Written evidence submitted by Savills [RSH 063]
Savills Affordable Housing team is the largest and most experienced affordable housing advisory business in the UK, with more than 100 professionals. We regularly spend time with the senior leadership teams, boards and operational staff of social housing providers ranging from the largest to the small specialists and covering housing associations, local authorities and for-profit companies.
We are the only advisor to have in house governance, regulation, asset management, funding, business strategy & planning, development and valuation experts who focus specifically on the affordable housing sector.
Our experience of housing providers, their operations and their interface with the regulatory system gives us in-depth insight into the matters being considered by the committee.
Most social housing is of good quality. Recent coverage has highlighted cases where larger providers in particular have lost track of oversight of their stock. The reliance on reliable, up to date data and information on stock condition is consistent across all providers, but is perhaps amplified as providers increase in size.
Social landlords can avoid serious deterioration in the quality of their properties, and can be assured about the quality of residents’ homes, if they undertake regular inspections of stock condition and have an appropriately aligned investment programme.
The need to remediate building safety risks looks very different across different property portfolios. We would caution against trying to specify a sector-wide cost of remediation such as a benchmark cost per unit.
To date there has been extensive focus on properties 18m+ in height, but less on those between 11 and 18m. Therefore providers may not yet be able to answer questions about resource requirements and the consequent impact on how resources are allocated for other priorities including general maintenance and improvements.
For the regulator, government and others to be confident in forecasts of future costs and resource impacts provided by social landlords, they should seek assurance on how assumptions have been informed. Providers are not able to make informed strategic decisions or reliable cost forecasts if stock is not regularly surveyed.
It is possible to give a figure for cost of retrofit works for energy efficiency in the social housing sector, but assigning a cost against the assessed investment need depends very much on pricing of components and labour. Both of these have increased massively in the last 12 months.
Providers’ strategies for retrofit will depend on how they balance priorities and what they assume about future costs. It should not be assumed that providers will invest in all stock to bring it up to a zero carbon standard, and this then opens up opportunities for, and need for, regeneration programmes.
The committee may be interested to review the report on housing association decarbonisation costs and funding options that Savills prepared for the National Housing Federation: https://www.housing.org.uk/resources/decarbonisation-costs-funding/
The regime has proved itself remarkably robust in sustaining the social housing sector and enabling it to attract large volumes of investment to provide more affordable housing.
It is common ground that the regime needs to be widened to include proactive regulation of customer service matters, as proposed in the White Paper. Where structural service failure is identified under the proposed new approach to consumer regulation there will be implications for economic regulation; in terms of views formed on providers’ governance and financial management.
Comments on how changes in the sector are challenging regulatory practices are set out elsewhere in this response.
In general the co-regulatory approach where providers work with the regulator to address problems is successful. However we have observed some instances where the regulator appears limited in its capacity to quickly take action. In particular this arises when the providers are in a subset of mainstream provision for example very specialist provision, particularly complex business structures, or scale of activity.
The current regulatory framework was developed before the emergence of very large providers with over 100,000 homes. Well-publicised cases show that RPs where organisation-wide operational performance is judged acceptable after regulatory assessment may still experience severe local service failures that are putting the health and well-being of residents at risk. A solution to this issue will be necessary as part of the introduction of consumer regulation – both for interventions and for the regulator’s ability to uncover problems.
In the past various regulatory interventions in response to structural service failures have been mooted:
Ideally the risk of severe service failure, or the early stages of it, would be identified by a) the provider itself or b) the regulator before regulatory action against providers is required. Crucial here – and currently requiring attention by the regulator and RPs alike - are the availability of staff with levels of technical expertise that enable business practices to be well understood and anomalies identified (asset management practices; emerging investment/ownership models; and data quality being key areas).
The White Paper reforms are generally going in right direction to enable the regulatory regime to consider and act on matters that directly affect the customer experience of social housing.
The White Paper itself was a long time coming, but since publication progress has been made on developing a new regulatory approach, with clear messaging given by the regulator and engagement with stakeholders on the detail of new approaches. This is important to ensure the resulting system is going to be effective and has buy in from landlords and tenants alike. Once the reforms are implemented, the regulator will need to further build stakeholder confidence by showing willingness to use its new tools across all types of registered provider, creating a positive experience of proactive regulation of consumer standards, and demonstrating it has the technical abilities required to scrutinise information presented as evidence of compliance.
An area that needs particular attention as the regulatory regime is reformed is the retention and use of robust data within registered providers, and the regulator’s engagement with this data. The regulator’s message on the need for good data has to date not driven the improvements required. To deliver their core business activities well Registered Providers must be able to use and rely on information they hold about stock profile, stock condition, rents charged, tenancy and lease terms, compliance, property ownership terms and liabilities
The Decent Homes Standard should be brought up to date. Savills has given detailed feedback to DLUHC consultations and the working group on changes that should be made to the Decent Homes Standard, and would be pleased to make our written responses available to the select committee.
We agree that the Standard should be amended to include energy efficiency. It is important that a revised Standard does not create perverse incentives – the NHF report on decarbonising the housing association sector addresses this.
At this stage the Standard should be a point on the route to net zero, rather than setting a target to be hit. Technologies and knowledge of stock are still emerging, and mandating a target can create inefficiencies in programmed stock investment plans.
The broad success of the regulatory regime suggests that all providers of social housing should be compelled to register. Indeed, the emergence of the FPRP sector demonstrates that the regulatory regime is acceptable to investors and entrepreneurs as well as the established non-profit sector. There are some notable cases where providers that were set up outside the regulatory framework have failed, with a resulting cost to the public benefit of their provision (the loss of S106 obligations).
The need to get or remain registered has to date largely been driven by receipt of capital grant funding or ownership of s106 units. The case for requiring universal registration is strengthened as the regulator’s ability to undertake consumer regulation is being significantly enhanced – where providers are catering for people whose needs are not met by the market and who lack consumer power, it is reasonable for there to be some oversight of their provision even where the provider is not the custodian of public support in the form of grant or s106 obligations.
This opens questions about proportionate but effective regulation of smaller providers which we have addressed further in response to other questions. There is also an opportunity to consider how far the definition of social housing extends. A universal requirement to register would necessarily bring some long established housing associations and co-operatives into the regulatory ambit – these are generally offering low-cost accommodation to clearly defined groups of people who cannot otherwise meet their housing needs. However, in addition to this thousands of people are now accommodated in what is colloquially called “unregulated social housing”. Residents here are almost certainly unable to meet their needs well in the open market, are often vulnerable for financial or social reasons, and may benefit from the protection of a regulatory regime. The test of whether rents are “sub-market” is hard to apply to this type of provision, and so currently some sits within the sector (often facing challenges from the regulator to prove it can meet the rent standard) and some sits outside. Policy makers should consider what they want to achieve through universal registration and whether the current statutory definitions of social housing would enable these aims to be realised.
The growth of the “For Profit RP” (FPRP) sub-sector does present challenges for the regulatory system. It is facilitating the flow of substantial volumes of investment into affordable housing. In return investors expect a reasonable return, but the models for deriving this return are different from the familiar practices of banks or the capital markets that provide secured lending to housing associations in return for a coupon. In addition, the nature and purpose of FPRPs varies, and this affects the nature of the return sought. It is certainly not as simple as the shareholder(s) taking a dividend once a business generates surpluses.
The question of “what is a reasonable profit” will arise. Regulation will seek to ensure that the FPRP is financially able to support the needs of its stock and tenants over the longer term, as it does for all Private Registered Providers. However this does not address the inevitable question of whether investors are securing a reasonable return on investment into/operation of sub-market housing that is intended to support lower income households, that may be supported by public funding (SHG or S106 obligations), and where their exposure to financial loss is protected by regulation. We could look to the economic regulatory approach taken by the utilities regulators, who judge the adequacy of investment programmes and set pricing accordingly. This links back to points about the quality of social housing stock and the interface with regulation that were considered earlier in this response.
Another question that increasingly arises is that of independence and third party interests. It is an established regulatory principle that RPs actions must not unreasonably advance third party interests. There have been cases where unreasonable advancement has been clearly seen and regulatory action has been taken; but with changes seen in the sector it is now time to consider and more clearly define what “unreasonably advance” means. In particular, the regulatory perspectives on the reasonableness of the extent of a shareholder’s power to influence its FPRP, and an FPRPs interactions with a wider corporate group, need to be refined and communicated.
The regulator will increasingly be regulating RPs with structures and business models that it is not used to looking at. Some of these will reflect practices that are considered perfectly normal in other corporate domains e.g. use of long leases, employing legal structures that ring-fence risk into multiple vehicles, provision of services between group companies. The regulator will need to ensure that staff have the expertise and insight to make informed judgements about these RPs, and that regulatory opinion is not too heavily informed by what is ‘normally seen’ within the HA sector.
We believe that principles of good governance are shared by non-profit and for-profit sectors (see NHF and UK Corporate governance codes), however in light of diversification of corporate structures and objectives overseen by the regulator, further thought must be given to what the practice of good governance of FPRPs looks like, especially as it relates to judgements about an RP’s ability to meet regulatory standards.
The regulator should increase its focus on how RPs are securing value for money in delivery of their activities, especially where approaches to established practices are changing. Trading of tenanted properties between RPs (stock rationalisation) is an important part of proactive asset management programmes. There is currently a strong appetite from FPRPs to acquire shared ownership stock, and there are good financial reasons for the HAs that currently own that stock to realise its value through sale. We observe an increasing number of bi-lateral deals on shared ownership portfolios, i.e. there is no market test of the value of the stock, and in such circumstances it is difficult for RPs to know that they are getting best value in these multi-million pound transactions. There are also greater opportunities to identify and respond to resident views on future management during a competitive process. The regulator is not (and should not be) required to give consent to sales but, when it reviews the governance and financial decision making around major asset management decisions as part of its oversight of RP businesses, greater attention should be given to RPs’ definition and achievement of value for money.
The rapid growth of non-profit lease based providers that house some of the country’s most vulnerable households has exposed challenges. On the one hand, since concern arose with the business model used by these providers the regulator has taken a robust approach, proactively seeking detailed information from providers and then challenging the approaches to governance, financial management and property management. This approach has given visibility to multiple problems, and has been backed by the courts. On the other hand, it took a long time for the issues to be explored by the regulator, and the regulator has not been able to intervene to eliminate the risks or indeed to prevent providers taking on yet more risk.
Under the principle of risk based regulation, providers with fewer than 1000 units are subject to might lighter routine regulatory scrutiny than larger providers. Whilst we agree that the level of routine regulation should be proportionate to the business, it is time to review how the threshold is set with attention paid to whether the regulator should continue to use size as the sole indicator of risk that would materialise from failure.
In terms of the regulator’s ability to address problems identified with this particular business model, to give the regulator greater powers of intervention capable of resolving the issues could significantly disrupt the existing regulatory settlement for all providers. The solution in terms of lease-based specialist providers is likely to involve changes to the funding arrangements for provision of accommodation with support for vulnerable single people.