable homes, government rent policy (including the 2016-2020 rent cuts), and loan covenant restrictions on the use of resources.
We, together with others across the sector, are working hard to meet our obligations to existing residents and homes, whilst also delivering new affordable homes. However, without additional funding and support the sector’s ability to continue to contribute to new supply at scale and invest in existing homes at the level required is at risk.
The current state of financial resilience of social housing providers
Financial resilience is the sector’s financial ability, in a range of reasonable risk scenarios, to deliver its fundamental purpose and obligations - the necessary investment in existing homes, the building of new homes and the provision of services which are appropriately responsive and of the right quality. The sector’s resilience is decreasing as costs increase faster than income. Guinness believes that additional government investment into existing and new homes is necessary to achieve shared objectives on the provision of more new homes and quality of existing homes as they age.
In more detail:
High inflation (housing sector inflation – build costs, materials, labour - is higher than CPI) and increased costs (e.g. from enhanced building safety requirements) have led Guinness to increase 5-year assumptions about spend on our existing homes by nearly 10% when compared to our 2022 forecasts. We now expect to spend £900m on existing homes over the next 5 years. As a consequence, we expect to scale back our development programme by c£200m, leading to a necessary 15% reduction in the number of homes we are able to build.
Other notable costs / impacts include:
We seek to manage these costs and the associated risk as far as possible, but they are in the main outside our control.
The differential between rising costs and income has resulted in Guinness’s operating margin from Social Housing Lettings falling from 32% in 2016 to 24% in 2022, and interest cover (the level at which income covers total expenditure including interest costs) falling from 218% to nearer 100% over the same period. This trend, which is clear across the sector from the RSH Global Accounts, reduces the amount available to reinvested in in new and existing homes.
Housing Associations, as not-for-profit providers of social housing, use each year’s operating surpluses to meet the cost of building new homes and investing in existing homes. We do not distribute any surplus to shareholders / owners, and therefore have somewhat more freedom than private developers to invest over economic cycles.
Historically, HA financial capacity was supported by Government grant, which was on occasion significantly enhanced with the objective of enabling ongoing, counter-cyclical development when private developers withdrew from the market (e.g. during the 2008 Financial Crisis). However, as grant has to a large extent been replaced by borrowing and cross-subsidy from sale, the sector’s ability to act counter-cyclically has been very significantly reduced.
The housing market primarily affects HAs which develop new homes:
This means more prudent assumptions about liquidity requirements must be made, and gearing levels increasing more quickly than they otherwise would as more debt is required to fund each home that is developed (for Guinness debt has increased from £1.1bn to £1.5bn since 2016).
To some extent, though in a high-cost, volatile operating environment this is far less reliable as a source of funding than was previously the case.
With grant rates only covering less than 25% of the cost of developing a new home (a significantly lower proportion than was historically the case), more internal financial capacity (more of our surpluses) has to be deployed – competing with increasing cost and investment needs of existing homes for that same capacity.
Institutional investors have seen social housing as a useful asset class to have within their investment portfolios. Social housing can fulfil “Environmental Social & Governance” or “Impact” investment criteria for funds and the returns can match liabilities (index-linked regulated rents are a reasonable match for index-linked pensions liabilities, assuming a stable rent settlement). However:
Key to retaining the attractiveness of social housing to institutional investors will be maintaining inflation linked rental streams over the longer term, effective regulation of the sector, strong ESG / Impact investing characteristics and - for those who are investing directly through For-Profit Private Registered Providers the quality of management and maintenance services provided by HAs.
New challenges to the social housing sector
It is feasible and necessary to invest more in existing homes but this requires choices about what we develop, and even then is likely to require additional Government funding to maintain or replace ageing homes as standards are rightly increased. Three streams of investment are required:
The precise mix of these can be tailored. But without the right combination and overall investment capacity, it is hard to see how the sector’s commitment to improving existing homes and increasing new supply will be met.
Most HAs, including Guinness, aim to do both because both are part of our social purpose and central to meeting housing need with good quality homes. We will always prioritise building safety. We are constantly trying to achieve the right balance in deploying our finite resources between meeting housing need through the development of new homes and ensuring our existing homes are in good condition.
It is important to recognise that part of the challenge is market capacity (labour, materials and specialist skills) which drives up costs but is not the same constraint as financing. The shortage of engineers and other allied professionals, in the context of buildings which have become increasingly complex over the last decades, is a particularly significant challenge.
Development types and tenures are broadly driven by the combination of:
The precise mix of home types and tenures on a given development scheme is a judgement made in light of these factors. Decisions on whether to build houses, flats or a mix of both will consider scale and duration of commitments over the development phase and beyond, the longer-term impact on financial capacity and associated risk. Large flatted developments, in particular, will take several years to build out. Despite being an efficient use of scarce land owing to their density, they therefore represent a significant commitment which cannot be flexed during the building period if other pressures come to the fore.
Ensuring our homes and residents are safe is the most important priority for Guinness and for the sector. In the absence of Government funding to remediate social homes, the impact of safety work on financial capacity places constraints on our ability to meet other priorities.
Other practical constraints include the availability and price of the necessary skills and materials, and the extent to which homes built under contract over many years in fact comply with the statutory framework in place at the time and with expectations now. Determining this is often costly and takes significant time (in both investigation and where necessary consequent work).
Further, where the responsibility of other parties (developers / contractors) is theoretically recognised, there are typically significant legal costs incurred in ensuring those parties fulfil their obligations to remediate.
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The scale of the challenge of meeting housing need, covering both existing homes and new homes, requires investment from government.
For-Profit PRPs are playing an increasing role in delivery of social housing. We welcome their participation and partnership. Their involvement has probably increased the total quantum of investment into delivering new social homes.
However, as in Q6 above, their long-term resilience has not been thoroughly tested because it is not known how they would respond to different circumstances when profit levels are under pressure. Further, to the extent that other resources (e.g. viable permissioned land for development) are constrained it is plausible to be concerned that additional investment may act to bid up prices and therefore achieve less than proportionate net gain.
Mergers have always been part of the sector’s approach to securing the retention of social homes within the sector and preserving the sector’s good standing with lenders and investors. It seems inevitable that need for this will continue, but with financial pressures affecting organisations of all sizes to some extent or other, capacity to “rescue” struggling organisations may deteriorate.
We believe there is no single right or optimum size for an HA. If operations are well-organised (including having the right density of homes in any given location) size should be no barrier to providing good homes and services, and connection with residents and stakeholders. Size can also bring distinct opportunities (particularly in terms of capacity to invest in homes, services and technology).
Local authorities and HAs have long worked in partnership, particularly in relation to supporting individuals and communities, and allocating homes to meet need. Deepening of partnership working on development, particularly in relation to identifying and bringing forward surplus public sector land, is helpful.
Shared Ownership (SO) in broadly its current form has existed since it was introduced by the Housing Act 1980 (though it originated even earlier). However historically it has been a relatively small component of the market and not well understood by potential purchasers.
SO homes broaden choice to customers (who are often not able to access full ownership in the marketplace) and is a useful part of HAs’ offer and financial mix (as it delivers a capital receipt upon sale).
The desirability in any specific location will depend on the homes and the housing market, and the affordability of the SO product in relation to local incomes (this is particularly a challenge in the London housing market) and its desirability in comparison to other options.
Sustainable SO requires that the purchaser understands fully how the product works (including why they pay rent on the equity they do not own) and their responsibilities (including repairs) in comparison to the landlord’s, and that the landlord is proactive and positive in discharging responsibilities alongside communicating with and working with residents.
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We are concerned that the Levy will not raise adequate resources to meet social housing (and associated infrastructure) needs, and will in fact lead to a reduction in the number of new homes delivered.
What are the policy and regulatory challenges to the Department and the Regulator?
Guinness argues that:
The engagement from, and pragmatic approach taken by, Homes England to grant rates and delivery in light of extraordinary cost increases, is welcome.
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The focus and quantum of grant funding available is not appropriate to address the challenges the sector faces:
a) The grant available for new build, combined with the limited availability of land and cost of building, means that demand will outstrip supply for the foreseeable future, particularly for family-sized housing (3 beds and more). The housing crisis will not be solved.
b) Lack of grant for existing homes, combined with constrained income / rising costs, means housing associations will struggle to keep ageing homes in good condition, and some may struggle to maintain safety / compliance.
As a Registered Provider, Guinness is not able to answer this question. However it is noted that the RSH is not the only statutory body with potential responsibilities in relation to exempt accommodation (others can include local authorities (who have the statutory enforcement responsibility in relation to the condition of accommodation), the Health and Safety Executive, the Care Quality Commission and the Charity Commission).
Yes, in relation to the current landscape and merger practice. However as the RSH does not have consent powers, it is difficult to be absolutely certain that an inappropriate merger could be prevented in an extreme scenario where each Board was determined to proceed, although the consent rights of other parties (e.g. lenders) will normally prevent unviable mergers.
Guinness considers that the RSH’s approach (focus on parent body in a group structure, outcome-based regulation, co-regulation, and proportionate proactive assurance gathering) is appropriate and provides a reasonable balance of assurance for stakeholders over HAs and the RSH’s ability to resolve problem cases. However the RSH’s capacity may come under pressure as its remit expands, the sector becomes more complex, and as financial resilience weakens.
It should also be noted that the RSH’s enforcement powers are constrained by the requirement to undertake an (expensive) Statutory Inquiry before those powers can be used. This is however only relevant in a tiny number of the most extreme cases of non-compliance, because the vast majority of cases are resolved successfully without those powers needing to be considered.
Guinness observes that the RSH engages with the sector on risks and how regulation is carried out, and frequently recruits to roles within its organisation. The approach noted under Q23 works well and the RSH is able to successfully resolve cases in complex organisations. This may be challenged as complexity increases, particularly if multiple such cases arise at the same time. However this would be considered on a risk basis – the cost of avoiding such risk completely may be disproportionate.
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In the absence of additional support it is likely to, for the reasons set out above.
May 2023