Written evidence submitted by Places for People [FSS 044]
The Levelling Up, Housing and Communities (LUHC) Committee has launched an inquiry into the finances and sustainability of the social housing sector in England, examining the financial pressures facing social landlords and the resources needed to meet a variety of challenges, including the need to build thousands of new homes for social rent and the task of improving social housing stock.
The new inquiry follows the Committee’s ‘Regulation of Social Housing’ report (published in July 2022) which examined the condition of social housing and highlighted the appalling and unsafe conditions of some social homes due to mould, damp, and leaks.
As part of its inquiry, the Committee will examine the current range of grant funding available and the increasingly complex financial and corporate structures proliferating in the social housing sector.
The Committee’s inquiry will also explore the social housing policy and regulatory challenges faced by the Department for Levelling-Up, Housing and Communities, the Regulator of Social Housing, and Homes England.
Places for People Group Response
Questions
The current state of financial resilience of social housing providers:
The sector is financially resilient and maintaining this is best facilitated through a clear and certain finance model. The sector is more needed than ever, which means that fundamentally, its prospects are good. Against the context of the cost of living crisis, demand continues to outstrip supply, exacerbated in large part by long-standing resource challenges associated with the planning system. That said, we are aware that the current pressures and requirements, especially demand for increased investment in existing homes, is putting viability at risk for a small number of associations. These challenges are especially acute for those with existing additional costs, such as building safety issues, or for those with more limited financial flexibility.
The operating environment is challenging, with stubbornly high inflation and an end to a period of historically low interest rates. Clearly it has not been possible, or desirable, to pass on all the increased costs of delivery onto our customers so there has been an impact on the sector’s finances and a deterioration of core financial metrics, especially as high inflation has also led to an increase in the cost of debt. Assuming this especially challenging economic environment is reasonably short lived, then most providers can be expected to bounce back reasonably quickly.
The investment requirement to retrofit existing homes to ensure they are ready for a carbon net zero future remains significant, driven by the scale of work needed and a shortage of skilled contractors and tradespeople to deliver works, amplified by cost inflation. The scale of the investment required, and the previously mentioned shortage of delivery partners means it will not reach many homes for several years, which does impact the communities we serve. There is evident need of sector collaboration as a means of sharing knowledge and/or procuring at scale to help reduce some of the costs housing associations are facing.
The role of housing associations has expanded in response to communities’ needs. For example, as customers struggled with large energy costs, we have provided support via our cost of living fund. We have tried to increase our support for our communities and especially those customers facing severe hardship. We believe in taking action to create community resilience and to help our customers thrive. Especially those who need our help the most. But providing this support does represent an additional pressure on budgets, and we have to balance this against our ability to invest in building new homes, improving existing ones or establishing support and infrastructure we know benefits communities in the long term.
They can’t. One of the main levers that providers can use in a challenging financial environment is to reduce expenditure on development, as we saw during the years of rent reductions. This is the case for both tightening market conditions and if further expenditure is required on existing homes, including activity to meet the Government’s net zero carbon ambitions.
It’s been a factor for both market sale and shared ownership products. That said, many associations have reduced their exposure to market sale, so this is expected to play less of a role in the future, albeit the tenure is still critical in developing mixed tenure communities. The increased costs of privately renting, coupled with many private landlords exiting the market, is also pushing up the need for social housing and emphasising the important role we play in our communities.
The cross-subsidy model has played an important role in boosting the supply of social and affordable homes. In addition, through promoting the development of homes for market sale alongside homes for social and affordable rent, the cross-subsidy model has encouraged the creation of sustainable mixed tenure communities. Cross-subsidy works best when the housing market is strong.
In a model where social and affordable homes are fully funded there is an opportunity for the margins from market homes to be invested to support communities more broadly, while also reducing the risk to the housing association’s balance sheet from any market volatility.
Debt investors are an established part of the financial model, having been supporting the social housing sector since the 1988 Housing Act. In addition, in the past decade, there has been an increasing interest from institutional investors such as pension funds. The sector represents much needed diversification alongside a relatively stable long-term income stream and government support within a strong regulatory framework.
Private equity investors generally target investments over shorter timeframes and with higher returns but have invested in for-profit housing associations since their introduction in 2008. These are still a small part of the overall sector but bring with them new ideas and approaches that should be welcomed by the sector, particularly around structuring of finance and operational efficiency.
In terms of challenges, private equity investment requires a reasonable scale of organisation, and these investors usually target double-digit returns that may not be achievable for all the sector’s homes.
New challenges to the social housing sector:
Improving homes, meeting customer needs, and delivering building safety requirements are the core priorities for investment. Regardless of the reasons, as a sector we have a lot of work to do and, as an organisation, Places for People will not compromise on this. This impacts some organisations in terms of reduced development expenditure and, therefore, reduced delivery of new homes but, equally, our scale means that we will continue to build new homes because the UK needs more affordable and social housing. Beyond this, there is also considerable expenditure required to decarbonise our homes and operations, particularly older homes, and to deliver a climate transition plan. Getting our commitment to decarbonisation at scale, without some form of subsidy, is, and will continue to be, very challenging. Sector collaboration is key here to share knowledge and procure at scale to help reduce some of the challenging costs housing associations face.
It is possible to achieve both objectives and this is a core consideration in the business planning process. The upkeep of existing homes cannot be compromised but there is a balance between potential additional spend on existing properties, particularly retrofit sustainability, and investment in new development. As a Strategic Partner with Homes England, the delivery of new homes is an important objective of our business. We are committed to addressing this challenge with other providers and agencies that work in the sector, but also other organisations, who may be able to provide new technologies or alternate funding opportunities, to maximise the outcomes we can achieve across these priorities.
We see building new homes as a long-term investment for our communities, so as an organisation, we always endeavour to build the right types of homes for the specific needs of communities, and for our current and future customers. Along with a focus on quality and high levels of energy efficiency, this ensures that the homes are sustainable for the long-term. When reviewing plans for new developments, we look at local need and demand for the new homes (whether for affordable rent, affordable sale, or outright sale) and work with our local teams and local authorities to produce the most appropriate mix of tenures and house types for each development.
The safety and wellbeing of our customers is paramount. Anyone who builds needs to build safely and to capture information in a way that allows safety to be maintained during the lifecycle of the building. Housing associations are no different. At Places for People, we are committed to investing in building safety to safeguard our customers. It will be important for all of us as a sector to reflect on the second report of the Grenfell Tower inquiry when it is published and to consider if anything further needs to happen to improve building safety and how this will be financed.
NA
For-profit housing associations have a role to play in the delivery of new homes but are still a small part of the overall sector and those organisations have had minimal impact on the sector’s finances. They represent an opportunity to widen access to capital and increase the supply of social and affordable homes whilst introducing a different set of skills into the sector that comes with institutional capital management.
Yes. As the regulatory environment becomes more complex and the financial environment remains challenging there are benefits to scale. For example, a larger organisation can call on a deeper expertise in areas such as building safety and Environmental Social Governance (ESG) and is likely to have a broader balance sheet and able access finance at better rates.
The way an association discharges its duties to customers is not a function of its size but of its culture. This drives how it organises itself and prioritises customers and frontline engagement to ensure it delivers responsive, cost effective and appropriate services and products including additional support with, for example, cost-of-living difficulties faced by customers.
In our view the model has not been widely utilised and there is an opportunity to build on existing experience to increase the impact of partnership working.
At Gilston Park we are working in partnership with East Hertfordshire, Epping Forest, Harlow District Council, Hertfordshire, and Essex County councils to deliver the largest allocation of the proposed Garden Town. To help facilitate bringing this development forward, Hertfordshire County Council were awarded a significant level of Housing Infrastructure Grant that we will utilise to deliver large infrastructure that serves the whole Garden Town. When we re-pay the grant, this gets recycled into local projects within the county, as opposed to being returned to central government. The partnership has had to work closely to ensure we can deliver against various milestones agreed to ensure the funding continues. In addition, we are working with Homes England, Essex County Council and Hertfordshire County Council to set up the Harlow Town Fund to facilitate regeneration of the town centre.
Local authorities and housing associations typically work closely together in considering development proposals for particular sites. Our experience is that we work closely with the local authority’s housing strategy or enabling team in the initial design stages to consider the local needs and demand for affordable housing and the suitability of the homes and the scheme as a whole. This is in addition to the liaison with functions such as planning and highways needed to meet statutory requirements. The collaboration is generally positive and productive, although in recent years resource constraints on the local authorities’ part, particularly in the planning teams, have created challenges and led in some cases to substantial delays in delivery.
As the housing landscape changes with increased cost of home ownership and private renting, and as demographics change across the general population, shared ownership homes enable us to offer a different type of product to a customer who might otherwise be unable to access either a social or affordable home or an open market home. The shared ownership approach ultimately provides a route to homeownership to people who otherwise would not be able to achieve it. We support this and we are expecting to increase the pipeline of these homes in future.
Local authority house building accounted for 1% of new dwellings completed in 2022, compared to 39% in 1978[1]. Whilst housing association home building has doubled in this time (9% of all dwellings in 1978 and 18% of all dwellings in 2022), this has not filled the gap in providing affordable homes for people who need it. There should be more opportunities for local authorities to partner with housing associations to deliver more affordable homes.
Specific details of how the new Infrastructure Levy will be implemented have not yet been published, but the challenge will be funding and delivering affordable housing if the infrastructure levy is onerous. The proposals must reflect the need for flexibility to take account of viability of a site.
What are the policy and regulatory challenges to the Department and the Regulator?
We support the Government’s focus on listening to customers and improving the quality of homes. As a larger housing association, with the expertise to respond to increasingly complex issues and deliver economies of scale, including attracting institutional investment, we believe we are well placed to deliver improvements focused on customer needs while continuing to build more new homes. There is an increasing gap between our vision and what we can do within the limitations of the financing model. A clear and certain model with additional funding and flexibility for new homes and additional pressures such as improving the energy efficiency of our homes would assist us in delivering more for more customers.
While we understand the Government’s approach to rent setting for 2023/24, we are concerned about the Government intervening in the rent settlement on a regular basis. We would welcome a long-term settlement post 2025, one which prioritises certainty and consistency. One of the attractions of the sector to external investors is the predicable inflation linked revenue stream. The lack of clarity on the future rent settlement is very damaging. Having limited visibility on how the sector’s rents will increase in just two years’ time makes business planning very difficult and is negative from an external perspective. The sector needs investment for the long-term and therefore long-term certainty over rents is key. This means delivering new homes is more difficult to forecast and achieve.
Homes England has proved itself adept and effective in responding to Government policies and priorities with a range of grant, investment, procurement and enabling interventions that it has been able to utilise and modify as Government priorities have emerged and developed. Our experience has been that it has been able to adapt its interventions and then engage with, and draw on, the participation of its housing and development partners to do this and to meet its own objectives. In recent years we have seen the introduction of large scale, long-term strategic partnerships with housing providers to maximise delivery of new homes alongside an increasing focus on regeneration and place. As a strategic partner delivering over 7,000 homes through the 2016-21 and 2021-26 Affordable Homes Programmes, we have already seen the positive impact of this strategic approach on our ambitions to grow our overall development programme and affordable housing programme.
We understand this question to relate to restriction of grant eligibility to units over and above those mandated through the often under resourced planning system. We have not conducted a full evaluation of the impact on supply ourselves and are not aware of any external studies. From our experience (both as the purchaser of developer produced homes and as a developer of homes for sale ourselves), this restriction does not necessarily impede supply in a strong market.
No. While the grant available for the delivery of new homes through the Strategic Partnerships is very welcome (albeit more grant for new developments would always be welcomed), the key issue facing the sector is the investment required for sustainability retrofit in existing homes, especially to meet the target of carbon net zero. The limited availability of grant for this is not sufficient to address the challenges which exist. A more flexible approach to delivering carbon net zero targets, like the Strategic Partnerships model, may deliver more benefits. Similarly, a long-term commitment to providing funding for social housing decarbonisation is needed so that housing associations can make long-term/larger procurement commitments and plan for the long-term.
Our expectation is that the Supported Housing Regulatory Oversight Bill should address the need for adequate supervision and oversight, as well as issues associated with rogue landlords taking advantage of currently weak exempt accommodation regulations.
Yes. The financial data derived from regulatory returns such as the FVA, annual accounts, Financial Forecast Returns, and Quarterly Surveys provide adequate oversight of the financial reasons behind individual mergers, and whether new partnerships will be viable between specific organisations.
The current degree of involvement by the Regulator in merger processes, particularly through downgrades, partner selections, subsequent in-depth assessments of merged organisations, and general regulatory checks and balances, should provide assurance that sector mergers are robust.
Yes. The role of the Regulator is to ensure that housing associations are well-run with effective governing boards, financially viable, and delivering high-quality services to their customers. Through this route it should be able to satisfy itself that the appropriate frameworks are in place in an organisation to raise funds appropriately.
Yes. It is for governing boards to assure themselves of the robustness of financial and corporate structures, and for the Regulator to consider if these are adequate based on evidence provided by those organisations.
If the purposes of such financial and corporate structures are unable to be justified to the satisfaction of the Regulator, then this can be addressed through routine regulatory engagement. While a certain level of understanding of financial and corporate structures is helpful, a detailed knowledge is not necessary.
The Regulator has identified that there are inherent structural differences, different capital structures and cash flow dynamics between for-profits and not-for-profits. Therefore, we recognise that it may be appropriate to have a bespoke regulatory regime for for-profit housing associations.
Yes. It seems likely that the challenging operating environment that the sector is currently experiencing will inevitably result in fewer affordable homes being built. Housing associations will also likely elect to focus expenditure on maintaining and improving existing homes.
Despite this, we will continue to find ways to build the new homes that are required. We are sourcing new funding streams and being agile in deployment of development opportunities presented to us. We will continue to find innovative ways of addressing the chronic shortage of good quality affordable homes in this country, and we would encourage others in the sector to do the same. Our scale enables us to do this at a time when other housing associations are withdrawing from building new homes.
May 2023
[1] Government Live Table 213: Permanent dwellings started and completed, by tenure, England (quarterly)