Written evidence submitted by Stonewater [FSS 039]
Stonewater is pleased to provide its written evidence to the Levelling Up, Housing and Communities Select Committee inquiry into the Finances and Sustainability of the Social Housing Sector.
For more information about any of these responses, please contact Denice Currie, Director of Communications, via denice.currie@stonewater.org.
Stonewater would also be delighted to provide further evidence to support this inquiry during the oral evidence sessions.
The current state of financial resilience of social housing providers
As a sector we are weakening. The significant increases in costs of materials, staff, contractors and business overheads, amongst others; a prolonged period where rent income increases often did not keep up with inflation (only 3 out of last 8 years saw rent increases linked to the CPI +1%, which was offered to the sector as a 10-year settlement in 2013); and significant increases in the cost of regulation (fire safety and zero carbon), have left the sector unable to cope with any further financial shocks. Financial viability of many organisations is at risk and there are likely to be further significant failures in the short to medium term.
Many organisations will be able to pass much of the increased energy costs on to customers in the form of service charges. These however are not subject to a cap, and are at wholesale price levels.
This will also have the knock-on effect of financial pressure on the most vulnerable in society, higher support requirements from social housing providers and more reputational damage to the sector, while dealing with rising complaints and trying to support those who are struggling. This is already causing issues for thousands of housing association customers across the country, exacerbated by less generous support from the Government when compared to people who on domestic contracts.
Interest cost increases impact the delivery of new homes (which will have been originally appraised at much lower rates), the investment in existing homes and the banking covenants. Housing delivery is a medium-term commitment, with much of the expenditure already contracted for the next 2-3 years. On top of this, we also have to add shorter-term investment in maintenance, and regulatory investment. In order to maintain financial performance, credit ratings and bank covenants, the non-contractual expenditure may be the first to be reviewed and reduced, creating further issues for the future.
Providers may also look at selling assets to prop up performance, further reducing the supply of social housing.
There is an underlying need for new homes – particularly ones that are affordable. In the absence of market confidence, or access to mortgage finance, housing associations can shift to the delivery of a higher number of rented properties. In order to give housing providers the confidence to do this we need certainty about rent levels over a longer period of time, and increased levels of grant funding to close the viability gap caused by inflationary pressure and increase in cost of borrowing. More rented housing means more long-term borrowing, and this is a challenge in the context of the rising cost of borrowing and results in the need for greater levels of government support.
The higher cost to deliver new homes, and to complete regulatory investment, does not translate into higher asset values (as these are valued based on the discounted income streams, which have been declining in real terms over recent years, due to the real reduction in rents). This also does not translate to higher security values and most recently built stock will be on the balance sheet at a net book value (NBV) higher than it is able to be used for security against borrowing. This is because the valuation of property for social rent is predicated on the discounted value of future income streams. If our income is not in line with the agreed rent settlement, the valuations may reduce. All new property for social rent costs more to build than the valuation and the grant we have received in recent years has not always bridged that gap.
This means that our gearing is likely to look lower than the capacity we actually have as a sector. This has the adverse effect that many housing associations feel they need to sell properties to maintain covenant compliance, reducing the social housing assets available for rent.
We have not pursued this as an option – Stonewater does not deliver any homes for market sale, focussing on rented and affordable home ownership properties. In order to make a meaningful impact in business planning terms, this would require building homes for market sale at significant scale and would alter the risk profile of the organisation, thereby reducing our credit rating and increasing our cost of borrowing.
The USPP market is still fairly small and limited to the larger, more sophisticated organisations, due to the cost and due diligence required for each issuance. The international investors require significant education in the sector and, whilst they are very interested in the market, they are nervous about investing in the current climate of increased regulatory expectations, reduced returns and worsening margins.
Stonewater has offered to educate potential new investors about the metrics and help improve their understanding of the sector but there is a reluctance to engage at present. Reasons we have been given include that there is no clear inflation-linked income stream commitment (as a result of the previous rent reductions and current 7% cap) and, although good ESG credentials have attracted institutional investors to look at the sector, the spreads they would be specifying currently do not make an attractive sector.
New challenges to the social housing sector
More resources are needed if we are to seriously address the damp and mould, health and safety and sustainability agendas at the same time, while also delivering new homes and maintaining existing ones. Each of these areas are important in their own right but they are also intrinsically linked – the ability to deliver on all these agendas quickly requires more support or capacity to increase revenue.
The balance between the total capital investment (re-investment and development) is important to maintain, so financial investment (resource) is a balance between the two – not simply a focus on how much re-investment in existing stock is made.
We need to keep both of these in balance, and need to be large enough to be able to do both.
There is also balance to be struck as development spend is committed months (often years) in advance, and so the shorter-term investment in repairs also needs to be carved out in advance, with contingency to ensure that there is balanced investment.
This is highly dependent on the nature and age of the stock – one of the biggest impacts is the resource required to undertake more inspections across all compliance areas to meet the new requirements as well as the work resulting from this. Recharging costs to leaseholders is an issue with regard to this.
We are not well placed to comment on this in detail, but would note that direct delivery by local authorities remains small scale and sporadic.
It is not possible to identify the extent to which this has made the sector more robust. For-profit housing associations are more likely to be transient – driven by a commercial drive for return on investment rather than altruism, which is the founding principle of most charitable housing associations.
Investment by for-profits is more likely to be cyclical, particularly if a rise in gilt rates makes other forms of investment lower risk and more attractive. This is the opposite of not-for-profit housing associations, who are contracyclical.
We may reach a point where the opportunities of this become rarer. It is considered that there may be an optimum size for a housing association, beyond which governance and oversight becomes more challenging.
In terms of whether mergers might create organisations that are too large, we would argue that the issue is not the size of the association per se, but its ability to stay truly connected to the customer through the Board and its senior leaders. We have seen both small and large organisations demonstrate that they do not know or understand customers and vice versa. Effective use of data is the key to informed decision making, coupled with a strong customer focus and line of sight to lived experience.
Engagement on this is typically patchy. Procurement processes are also usually lengthy and cumbersome, making true partnership working challenging – and many housing associations do not have the capacity available to be able to respond to them without it impacting other services. It is difficult to identify a truly successful example of this.
Stonewater’s appetite for shared ownership is limited to around one third of its new build programme. This is broadly in line with the latest guidance from Homes England around Strategic Partnership funding.
These properties are attractive to purchasers and have sold well, with sales in recent months being for between 10% and 75% (with a typical purchase being at around 45%).
From a financial viability point of view, such properties are easier to deliver than rented homes but carry a greater degree of risk. Stonewater mitigates and manages this risk by building across a broad geographic area, rather than concentrating sales in one place.
It is only recently that the Government has provided enough detail on the Infrastructure Levy to even begin to consider how successful it might be. The intention for there to be ‘at least as much’ affordable housing under the new system as before is welcome, but whether this will actually be achieved across the country will only become apparent after the Levy has been tested. The Government has confirmed that the Infrastructure Levy will be piloted in certain areas in advance of being rolled out more broadly. This pilot-based approach is to be encouraged because it will hopefully tease out any operational challenges and allow them to be addressed and resolved without a significant disruption to delivery. However, it is important that the pilots take place across the country, rather than in one region, to ensure it works in different housing markets.
There are a number of other considerations, including whether Local Authorities should be set a minimum proportion of the Levy that would be for the ‘right to require’ (the proportion of the Levy that must be delivered in-kind, via on-site affordable housing). While local authorities will be required to evidence these rates as part of their charging schedule, a minimum threshold which can be exceeded would provide greater certainty. It will also be important for Local Authorities to understand the existing use value of properties with a restriction on the tenure for which they can be used. For example, there is no relationship between the open market value and the value of a property for Affordable Rent because the latter value is derived from a capitalisation of the receivable rent over a defined period. It will be important for Local Authorities to understand the basis of such valuations, and any changes in value arising out of a change in the market for such properties (e.g., the cost of borrowing which supports the acquisition of such properties for the housing association sector). Formulae can be established to calculate indicative transfer values and rates locally but should be subject to regular review.
We would also argue that local authorities should be encouraged (or even required) to seek a mix of tenures from the Infrastructure Levy to meet the needs of their entire community. In such a case, the combined value of an indicative mix of affordable properties would need to be established as a comparable with open market value in order to understand the value of the levy.
What are the policy and regulatory challenges to the Department and the Regulator?
It is important that there is a range of housing options to cater for the broad needs of society. However, in some areas a greater emphasis on delivering homes for social rent is required – as affordable rents are not affordable for working families in many parts of the country. The current policy focusses on affordable rent, shared ownership and rent to buy – but the narrow focus of these products does not meet the broad housing needs of our communities which could be provided through intermediate rented products.
Shared ownership is a good product and an intermediate rent (which could be at affordable rent levels) would suit an intermediate rented market product (akin to rent to buy but with no presumption of purchase) and customers whose needs are not currently met at all. The financing of such a shift would need to reflect the rents set.
The affordability for working households is a key and growing issue. Almost half of housing association customers fall into debt within 6 months of initial let.
It is also the case that some housing needs are not met at all. This is because, when evaluating new developments, we undertake an affordability assessment against the average income levels locally at the 30th percentile, and the median for single income and dual income households.
Where housing costs account for more than 40% of income this is flagged as red. For affordable rents the likelihood of homes being unaffordable for single income households is very high, and this situation is getting worse. This can lead to customers being in the position of having to make a choice between heating and eating. Whilst we have mechanisms in place to support customers who fall into this situation we know that, even given this support, 40% of new customers go into debt on their rent within 6 months.
It is also the case that some customers will be rejected based on affordability and therefore are not being helped at all.
For exempt accommodation we are aware of providers who don’t have to register with the Regulator and offer high risk, unsafe, expensive accommodation, often exploiting the most vulnerable groups who genuinely need safe housing.
We would recommend that all organisations that provide accommodation that falls into the “exempt accommodation” category should be required to register with the Regulator, rather than remain voluntary so that this exempt accommodation can have a level of regulation. This would ensure a guarantee around standards, quality and safety ,and deter those who just want to make money through offering poor quality housing.
Access to new sources of finance such as private equity
The expectation should be that those lending into the sector do appropriate due diligence to ensure that the risk to capital is limited. This should complement the work of the Regulator and, where appropriate, credit rating agencies.
We do not have the necessary insight into the skills of those who work within the Regulator to be able to answer this question, and it is highly unlikely that anyone outside of the organisation does.
Yes, it is highly likely that the number of homes delivered will be further reduced –unless the Treasury makes significantly more money available to mitigate the impact of both higher inflation and higher interest rates, both of which will bear down on the capacity within the sector.
About Stonewater
Stonewater is one of the largest social housing providers in the UK, owning and managing around 36,000 homes for more than 78,000 customers.
Driven by our Vision of everyone having the opportunity to have a place that they can call home, we offer homes for rent, shared ownership and sale. We also have specialist housing, retirement and supported living schemes for older and more vulnerable people, domestic abuse refuges, LGBTQ+ Safe Spaces, and young people's foyers.
We aim to become a truly customer-driven organisation by building a relationship built on respect, honesty, transparency, and a commitment to equality, diversity and inclusion.
Stonewater has an annual turnover of around £225m and £2.2bn in fixed assets, a long-term rating of A by independent credit rating agency, S&P Global Ratings, as well as a top G1/V1 governance and viability ranking.
For more information, visit our website at www.stonewater.org
May 2023