Written evidence submitted by Orbit Group [FSS 043]
Call for evidence: Finances and sustainability of the social housing sector
Thank you for the opportunity to participate in the Levelling-up, Housing and Communities’ Select Committee’s call for evidence regarding the finances and sustainability of the social housing sector.
Orbit Group is one of the UK’s foremost housing providers, creating thriving communities within a growing portfolio of over 46,500 affordable and social rent homes largely throughout the Midlands, East and South of England. We are one of the largest builders of affordable homes in the UK and believe everyone is entitled to a good quality home they can afford in a place they are proud to live. We support over 100,000 customers in differing stages of life, from those seeking their first home to customers looking for enhanced supported living.
The social housing sector is facing a challenging set of circumstances. A whole raft of circumstances have come together to make the need for investment in new and existing homes greater than ever against a backdrop where the policy and economic environment makes it harder to do so.
At Orbit we are looking for the following policy outcomes to support the positive impact our sector can have:
Please find below our responses to the Call for Evidence. We trust this feedback assists with your inquiry and we would be happy to discuss these points further with you in more detail should you wish.
The current state of financial resilience of
social housing providers
QUESTION 1
The social housing sector has traditionally demonstrated strong financial resilience. As organisations with philanthropy at the heart of their ethos, we understand the importance of operating within a sound business model underpinned by value for money to ensure that our current and future customers are protected and cared for.
Increased fiscal, legislative, environmental, regulatory and customers’ cost-of-living pressures are all having an impact on the day-to-day operating costs of Housing Associations. As a result, across the sector, we can see weakening financial positions sometimes resulting in viability downgrades or changes to aspirational plans, such as a reduction in proposed development programmes.
We believe it is important to note, however, that while viability can be under strain, it does not mean it is necessarily at risk. The stress-testing scenarios and financial modelling we conduct at Orbit, help us to monitor and identify key areas of risk and review our operations and investments accordingly. This diligent approach to our finances and governance ensures that our financial viability remains robust.
QUESTION 2
High inflation, increased energy prices and other additional costs have significantly affected the cost base for some of our key investment areas – new builds, capital delivery programmes and our repairs service.
Increased energy costs affect us as a direct customer (the business) but also because we carry the costs on behalf of our customers, to shield them as much as possible. For example, we have borne substantial energy costs this year relating to our independent living schemes, which is a direct cost to Orbit.
Inflation has reset all prices and the costs are now baked in. We have increased our rents at rates lower than inflation. This means that housing associations are now in a worse position with lower income and higher costs.
We pay to support our customers to sustain their tenancies and mitigate the risk of rent arrears increasing. As part of the added value proposition which housing associations offer to their customers, this is often a hidden, but important, cost with two main benefits – reducing stress pressures on our customers and protecting our business from the risk of increased rent arrears. It also means that customers are less reliant on Government support in many areas such as training into work, mental health and wellbeing. However, increased housing association cost pressures mean there is the potential for a reduction in funding in these vital services.
We are building better quality, safer homes at a lower margin due to our business model, which puts us in good stead to make strong headway in tackling the housing crisis. But building new affordable homes is also proving to be a challenge. The lack of skilled labour and shortages in the supply chain have both taken their toll along with land scarcity and competition for land driving up prices. A total of 65% of our Orbit Homes’ business is direct build which is affected by wage cost increases (due to a lack of skilled labour in housebuilding), and overall inflation on the construction products we are buying. On top of this, we also have increased costs due to the implementation of the Building Safety Act 2022.
QUESTION 3
We are committed to continue building to play our part in reducing the housing crisis and also assist us with delivering economies of scale, but it is becoming more challenging. Increased costs associated with developing each unit create additional balance sheet pressures for us as an organisation. And additional cost requires additional grant because the alternative would be to take on extra debt funding at the increased interest rate amounts, which will ultimately reduce our overall capacity.
As a result of the increased risk associated with rising costs to build new homes and operate our core business, and through a tightening housing market, we are considering scaling back our development activity to protect our financial viability. Currently this is in the region of 700 fewer homes than we originally planned for within our Orbit 2025 strategy period.
Regeneration of our own stock is vital to maintain the long-term quality of our homes, to improve the living conditions for our residents and move towards our net zero carbon ambitions. Orbit has identified 21 schemes with over 1,000 homes which cannot be improved cost effectively without major intervention, which requires moving residents and possible demolition. There is often an opportunity to increase the density, but not sufficiently to create cross subsidy from market sale to re-provide the affordable homes. The nature of our stock means we have numerous examples of low density pre and post-war housing, which is no longer fit for purpose, and could be developed with significantly higher density if funding is available for ALL new (including rebuilt) homes.
By nature, regeneration opportunities are likely to be in lower value areas so market sale does not provide the profits required to cross subsidise the affordable re-provision, this is particularly true at the point of a market downturn. Without additional funding these regeneration developments will take much longer before the go-ahead is given.
QUESTION 4
The changes in the housing market in recent years and the effect on housing associations’ balance sheets cannot be underestimated.
As we stated in Question 2, increases in costs including build cost inflation are putting pressure on future balance sheet metrics which requires us to prioritise our investments to maintain financial viability.
More recently, our market sale homes (which we sell to partly cross-subsidise our housing association operations) have been adversely affected both in terms of volume output and product affordability.
Overall, the margins of our market sale products are eroding as inflation costs increases exceed the house price growth and, sales prices have been seeing year- on-year declines.
Currently, two of our developments are affected by nutrient neutrality, which is stalling our build programme. We are also adversely affected by the building safety levy, the proposed infrastructure levy, a lack of direction within the overall planning framework, delays to planning consents due to local government staff shortages, the latest direction by Government to abandon housing targets and the failure of some authorities to uphold their local plans. Plus, changes to the shared ownership model mean that we are now exposed to increased maintenance costs for up to ten years.
QUESTION 5
Market sales do not fully cross subsidise and the increased pressures (as mentioned above) plus inflationary measures faced by housing associations to produce more homes, means that we have to carefully balance our portfolio of builds more so than previously.
We would welcome more funding in this area and polices which encourage more new, affordable homes to be built to help us deliver against the substantial identified need.
Continuing the building of new homes will depend on the availability of additional grants and other funding support. For example, the extra we receive from Homes England for our methods of modern construction (MMC) is helping. However, it is not a fix all and significant further investment is needed to ensure continued support across the sector. We have recently resubmitted our Homes England Strategic Partnership 2021-2026 grant funding proposal to request additional grant to support the unprecedented increase in labour and materials costs. We await the outcome of this bid.
In Erith Park, Bexley in London, Orbit has regenerated a former tower block estate of 254 mainly social rented homes and replaced this with 320 new homes including larger family homes. The development included 64 market sale homes, as part of the overall vision to ensure we provide a mixed tenure development with long-term sustainability. Viability assessment prior to start on site, approved by Greater London Authority (GLA) and the local planning authority, demonstrated that the market sale was making zero profit (at current costs and values). The developer of market sale homes was willing to proceed on the basis of anticipated value increases, these have been realised to some extent because of the regeneration value uplift, but only to get to a developer profit of around 15%. This regeneration could not have proceeded without the GLA grant. This funding is conditional on a post completion viability assessment to ensure grant at this level is required.
QUESTION 6
No comment
New challenges for the social housing sector
QUESTION 1
In financial year 2022 we spent almost £90 million on the maintenance of our existing homes and for the coming year we have budgeted £118 million. A total of 99.97% of our homes meet the current decent homes standard and 83.5% of our homes are at EPC C. That said, we are always looking at ways to improve our stock and our Strategic Asset Management Team has a rolling programme to assess our properties and identify where investment should be targeted based upon its condition. We have also increased the level of investment into damp, mould and condensation and repairs and maintenance.
We carefully balance the investment within our financial plan between maintaining existing stock, building new homes and investing in our staff - all within the constraints of our financial golden rules to maintain financial viability. However, increased investment requirements in existing stock, as a result of regulatory requirements, is resulting in difficult compromises and financial trade-offs being made.
We also need to make allowances for any new calls on our funding throughout any given financial year. The forthcoming revised decent homes standard and any work to support Awaab’s Law, for example, will need to be delivered.
QUESTION 2
It is not possible to do both to the extent that we would wish to.
With increased regulatory and statutory demands on housing associations, there comes added financial pressures on the maintenance and upkeep of existing stock. This includes building safety requirements where we have invested significantly as well as our net zero carbon ambitions and commitments. EPC C works, for example, are expensive and require significant resources and, as buildings get older, they require more investment to maintain them. These demands mean that more capital is tied up in existing properties and is not available to invest in new ones.
We have taken the decision to focus our development on house developments rather than apartment developments as we consider this a better use of the capital employed. Developing apartments results in a considerable timescale from starting on site to delivering practical completion as effectively the entire apartment block and all communal areas must be completed prior to occupation. We also appreciate the additional costs associated with apartments in respect of service charges. The development of apartment blocks also carries greater risk and cost because we would need to appoint a main contractor to build apartment blocks, due to their build complexity.
QUESTION 3
We are mindful of the following issues as we carry out our building safety requirements:
Finally, while the Building Safety Levy is intended to assist leaseholder customers, Orbit supports the Home Buyers Federation’s (HBF) view that this is an unfair tax whereby housebuilders are being asked to fund the mistakes of others.
QUESTION 4
No comment
QUESTION 5
Our experience is that for-profit housing associations have increased the cost of S106 bids since entering the market, making it more expensive for not-for-profit organisations to compete with them, thus putting further pressure on our balance sheets.
QUESTION 6
Where appropriate, mergers can create a stronger financial entity if benefit realisation and economies of scale are achieved. However, housing associations also need to consider how larger organisations can maintain closeness to customers while still effectively managing their assets.
QUESTION 7
We work in partnership with a number of local authorities where we have substantial stock. These have included significant regeneration deliveries, working to deliver whole house retrofits as well as on specific developments. More could be done to build strategic partnerships where there are common goals.
QUESTION 8
In our experience, more shared ownership properties are needed now to help potential purchasers get on the property market. Shared ownership provides additional security for owners and allows them to purchase equity in a home they might not otherwise afford. That said, shared ownership also puts additional pressure on housing associations with the 10-year maintenance requirement.
The grant funding regime needs to be more flexible to support social housing providers. For example, our revised Homes England Strategic Partnership (HESP) bid has requested increased grant for shared ownership. However, we have been asked to review our mix and move away from a higher level of shared ownership properties.
Currently, we work to a model of 60% rented and 40% shared ownership. However, as the AHP has more emphasis on social rented rather shared ownership, we would struggle to fit this into our model if the split went 70 / 30 affordable / SO. Original HESP guidance two years ago was to provide at least 50% Shared ownership properties within the bid.
Furthermore, funders restrict the amount of shared ownership units that can be charged as collateral. Therefore, although we have found the product very successful it will limit future funding capacity with traditional funding structures.
QUESTION 9
We support the National Housing Federation’s (NHF) concerns that the Infrastructure Levy risks a significant reduction in the delivery of affordable housing and homes for social rent through the planning system. Almost 50% of all new affordable housing are funded through S106 agreements. Under current proposals, there is a chance that developer contributions could be siphoned away from delivering affordable housing to other, unspecified forms of infrastructure or local authority spending priorities. We also believe that the extra work the levy will entail will put even further pressure on already under-resourced planning departments.
What are the policy and regulatory challenges to the Department and the Regulator?
QUESTION 1
Housing policy as a whole needs an holistic look to deliver the number of good quality homes that are needed in the country and to improve the thermal efficiency of the countries housing stock. There is a critical need for a long-term plan to meet housing need, built around a framework of stretching but achievable housing outcomes that can drive real change, year on year.
The policy and funding environment is not designed to deliver the number of new homes need and to unlock the investment need in housing stock. Planning rules and how they are implemented locally present challenges to builders along with the regulatory environment.
As part of this, we would ideally like to see the introduction of policies which encourage the building of more affordable homes, which the new national planning policy framework (NPPF) does not propose to do.
QUESTION 2
Homes England support is welcomed, especially in relation to funding for modern methods of construction (MMC).
However, we believe that the whole grant funding regime needs to have greater flexibility and greater urgency to support social housing providers. As stated above, our revised Homes England Strategic Partnership (HESP) programme increased the proportion of shared ownership. The change in tenure priorities within a programme is challenging to accommodate within our Financial Plan.
The impact of the additionality rule is preventing the wholesale improvement of some of our older and more challenging estates as per our examples in Section 1, Q5 and below in Q3.
QUESTION 3
The restriction of funding to ‘additionality’ only (i.e. not the S106 homes) is having an impact on supply of affordable homes. Orbit is keen to maximise the affordable homes delivered on larger sites, providing it does not negatively impact on the wider area. However, the ‘all or nothing’ approach to grant funding is counterproductive.
For example, we have a site which has outline planning permission for 108 homes in a neighbourhood with significant other private developments over the last few years. Orbit is keen to deliver a 100% affordable scheme (40% rent and 60% shared ownership) and this could be all grant funded. The local authority is insisting on inclusion of an element of market housing, but even the inclusion of one market sale home would result in the loss of funding on 38 homes (the S106 element) and thus the scheme is non-viable. This requirement from the local authority has so far delayed the delivery of these homes by three years.
QUESTION 4
No, it falls short.
Housing associations are under ongoing pressure from years of rent cap enforcements (including the latest one), increasing standard expectations, deeper scrutiny and higher environmental requirements. For example, retrofit funding is amounting to less and less per property even though government targets are increasing. Additional grant funding is also needed for regeneration developments if these are to work in line with levelling-up ambitions.
QUESTION 5
No comment
QUESTION 6
No comment
QUESTION 7
The regulator has a view of Value for Money through metric and statement monitoring via In Depth Assessments, Financial Forecast Return etc which feeds into the governance and viability rating that can directly impact organisations. This should be sufficient to secure value for money.
QUESTION 8
No comment
QUESTION 9
No comment
QUESTION 10
Yes, it is our understanding that the sector will under deliver the 2021 programme. Orbit has met its targets but Brexit and Covid-19 in addition to the financial challenges have taken their toll on the sector as a whole to meet the AHP forecasts.
Our current forecast of programme delivery assumes that build cost inflation returns to more normal levels next year and that there are no further market shocks. The programme could be further impacted if these assumptions are challenged.
May 2023