Written evidence submitted by the Aster Group [FSS 047]
Aster Group is a not-for-dividend Registered Provider operating in London and across the South of England. We manage over 37,000 homes and strive to achieve our purpose that everyone has a home. We are submitting this response to the call for evidence on the finances and sustainability of the social housing sector, and welcome this inquiry taking place.
The Current State of Financial Resilience of Social Housing Providers:
Over the last year, the sector has seen a large number of registered providers (of all sizes) have their viability downgraded from V1 to V2, which demonstrates that the financial resilience of social housing providers is clearly being put at risk. Financial downgrades (by credit rating agencies as well as the regulator) continually cite inflation and wider economic factors as the reason for downgrades, alongside investment in existing and new homes.
The 7% rent cap imposed on the sector for this financial year is significantly below inflation, and coincides with our costs increasing at a rate significantly beyond inflation. We are therefore having to meet those increased costs from a position of reduced income. To ensure that shared owners are also protected, the sector has also voluntarily applied the 7% cap to shared ownership properties rental income, and while this is the right thing to do to support our customers it is an additional shortfall that we have to meet and will weaken our financial resilience further.
Operating margins across the sector have already decreased over the previous year, largely because of the impact of the wider economy and other financial pressures mentioned above (our own operating margin has fallen from 31.1% to 16.9%). Many registered providers are therefore going into this financial year with a weakened financial position. Social housing providers rely heavily on buying services and materials to maintain our homes (and fuel to get to those homes) and are therefore exposed to cost increases that rise significantly above overall inflation. We also operate care and support services, which have their own significant cost pressures – for example, the cost of providing care and support has increased due to increased staffing, food, and PPE costs, but the funding that we receive has not increased at the same rate.
The cost of borrowing has also increased significantly - in January 2021 Aster borrowed at 1.4%, but we are now finding that to be closer to 5%. This is a significant increase for a sector that relies on borrowing to ensure that development programmes can continue to provide desperately needed affordable homes. Unlike the private sector, we are not able to increase our rental income to offset these cost increases, requiring us to meet these additional costs with the already limited resources that we have. This has an enormous impact on the sector’s financial resilience and ability to carry out anything other than essential services.
The cost of borrowing, and therefore our financial resilience, may also be affected by any lack of certainty with the rent settlement. We rely on borrowing as part of our financial plans and have agreed terms with lenders based on the certainty provided by the rent formula – should we see any further variation to this it could impact on our ability to meet our covenants and meet interest payments on that borrowing should we not take any mitigating actions (which could have an impact on service delivery). Any uncertainty as to the rent settlement may further decrease the financial resilience of the sector as we will find it more challenging to commit to accurate long term financial plans. Short-term decision making can increase costs significantly, for example where we are unable to benefit from larger procurement frameworks and economies of scale that can be achieved with effective long-term planning. The rent cap has significantly disrupted financial plans and created uncertainty, at a time when the sector is (rightly so) under significant pressure to do more.
As a not for dividend business, we reinvest all our surpluses into activities that support the delivery of our corporate strategy. To ensure financial resilience, our reduction in surplus will mean that we will have to make difficult decisions to remain financially viable in the long term. Ultimately, maintaining our financial resilience may have a negative impact on our customers (who may receive some reduced services), our development programme (not being able to deliver as many much-needed affordable new homes), and our colleagues (who are also experiencing increased costs-of-living). We will always prioritise our customers and colleagues and therefore, like many other registered providers, we have to review our development programme as our primary area of ‘discretionary’ spend. We are still committed to developing as many homes as we can, knowing that affordable homes are desperately needed, but our output will reduce if our financial position deteriorates. Extrapolating this impact across the sector will likely result in the loss of tens of thousands of desperately needed new homes without any grant funding being made available to support the delivery of new homes.
While we do have a strategic partnership with Homes England, and have access to grant funding, our bid did not anticipate the level of inflation, which will impact our programme and costs. Should we have to reduce our development programme, it will take time to return to our current level of output as we will have to rebuild an order book, find new sites and re-build developer relationships etc. In essence, if we have to pause or significantly reduce our new affordable housing delivery, it will be impacted for several years – and that is before considering the wider impact (operationally and economically) of a potential contraction in demand on the construction industry at large.
While others in the sector who rely on a cross-subsidy model may be more vulnerable should the housing market contract, we invest in affordable homes for the long-term, and do not rely on significant income from open market sales. The changes in the housing market over the recent years have not had a significant impact on our own balance sheets, although we recognise that others in the sector may find this more challenging should the housing market continue to contract.
In relation to private equity investors, we do not necessarily see this as a challenge to the sector. Arguably, any additional funding provided to the sector to support the development of additional affordable homes has to be welcomed. There is a significant need for good quality affordable housing in the UK, and we therefore do not find that for-profit providers have an impact on our own development programme or our financial resilience as overall demand for affordable homes significantly outstrips the sector’s development programmes.
New Challenges to the Housing Sector:
Maintaining and improving the condition of homes is, and always has been, a significant financial outlay for any provider in the sector and this will continue to be the case to ensure that our customers have homes that are safe and well-maintained. However, costs are significantly increasing at a time that we are being asked to do more while receiving less income in real terms. It will therefore be increasingly less feasible if inflation and expectations of the sector continue to increase in the way they have been in recent years, unless additional grant funding is made available to support this. Should additional grant funding not be made available, it will put our development programmes at risk so that we are able to continue to meet the other demands on our finances.
We have always had to make difficult choices when it comes to how we balance our investment between new homes improving the condition of our stock beyond the decent homes standard (and, increasingly, to meet the net zero targets). We use data and information to enable evidence-led decision making, and this feeds into our long term financial planning so that we are able to balance these demands on our finances. We have recently made a significant investment to carry out a full stock condition survey so that we have robust and reliable data to enable this data-driven approach to decision making. Although we are investing in our stock, we strongly believe that we should continue to develop as many new homes as we are able to, ensuring that everyone has a home that is affordable and meets their needs. The cost-of-living crisis and increasing cost of privately renting are making affordable rental options or affordable home ownership less achievable for many, and registered providers are best placed to develop and manage stock to meet that demand. It is possible to develop homes as well as focus on maintenance and upkeep of existing stock, but it is getting more challenging to achieve that balance and we are pushing our comfort zones to achieve this, making difficult decisions to ensure that our financial health is maintained.
In relation to the decision making that goes into agreeing new developments, we will always consider property and tenure type when making any decisions, although we have less control over this with S106 sites. We will always look at housing need in an area to ensure that the homes we are building are suitable for meeting the needs of the local area, and that the houses are of a quality that our customers would be proud to call a home.
In relation to building safety, Aster has only a limited of number of properties that are classified as high risk, and therefore we do not have significant building safety costs in the way that some others in the sector do. There are registered providers in the sector that are disproportionately affected by the impact of building safety costs, and the sector has seen some rescue mergers take place partly as a result of building safety liabilities and issues. The financial resilience of not-for-profit or not-for-dividend housing providers will be decreased for those that must make significant investment in properties for building safety. Improving building safety is essential, but it will divert funds away from other activities by that registered provider. We would urge for grants to be made available to provide financial assistance in meeting building safety requirements so that these can be carried out.
Mergers need significant resource to work effectively, especially those involving struggling Housing Associations. Significant resources are required to provide initial stabilisation and ensure that customers have safe homes and communities to live in, especially for those providers with stock that requires significant investment for building safety purposes. For a successful merger to take place therefore, any Housing Association that is considering merging with one that needs support therefore needs to be in a position of strong financial resilience. As a result of weakened financial resilience within the sector, merger activity such as this will carry additional risk and potentially affect the financial viability of an organisation, and it is unlikely that boards will be able to consider diluting operating margins any further through merger activity.
While we appreciate that there were other non-financial factors and that it was an extreme case, it is questionable how many Housing Associations in the current operating environment could perform a rescue in the same way that Sanctuary was able to do with Swan Housing. As a result of the reduction in the sector’s financial resilience, we are therefore likely to see more struggling Housing Associations start to default, in a way that could damage the reputation of the sector. Lenders are currently attracted to the stability of our sector. Should there be any defaults or breaches of covenants, this will weaken that reputation and will have a huge impact on the sector’s ability to borrow at reasonable interest rates in the way we do now, risking our development programmes and our service delivery.
The Inquiry seeks evidence as to whether the RSH has sufficient power to ensure that mergers result in a financially viable new organisation. We believe that the regulatory standards that are currently in place are suitable to ensure that housing providers consider the future financial viability of an organisation following a merger. However, as a consequence the reducing financial resilience of the sector overall, it is going to be harder to create mergers that result in a financially stronger organisation in the short-term, especially where one of the organisations is in a weakened financial position and requires significant investment. Housing Associations should remain autonomous to consider the mergers that they feel are appropriate for their organisation, while acting in accordance with the standards set by the Regulator. That being said, we would welcome consideration as to how Housing Associations like us can be supported to assist struggling providers, recognising that doing so could weaken our financial position in the short-term. For example, could the regulator provide greater flexibility when it comes to regrades if mergers create short-term pressures but those are being well-managed and there is a clear plan as to how we will return to a pre-merger position? The regulator could also play a more proactive supporting role in our discussions with lenders, in such circumstances.
Whilst merger activity in the sector has created some very large providers in terms of stock size, we don’t believe that there is any size of an organisation that automatically means it cannot discharge its duties and responsibilities to its customers. Particular focus will need to be given by those organisations to ensure its structure, resourcing and capacity allows it to discharge those duties and ensure that services can be delivered at scale. Larger organisations are more likely to benefit from a position of resilience that allows them to continue to deliver their services in the longer term. Smaller Housing Associations may find it more challenging than larger associations to attract the right staff, maintain financial capacity to continue to meet competing demands on their finances, and may not be able to benefit from the economies of scale that the larger associations are able to as just a few examples. We therefore suspect that more mergers will take place to provide larger Housing Associations, to ensure that financial stability is maintained in the longer term.
The inquiry seeks evidence in relation to partnership working between councils and Housing Associations. We have seen limited evidence that Local Authorities are collaborating with Housing Associations in this way to date and have seen little encouragement from DLUHC to such partnerships. We do however welcome any collaboration that results in more affordable homes being built, but note our concerns as to whether Local Authorities have the necessary resource, expertise or processes in place to build and manage affordable homes at any scale. We believe that the most effective way of delivering more affordable homes is for Housing Associations to deliver and manage these, working closely with the Local Authority to ensure that we are meeting the housing demand within their locality.
We strongly believe in shared ownership as a way for people to afford to own their own homes, and believe that it is right that the Affordable Homes Programme includes a high proportion of shared ownership properties. It is a tenure that is increasing in popularity largely driven by a greater understanding of it and the impact it can have on people looking to get on the housing ladder. We are finding that the shared ownership market is proving to be more resilient than the wider housing market, and therefore we believe that this is a very desirable product for those who want to have the benefits of home ownership, but traditional home ownership routes are not affordable for them.
The inquiry queries the impact of the introduction of the Infrastructure Levy. We do have significant concerns about the introduction of the Infrastructure Levy and the impact of the changes to S106. We are currently in the process of responding to the consultation that is open on the infrastructure levy and will respond in detail to that separately. While we note that the consultation notes that the number of affordable homes delivered will not decrease under the Infrastructure Levy, we do seek assurance that this will be the case, as we do not support any policy that will reduce the number of affordable homes built, knowing how desperately needed those homes are.
Policy and Regulatory Challenges to the Department and the Regulator
The current range of grant funding is not sufficient to allow us to address everything that we are expected, and need, to achieve. Our financial resilience can be significantly improved through more grant funding being made available.
To demonstrate the competing challenges that we, and the wider sector are trying to address with our limited income, we are:
Without any grant funding to support some of these priorities, we will have to make difficult choices to ensure that we remain financially resilient, such as reducing the number of homes we build, or decreasing the amount of support that we have available to help customers sustain their tenancies and prevent homelessness. We are seeing the impacts of both the housing crisis and the cost-of-living crisis, and we believe that our sector is well-placed to continue to meet the needs of those who are most vulnerable within these challenging times. We are only able to do this however if we are financially resilient as a sector, and we therefore welcome the conclusion of this inquiry to ensure that we can continue to achieve our social purpose for those that rely on us to provide safe and well-maintained affordable homes.
May 2023