Written evidence submitted by Metropolitan [RTB 148]
Metropolitan welcomes the opportunity to submit to this inquiry and outline our views.
About Metropolitan
Metropolitan is a leading provider of integrated housing services, care and support and community regeneration. We manage over 38,000 affordable homes for rent and sale, along with a range of care and support services. In total we service around 90,000 customers across London, the East of England and the East Midlands.
Metropolitan is a charitable organisation that exists to support our customers and reinvests every pound of our operating surplus into developing new homes. Over the coming years we are investing £200 million a year on average in new homes, supported by a projected surplus of £61 million in the financial year 2014/15.
At Metropolitan we measure success in three key ways:
The number of affordable homes we deliver
Our financial strength, which supports our ability to deliver new homes
Enabling greater independence: supporting our customers towards greater personal resilience and less reliance on our services or the state
Our successful business turnaround
Prior to 2012 Metropolitan was in a perilous financial situation, the business was in danger of breaching its debt covenants and any further reduction in our governance rating would have seen intervention from the HCA.
In 2012 a new high performing management team was assembled, which brought in expertise from a range of other sectors. And following a robust programme to drive up performance, we have since transformed our financial position and increased our governance rating from G3 to G1.
Over that time an extensive programme of efficiencies has delivered £30m per year of cost savings and secured the fastest and most dramatic financial turnaround in the housing sector in recent years. As a result we are now safely in the top quartile of financial performers in the G15 group of housing associations. Our strong financial performance also means that we will be able to deliver over 1,000 new homes a year on average over the coming years.
As part of our turnaround we have created a greater focus on independence for our customers across all our services. Even as we have saved £30m per year from our operating costs we have supported over 4,000 independence steps for our customers not by massive financial investment but by putting this enabling principle at the heart of our business and working with partners in the public and private sectors.
Through this agenda we aim to ensure our care, housing and employment services are not about dependency but about transforming the life chances and outcomes of our customers. And in the process seeking to bring down the personal and financial cost of social failure where we find it.
Our successful financial turnaround in numbers:
Our strong financial performance enables us to reinvest more in regenerating communities, building more homes and ultimately delivering greater value for our customers.
We have a sharp focus on outcomes supporting independence and were able to deliver 4,754 ‘independence steps’ in 2014/15. As part of this over the past year we have also supported 370 of our residents into employment. (See Appendix A, p.15, ‘Our employment services’)
We have a growing Care & Support business that is self financing and works closely with our housing business to support successful long term health outcomes. Our services are focused around supporting people with mental health issues, learning disabilities and older people (See Appendix A, p.13, ‘Our care and support services’).
And in September we are introducing a report entitled Beyond Bricks and Mortar, which will support our efforts to enable independence amongst our customers. The report will produce recommendations for the sector and for government around enabling greater independence in employment, care and housing services.
How our surplus supports development
According to Inside Housing our development plans will put us in the top eight housing associations for delivery of new homes in the coming years. This includes a significant home ownership offer through both private sale and affordable home ownership products (See Appendix A, p.12, ‘Our home ownership offer’).
Inside Housing note that the Housing Associations with the highest annual surplus also have the biggest development pipelines. This is because our surplus is the key to unlocking finance for future development plans. In fact a projected surplus of £61 million a year for the 2014/15 financial year will allow us to spend over £200 million a year delivering new homes.
The link between surplus generated by Metropolitan (and other housing associations), and our development capacity is as follows:
Given the importance of maintaining the first two components, it is the final component, leverage for future borrowing, which is immediately impacted by any surplus reduction.
As an organisation Metropolitan will soon be raising the £250 million needed to kick start our development programme and we will need to factor government changes into our plans.
Our current development pipeline is outlined below:
Overlaying our surplus figures with our delivery of new homes and future development pipeline over a 10 year period demonstrates a clear correlation.
Completions tend to have a 3-4 year time lag on average, which is indicated in the diagram on page 5. Of particular note is the correspondence between the low surplus levels generated in 2010-2011 (before our turnaround) and the deterioration in completion numbers seen in 2014. By contrast, the improved performance since the turnaround has fed into the development pipeline highlighted above and will lead to significantly higher completions over the next 5 years.
Our surplus not only affects our ability to borrow directly but also our overall appetite for the risk associated with higher debt levels over the longer term. This in turn impacts on the number of private sale homes we can build to cross-subsidise our affordable homes, since whilst we are likely to get higher returns on these homes they also come with a significantly higher risk profile. This is because returns are more reliant on the cyclicality of the housing market than affordable rents and we must therefore price in the risks of any future downturn into our business model.
Ultimately sub-market housing needs an element of subsidy, whether capital subsidy or revenue subsidy. If capital subsidy is being reduced through lower grant and revenue subsidy through rents, then sub-market housing is more difficult to deliver.
Any long term rent reductions could also have a further impact because reducing rents not only lower our surplus but also affects our return on investment in social and affordable rent homes. The reduced return could further impact our appetite for risk in what has previously been a lower risk investment, whilst the reduced surplus constrains the number of private sale homes we can build to cross-subsidise affordable homes ourselves.
Assessing the potential impact of changes announced in the July 2015 budget
We have produced some initial estimates of the impact of some of these changes to help us assess any risks to our business. Because there is still detail to be published on many of these changes, what we have provided are only initial estimates of future risk and cannot be viewed as definite consequences of government policy. The estimates provided do not yet show a full cumulative picture and therefore only assess the possibilities relating to each change or intervention individually, unless otherwise stated.
Whilst each of these may present additional risks to our business that we will need to manage, we are confident that our business is robust and flexible enough to adapt to changing government policy.
It is also worth noting that these models look at the impact without factoring in mitigating changes to our business model. There are a number of measures we could take to mitigate some of the financial impact of these changes once we have more detail but there is no guarantee that this will not impact on the delivery of affordable homes. Similarly some planned changes could be further impacted by other policies in the upcoming Housing Bill or measures in the Comprehensive Spending review, which are still to be announced at the date of this submission.
1% annual rent reduction and the ‘Pay to Stay’ earnings thresholds
We understand that the rent reduction is positive for many of our residents who will benefit from reduced rents. The reduction will also contribute to the government’s deficit reduction programme through a lower housing benefit bill, with savings estimated at £2 billion by the Office for Budget Responsibility by the end of the 4 year period.
The main impact for housing associations will be on our ability to borrow to build over the longer term, since this is reliant on maintaining a significant surplus in order to meet our debt covenants and maintain an acceptable level of risk in the business.
The impact of ‘Pay to Stay’ is more difficult to assess until we have a more detailed understanding of how the government will seek to implement this policy. Whilst we absolutely support the principle of higher earners paying more to remain in social housing, we believe the thresholds and tapers announced in the budget could be difficult to implement and we support the concerns that have been outlined by the National Housing Federation in their submission.
We have included some figures below that describe the potential impact on our current development programme. However, this assumes no change in the type and tenure of the homes we build over the coming years and is based only on the specific impact of this policy and the potential for ‘Pay to Stay’ to mitigate any loss in revenue.
Modelling the impact of the rent controls announced in the 2015 budget, we have estimated the following annualised impact by the Financial Year 2020 (all figures approximate, rounded to nearest million):
Reduction in current rents, 1% compounded over 4 years (£8m)
Missed CPI + 1% increases, 3% compounded over 4 years (£25m)
Total annual reductions to surplus against plan
(£33m)
Offsetting increases for households over £30k/£40k
£3m
Net annual impact on surplus against plan
(£30m)
Estimating the impact this may have on borrowing capacity involves many assumptions about variable factors over the next 4-5 years, including interest rates and how favourably the sector is viewed by lenders in the light of these and other changes.
Assuming interest needs to be covered by approx 1.5 times, a reduction in operating surplus by £30m translates into a £20m reduction in capacity to pay interest.
In turn, assuming a 5% cost of finance, this effectively reduces borrowing capacity by a potential £400m, the cost of building between 1,200 and 1,600 homes.
The above represents what might be thought of as the ‘first degree’ impact of the proposals. In the longer term, houses developed would have generated additional surplus, from which further borrowing could have been raised.
Extending the Right to Buy (ERTB)
Presently the key issue surrounding ERTB is the uncertainty it creates for planning and development purposes
For the London market, ERTB is only likely to be viable for a tiny minority of tenants given relationship of property value even after the discount to our tenants’ income profile
Outside London, it could be within reach for a more significant minority of tenants.
Financially ERTB is worse for us outside London given the existing higher % of market rents, likely weighting towards higher earners (therefore increasing proportion subject to 1% decreases) and value/timing gap between ERTB sales and development/purchases.
Although we generate surplus on properties sold via ERTB, and this might appear to mitigate some of the impact on our surplus from 1% rent reductions, lenders will be looking at regular income-generating ability so this is unlikely to offset the negative impact on borrowing capabilities noted above.
Replacement of ERTB homes to maintain our stock levels will divert resources away from further growing social housing stock overall
In order to ensure we can deliver one for one replacement of these homes we will need to realise 100% of the capital receipt, including being reimbursed for any discount offered
In London, whilst financially the impact is potentially better for us initially, land prices and lead times for delivering homes will create significant challenges for delivery if homes need to be replaced within each Borough
Allowing some flexibility of delivery within London or between local authority areas would help support one for one replacement of homes
Lifting red tape and regulation around the use of the realised capital from ERTB will allow greater innovation around delivery and help support delivery of a wider range of properties in a wider range of areas
Welfare Reform and Work Bill
As an organisation one of our core business priorities is supporting the independence of our residents. This includes a focus on employment support through our Metroployment initiative and targeted training initiatives (see Appendix A). In some areas we also support business incubators for social enterprises and start-ups through targeted interventions using our existing asset base.
As such we support the government’s aims in the Welfare Reform and Work Bill to work towards full employment and to increase the number of apprenticeships across the UK.
With regard to the reduction of the benefit cap, the changes to child tax credits and changes to benefits for those under 21, we have not yet modelled the full impact of this on our business. However, we know that these and other changes will have an impact on some of our existing and future social housing residents, who are often more likely to be accessing welfare benefits than those in private rental or home ownership properties.
For Metropolitan as a business, the initial impact of reductions in benefits or tax credits for tenants, and any changes to other benefit entitlements, is most likely to be an increase in rent arrears. This in turn underlines the need for us to redouble our efforts to support residents into work.
Currently, we are already looking to engage more closely with the Work Programme with a view to expanding the range of support we offer to residents to get into training and work. We may also need to commit further resources to the support we already offer to residents in arrears, which potentially creates a further financial risk that we will need to manage.
In the medium to longer term there could also be a further impact on the size, tenure and location of properties that some residents on benefits can afford to rent. This could have a knock on impact on our ability to borrow to build certain tenure types in some areas, particularly where local authority nominations are more heavily focussed around those accessing welfare benefits. In the current market some central London Boroughs and the wider South East are most likely to see the biggest impact of this.
Future Challenges
As yet we have no plans to adjust the number and tenure of homes we are delivering over the coming years. However, we do have some flexibility in our development pipeline to adjust to government policy once further detail is announced either in the Housing Bill or elsewhere.
We are a committed social landlord and will continue to support the delivery of affordable homes for rent and ownership. We are already supporting this delivery by planning to build homes for private sale that can allow for a level of cross-subsidy.
As described earlier our surplus affects our overall appetite for risk over the longer term and our ability to cross-subsidise affordable homes with private sale homes. This is because whilst we are likely to get higher and more immediate returns on homes for private sale they also come with a higher and more immediate risk profile. High returns on homes for sale are much more reliant on the cyclicality of the housing market than affordable rents and we must therefore price in the risks of any future downturn into our business model.
The cyclicality of the market also has broader impacts. The housing market is now more pro-cyclical overall. During the last downturn production by the largest house builders fell 39 per cent between 2007 and 2009, reaching just 47,500 homes, according to data from analysts Peel Hunt.
At the time many of those larger house builders who hit serious financial trouble were able to support their pipelines through delivery of affordable units. However, as the need for private sale homes to cross-subsidise affordable units grows, the counter-cyclical nature of affordable housing delivery diminishes.
There are of course external factors that impact on our delivery of homes, such as the regulatory constraints placed on us by the HCA and any changes to our credit rating. But ultimately very high levels of gearing in relation to our surplus are not a sustainable or desirable business model for the reasons described above.
Over the coming months we will be working with the National Housing Federation, the G15 and others to seek to support the government’s aims, whilst continuing to manage any new or emerging risks. As part of this we are supporting the calls for greater flexibilities for Housing Associations outlined by the National Housing Federation to date.
We look forward to a continued dialogue with the government to ensure we can continue to increase our delivery of new affordable homes, whilst delivering on their ambitions for home ownership and supporting their aim of full employment.
Metropolitan as a charitable organisation will continue to support our customers and reinvest every pound of our operating surplus into developing new homes. Over the coming years we will continue to deliver efficiencies so that we can invest up to £200 million a year in new homes supported by our surplus.
We welcome this opportunity to outline the impact of government policy on our business and look forward to working with the committee during this inquiry.
Appendix A – Metropolitan Services
Our independence agenda
As an organisation one of our core business priorities, beyond building new homes, is supporting the independence of our residents across all tenure types. Even as we have saved £30m from our operating costs we have supported over 4,000 independence steps for our customers in the last year. We have achieved this not through massive financial investment but by putting the enabling principle of independence at the heart of our business and working closely with partners in the public and private sectors.
This means seeking to ensure our care, housing and employment services are not about dependency but about transforming the life chances and outcomes of our customers, bringing down the personal and financial cost of social failure where we find it.
This includes a focus on employment support through our Metroployment programme and training initiatives. In some areas we also support business incubators for social enterprises and start-ups, through targeted interventions using our existing asset base.
We also have a significant care and support business, which operates at a small surplus and works with our housing operation to integrate care needs and housing needs where appropriate to support the independence of our customers.
Our home ownership offer
Metropolitan is an award winning home ownership business, with a strong record of supporting customers into home ownership. For over 30 years, Metropolitan's home ownership service has helped low and moderately paid working people buy outright or part-rent a decent, affordable home.
We have helped over 42,000 households into homes of their own, including 5,000 key workers. As well as providing new homes and financial products to thousands of households who would otherwise be priced out of the property market, we provide marketing, sales and asset management services to businesses. We have also developed the successful My Choice HomeBuy shared equity product with partner organisations.
We are recognised as market leaders and low cost home ownership innovators. We invest in the communities we work in by supporting projects for local people and we support households in financial difficulty looking to stay in their home. This means that we not only help people onto the property ladder but we also help them to stay on it.
Case Study: From renting to owning
House shares and renting are part of everyday living in and around London as people save towards owning their own property. Metropolitan customers Vijeta and Tejendra went from renting with a live-in landlord when they first moved in together, to renting their own flat and then finally buying their own place.
Reflecting on where they started Vijeta said: “The place we were first renting was in a great location and had good transport links, but what we wanted more than anything was our own place.”
When Vijeta got a job at Queens Hospital in Romford they focused their attention close by. They spotted a home at Lymington Place available through Metropolitan’s First Steps Shared Ownership product. However, it wasn’t to be as they did not match the eligibility criteria.
Metropolitan were keen to look at other options for Vijeta and Tejendra and suggested renting a 1-bedroom flat at Lymington Place through Intermediate Rent. Intermediate Rent means you can rent a home at a rate around 20% lower than a similar home in a similar area from a private landlord. Taking this up turned out to be a significant stepping-stone for the couple.
“We loved our flat! It was fantastic to have our own space and I found myself just a 10-15 minute drive from work,” said Vijeta.
Just six months after moving in Vijeta and Tejendra decided to buy their flat and consulted Metropolitan about their options. They knew they wanted to stay at Lymington Place but realised they could buy one of the larger properties instead of their flat. They were torn because the flat felt like home but they knew that they would need more space in the future.
Ultimately they decided to buy a brand new two-bedroom home and now they are reaping the benefits of having a spacious property in their ideal area. Vijeta and Tejendra own 60% of their house and rent 40% at a rate of £142.50 monthly. The mortgage is £524.48 and the management fee is £5.33.
Our care and support services
Metropolitan helps thousands of people live independently through our care and support services. The people Metropolitan work with have a diverse range of needs. Services are tailored to each individual, working with them to achieve their potential.
Our services are focussed around supporting people where they can become more independent, whether that is out of intensive hospital care towards lowers intensity care services or out of intensive mental health care, stepping down support and where appropriate working towards moving into employment and full independence.
This is exemplified in our Cambridge Road service, which we recently developed on land provided by the local NHS Trust in Cambridge.
Case Study: Cambridge Road Mental Health Reablement Service
Metropolitan’s Cambridge Road Mental Health Reablement Service was newly built in February 2014 and is situated close to Fulbourn Hospital.
Located in the Cambridgeshire countryside, the brand new complex is quiet and serene. Comprising seventeen properties in a courtyard formation, the rooms are light, airy, and designed to a high specification. The service is currently full with all properties occupied. The service was also a finalist in this year’s UK Housing Awards.
The scheme accepts customers from a variety of backgrounds, including those recently released from hospital and those who are already living in supported accommodation. Many of them suffer from depression, addiction and personality disorders.
The accommodation allows customers with mental health issues to gain a sense of independence, but with the support of onsite staff 24 hours a day. They have their own living space but they also benefit from several hours of dedicated one-to-one support from key workers each week to help them take control of their lives.
The initial build took approximately 12 months and customers started arriving in late February 2014. Customers take up their tenancies once the necessary checks have been conducted to ensure that they are eligible for housing benefit support and qualify for the support offered by the scheme. Given the nature of these customers’ mental health issues, this can be extremely challenging.
Our employment services
Over the past year we have also supported 370 of our residents into employment and delivered a new apprenticeship programme across Metropolitan.
Our employment services are able to support residents in general needs housing as well as those with more specific needs, for example working with our care and support services to support customers successfully moving out of intensive mental health services subsequently moving into employment.
We also support a range of targeted community regeneration programmes working with partners in the public and third sectors. Our Clapham Park business incubator is just one example of Metropolitan’s extensive community regeneration programme focussed around social enterprise and employment.
Case Study: Clapham Park social business incubator
In March 2012 the Young Foundation and Metropolitan came together to develop a 12-month programme of support for local social entrepreneurs. During the development of the programme one of the biggest challenges that was identified was the lack of office space at affordable rates. The social entrepreneurs were all working from within their homes and could not afford suitable space. This had a negative impact on their ability to win contracts, register their business and hold professional meetings with clients.
The Young Foundation identified a Metropolitan retail unit in Clapham Park that had the potential to host the social entrepreneurs. With support from a local construction social enterprise (Urban Construction Services), the empty retail unit was transformed into a multi-purpose office space for local social entrepreneurs.
The business incubator now provides a great place for people to network and work with Metropolitan customers. The entrepreneurs who are based at the incubator each benefit from rent-free office space and facilities for 12 months.
September 2015