Written evidence submitted by VIVID [FSS 069]
About Us
We're a leading provider of affordable homes and extensive support services in the south of England.
Everyone has the right to a safe and secure place to call home and with a VIVID home our customers also have access to a wide range of tailored support to sustain their tenancies and support their wellbeing. This is summed up in our vision “More homes, bright futures.”
We invest in communities and address the shortage of affordable housing in the south, building the right type of homes to meet our local communities’ needs. We’re the fourth largest developer of new homes amongst housing associations in England, having built over 1,400 last year. From our creation in 2017 it is our target to have built 17,000 more new homes by 2027.
Summary
- Competing requirements generated by legislation, the inflationary environment and broader policy objectives are increasing operational costs in a manner not experienced in the sector, hitting not for profit providers particularly hard and impacting their investment choices.
- Crucially, additional costs are having to be covered by existing rent, changed from CPI + 1% to the current capped rate of 7%.
- Balance sheets with reduced margins are now defining the operations of providers while securing additional borrowing becomes ever more challenging, particularly with rates rising from 2% to 5.75%.
- The outcome is a reduced capacity to help tackle the housing crisis.
- To help provide a firm footing for the sector, we consider that:
How would you assess the financial resilience of the social housing sector currently? Are the increasing pressures and requirements putting financial viability at risk?
1.1 With regard to financial resilience and risk, it is important to recognise the tremendous differences that exist in scale across the sector from small rural associations to large scale providers that operate across multiple regional geographies and those urban focused associations with homes in high density arrangements. As a result, financial strength, and the ability to secure new capital, will vary so it is difficult to give an overarching view about financial viability across the whole sector.
What is clear is that operating margins are coming under ever increasing pressure given competing and growing requirements and responsibilities – from building safety and decarbonisation through to the management of damp and mould. For instance, we have allocated £750m in our forward plan to support meeting net zero carbon targets. Many in the sector are, therefore, working in an environment that is being defined by the need to make seriously hard choices with balance sheets dictating activity in a greater manner than ever before. It seems to be the case that the sector is having to do more but with less.
What pressure has high inflation, increased energy costs and any other additional costs placed on the finances of social housing providers?
1.2 The pressure generated by the UK’s 40-year inflationary high period coupled with increased energy costs has arrived a time when the sector is having to increase capital expenditure in multiple other areas. It is this that has led many providers to be working in something of a perfect storm. These financial pressures mean that for some, securing new sources of capital has become harder with reduced budgetary headroom to cover borrowing costs. Not only has securing borrowing become harder but the cost of doing so has also risen. The outcome is that, in some areas, critical activity cans are being kicked further down the sector road.
To what extent can social housing providers maintain output levels in housing development to provide a counter cyclical balance in otherwise tightening market conditions?
1.3 The sector’s ability to deliver new development is clearly being affected by the current operational and financial pressures. As a result, Government subsidy and / or funding is an important factor as is the nature of the development programme that each provider has. Of course, if an association has a significant stock of unsold open market homes, its ability to act in a counter cyclical manner is likely to be reduced given current conditions. When the need to see an increased delivery of low-cost housing has never been greater, the perfect storm ‘headwinds’ are currently dictating otherwise. In terms of Government subsidy, the British Property Federation noted in a report published last year “the provision of capital grant is at historic low levels, with Government funding as a % of investment falling to around 20 per cent from between 50-80% in the 1990s and 2000s. Recent initiatives from the Government have reversed this long-term trend to a degree but a gap remains.”
1.4 Given government subsidy levels and current pressures, it is unsurprising the recent quarterly survey by the Regulator of Social Housing (RoSH) highlighted development forecasts reducing to the lowest level for two years. This drop in delivery is happening when the need for affordable housing has never been so acute, driven by increasing private rental costs. This increase in rental costs is adding to the impact of the cost-of-living crisis with housing revenue allowances remaining frozen at 2019/2020 levels, meaning housing costs for many outstrip support from the state. On the topic of private rent, we are keen to highlight the potential consequences of the changing tax regime for those that own buy to let properties. With mortgage rates having risen, our concern is that the UK could see a significant proportion of rental homes subsequently sold at a time when affordable housing is in such high demand. In turn, this has the potential to lead to high numbers presenting as homeless or moving locations potentially damaging the economy.
1.5 In considering output, future levels also stand to be impacted by the Government’s recent planning reforms, so the challenge to see homes delivered by the sector has only got greater. The issues connected with the UK’s planning system also further impacts the sector’s ability to act as a counter cyclical balance in the current market.
Does the cross-subsidy model, by which market housing helps pay for social and affordable housing, have any continuing viability?
1.6 We believe the cross-subsidy model will continue to play some form of role in supporting the delivery of affordable housing in the UK. The benefit of this model needs to be weighed against the risks, however, so when entering a recession, there is likely to be less cross subsidy generated. It should be noted that research completed by the British Property Federation (‘BPF’) highlighted that in some instances, such activity can lead to a drop in credit ratings for associations owing to the higher risk profile of selling homes on the open market. With new funding models and initiatives coming forward, we may see these act as stronger and less risky alternatives to providers using market homes to generate revenue in future.
To what extent have private equity investors, and in particular, international investors, been entering the sector? What challenges does this present?
1.7 Given the disconnect between supply and demand, it’s no surprise affordable housing has become a clear alternative real estate asset class given the long term, low risk returns that are offered.
While institutional investors like Legal & General have long been active in the sector through the provision of debt funding to traditional providers, the step change has been the entry of private equity (either through affordable housing investment funds or for-profit providers). There are now 69 registered for-profit providers and according to recent research by Inside Housing, private equity firms and / or funds own 11% of these.
1.8 The challenge posed by investors in the sector has been increased competition, particularly when it comes to securing Section 106 stock. Our experience is that investor appetite to build portfolios increased the ‘price per unit’ of such homes - given the ‘deeper pockets’ of a global private equity investor compared to a UK not for profit provider. Our view is that, in the main, investment in the S106 marketplace has been the focus of these parties as opposed to delivering new stock. Of course, Blackstone’s contribution through its own for-profit provider over the last year is welcomed with its delivery of over 3,400 new affordable homes.
1.9 If the potential of private equity and / or international investors is to be maximised to help drive greater supply, existing tax arrangements should probably be reviewed. Not-for-profit providers presently receive relief associated with both stamp duty land tax and corporation tax. If these reliefs could be extended to allow for-profit providers to operate on the same basis, this may prove beneficial. Of course, with this comes questions around future profit, assets and people given the rationale behind the operations is clearly different from traditional providers.
The Secretary of State has specified that more resources need to be directed towards maintaining and improving existing stock. How feasible is this for social housing providers?
2.1 The feasibility of directing more resources to maintaining and improving existing stock is heavily dependent upon the scale of such work and the strength of each providers’ balance sheets. However, directing greater resources to these areas simply reduces providers’ abilities to focus on other priorities, such as developing new affordable homes. Here at VIVID, we have reduced our forecast for new home delivery in the coming year by 300. Apart from this, the need to place greater emphasis on existing stock impacts on the ability to invest in and operate a range of vital support services. It is these services that often play a key role in helping our customers sustain their tenancies and to continue living in a decent, safe home. Any reduction in such offerings has the potential to make a noticeable negative impact. By way of example, our charitable arm, VIVID Plus, helped support customers secure over £5.8m of unclaimed income over the last year.
2.2 The challenge for not-for-profit providers is that investment in existing stock is made harder by the fact that much of it is aging. In some instances, stock owned by traditional providers is around 50 years old, so maintaining and improving these homes contrasts sharply with delivering improvements to newer homes. It is this contrasting picture that needs to be recognised when it comes to considering the directions posed by the Secretary of State given the challenge for traditional providers is removed from the position of for-profit providers (who benefit from less pressurised balances and newer stock).
How do social housing providers choose whether to undertake new development or to focus on maintenance and upkeep of existing stock? Is it possible to achieve both objectives?
2.3 With regard to decisions around new development or management and maintenance, it should be noted that in some instances, we are obliged to carry out certain work given incoming legislation. The need to carry out specific scopes of work, such as those around building safety, is subsequently driving increased costs. The pressure this is causing is highlighted by the decision to downgrade the rating of three established not for profit by the regulator last month. The judgements reached resulted from the providers’ investment in their existing homes set against the uncertain economic environment, which left them with a reduced ability to manage unforeseen events.
The ability to develop new homes – or not – is, therefore, dependent on the available budget that providers have and / or their ability to secure additional funding. What will assist providers with their ability to plan to deliver both will be a long-term rent settlement from the Government as well as longer and more flexible funding programmes.
What issues does the requirement on Housing Associations to carry out building safety present?
2.4 The latest building safety requirements, including those around fire, have generated a further significant cost pressure on providers’ budgets with the National Housing Federation estimating that associations will spend more than £10 billion in the next ten years. From our perspective, we have allocated circa £50m towards building and fire safety. So, at a time when the sector is being asked to direct further resource towards maintenance and investment, it is being challenged to ensure building safety but from existing budgets. As a result, consideration may want to be given to an expanded building safety fund in future. The drive to see work completed is also set against a current skills and labour shortage, which is adding to the scale of the challenge.
Have for-profit Housing Associations made the sector, as a whole, more financially robust?
2.5 The ability to register for-profit providers has allowed equity to directly enter the sector as opposed to seeing, as has long been the case, typical lenders or institutions support traditional providers through the provision of debt funding. However, we do not necessarily consider that for-profit providers have made the sector more financially robust as a whole – at least for the time being. Recent research highlighted that for profit providers control around 28,000 affordable homes out of the 4.4million owned by the entire sector. It is worthy to note, however, that nearly 60% of this is shared ownership stock as opposed to other tenure forms. As a result, not-for-profit providers still manage and deliver the majority of the UK’s affordable housing and it is this part of the sector that is having to operate with reduced margins. With greater co-operation forecast between the two and with over 40% of associations engaged in some form of for-profit partnership, as indicated by Savills recently, the greater introduction and deployment of private capital over the long term should prove to be a boost to the health of the sector.
Traditionally, struggling Housing Associations have merged with stronger, sometimes complementary, Housing Associations. Will this continue to be possible?
2.6 Despite a decline in popularity and with a recent survey (RSM, March 2023) citing that 61% of associations feel that mergers do not improve conditions, we believe there is still a role for certain organisations to come together. This is based on the greater cost pressures, including those presented by building safety requirements, and coupled with the fact that scale helps support borrowing ability. Our view is that future merger activity is likely to involve smaller providers looking to strengthen their financial position financially while benefiting from pooling previously limited resources (such as procurement, for instance). However, we consider that future mergers will be approached in a different manner with greater focus on the ability they offer to create value organisationally and crucially, benefit for customers locally. The newly introduced Tenant Satisfaction Measures will no doubt help here as these will have to be reflected in any merger.
Has the emergence of partnership working between councils and housing associations in local areas made the sector more resilient? What encouragement has the Department given to such partnerships?
2.7 Our experience tells us that each authority is very different but in our operating area, we’ve authorities with whom we have very good working relationships. We do, of course, operate in multi-agency approaches when it comes to acute cases linked to the health, well-being, and safety of our customers. However, we do not believe or are aware of any direct initiatives that have encouraged partnership working directly with the sector. In future, we believe there will be a greater need to see a variety of partnerships, including those involving local authorities, come to the fore to help increase affordable housing supply.
The Affordable Homes Programme includes a high proportion of shared ownership properties. To what extent is this form of tenure desirable for potential purchasers and for social housing providers?
2.8 We believe that shared ownerships remains both a good and desirable product within the UK. We continue to receive strong levels of interest in this tenure with January through to March seeing the highest level of demand we have had. Over the last year, we’ve sold over 450 shared ownership homes. Not only is shared ownership a good product for those unable to secure an open market home but it is also a good product for us given the cash injection it provides. The introduction of greater flexibility around staircasing and reduced minimum share should only prove beneficial in the longer term. However, the revisions to the regulation have also imposed longer term obligations on providers around repairs, thus adding to existing responsibilities.
What contribution have council owned housing companies made to increasing social housing supply?
2.9 Research indicated that by 2021 around 80% of councils had housing owned companies in various operational states. However, the Government’s own recorded data for the last year (2021 – 2022), local authorities delivered 13% of all affordable homes provided. This delivery rate stems, no doubt, from the fact that the purpose and remit of council owned housing companies differs and, therefore, not each organisation has a clear focus on the creation of new affordable homes. While the sector has seen several notable failures, such as Croydon, it is important to highlight that there have also been successful operations like those companies operated by both Newham and Dagenham. If anything, the collapse of Brick by Brick in Croydon is a sharp reminder about the importance of effective governance and oversight. There remains a role, in our view, for local authorities and their own housing companies in future if the UK is to address the affordable housing shortage.
Will the introduction of the Infrastructure Levy and changes to Section 106 significantly affect the capacity to develop affordable housing?
2.10 The proposals around the new Infrastructure Levy pose real risk to the delivery of affordable housing as highlighted by the National Housing Federation in recent evidence sessions held by this Committee connected to national planning policy reforms.
Is the current Departmental policy on social housing and affordable homes appropriately focused?
3.1 With regard to departmental policy, it is clear that greater recognition has been given to the delivery of social rent housing, as seen by the focus in the recent NPP consultation and given that the current Affordable Homes Programme now also covers this tenure. However, we appear to be operating in a contradictory policy environment given that the proposed changes around housing targets and five-year housing land supply requirements will only, as highlighted by both the NHF and the HBF, lead to a significant decrease in new housing. The departmental aim of seeing more affordable housing delivered also stands to be potentially impacted by the radical reform of the existing developer contributions regime and its replacement with the Infrastructure Levy.
Is Homes England being directed appropriately by the Department and is it achieving its objectives?
3.2 With regard to Homes England, our view on its direction by the Department and its ability to achieve its objectives is mixed. We welcomed the change in the guidance to the Affordable Homes Programme, including the introduction of social rent grant rates to help drive delivery of this specific tenure. The ability to see new homes previously intended for market sale brought into the programme was also a helpful step given the broader housing market. However, it is clear the organisation has encountered challenges in recent times as reflected in its missed targets. In this respect, it is worthy to note the recent conclusions from the National Audit Office’s review of the work of Homes England.
Is the current range of grant funding available appropriate to address the issues and challenges that the social housing sector faces?
3.3 It is vital that if stock is to be improved and meeting net zero targets achieved, greater flexibility around funding needs to be urgently considered. At present and as highlighted in this Committee’s previous consideration of the sector (Regulation of Social Housing, 2022), existing funding under the Affordable Homes Programme is directed at new, additional homes. As referenced, not-for-profit providers own much historic stock and, in some instances, being able to simply replace some homes and / or regenerate communities would prove better and more cost effective while delivering benefit for tenants. If anything, given current costs pressures, is it time to see the existing public guarantee scheme extended to support housing associations in the UK?
Does the Regulator of Social Housing have sufficient powers to ensure that mergers result in a financially viable new organisation?
3.4 As for future mergers, we believe there is now a need for these to only go ahead when they have regulator approval with financial viability being a core focus and improving services to tenants.
In terms of the regulator, we are concerned that the current regime is not appropriately focused and, in some instances, is driving associations towards areas which they should not hold responsibilities for. For instance, within the new Tenant Satisfaction Measures, associations will hold responsibility for the management of domestic violence. As a result, we believe there is a danger that providers will become overtly focused on performing well for the regulator as opposed to on core operational areas. Any further expansion in the scope of the regulator stands to create a lack of focus while also seeing cost increases, which will necessitate additional funding to be subsequently covered by the sector.
Does the Regulator of Social Housing have the resources and skills necessary to regulate the increasingly complex financial and corporate structures proliferating in the social housing sector?
3.5 As for the ability of the regulator to deal with the new corporate structures that are coming to the fore, we feel it is not particularly well placed. Given expectations that equity investment is likely to be the leading future funding source and with the creation of differing partnerships and ventures, the regulator will need to be prepared to assess differing sets of risks. As a result, we believe the regulator needs to have strong commercial acumen if it is to perform well in future. If the regulator does not evolve or advance in line with the sector, judgements will be made that are shaped or weighted by what has been considered typical or normal within the sector to date.
May 2023