Taking stock

The reshaping of social housing’s funding and the market have meant a significant change of focus for providers. It is also impacting on their customers.

Development and Housing Supply – The Government wants increased housing supply, but of homes for sale. Housing Minister Brandon Lewis has highlighted a target of 1m new homes over this Parliament; David Cameron wants 200k Starter Homes. There is a renewed drive to develop unused public land, plus changes to the planning process, and S106 refocused to Starter Homes. But a significant increase in delivery will not be easily achieved, given the financial challenges for housing associations and councils of the 1% annual rent reduction (and HAs have typically developed one-third of total new build output in recent years) and the apparent unwillingness of the commercial development sector to play ball.

Although many HAs intend to continue developing affordable rented homes, this will largely only be fundable via cross-subsidy from market sale or market renting.

Some large HAs are taking on the developer role themselves, and some have housebuilding subsidiaries. The Homes & Communities Agency meanwhile (in London the Greater London Authority) is taking on the developer role for land it owns, directly commissioning housebuilder-contractors. This may be gradually expanded to cover 160,000 plots of public land. As regards the Right to Buy for HA tenants, while it is intended that sold properties should be replaced by new supply, it is doubtful this will be achieved, especially in the same areas or same tenure, even in London where Government now agrees each property sold should be replaced by two new ones. Devolution particularly in the North and Midlands may provide opportunities for HAs to develop housing on a co-ordinated basis at scale, and the new Homes For The North group may be well placed to facilitate this.

House Prices – Is a house price bubble inflating? Some believe China’s and Russia’s economic problems will mean reduced demand for high-end properties that have fuelled London and South East demand and prices. Others anticipate a flight of foreign money to safety in UK real estate. Some authoritative commentators expect prices to continue rising, even if the level of increase reduces in the most expensive areas. Meanwhile the proportion of new homes in expensive parts of London and the South East bought by absentee overseas owners, continues to cause concern.

Affordability – Assuming the predictions of continuing house price and private rental increases are correct, the unaffordability of many areas will worsen. The new shared ownership flat in inner London recently priced at £1m+ is not a one-off. Some London councils are exporting their homeless to lower cost areas. Meanwhile we are seeing banks relocating staff outside London to save costs, and ‘Big 4’ accountancies buying homes for staff or otherwise helping with housing costs. ‘Hidden homelessness’ (grown-up children living with their parents because they cannot afford to move out) is increasing. Moves away from higher cost areas are likely to increase with ‘pay to stay’, the benefits cap reduction (though most people on benefits are in work) and the bedroom tax.

Home Ownership Demand – Brandon Lewis recently stated that the Government’s changes could bring home ownership to those on the lowest incomes. This does not address the financial capability of people on low incomes to meet mortgage commitments, other than in the cheapest areas. Just eight years ago, an international financial crash was triggered in particular by the prevalence of ‘sub-prime’ mortgages in the USA. Many people are not in a position to own, or may not wish to do so. Where people cannot afford ownership and there are insufficient affordable rented homes, that leaves the private rented sector, where there is an increase in the stock owned or funded by institutions and corporates, but a potential reduction in the availability of properties owned by smaller scale investors, following the Chancellor’s restrictions on buy-to-let.

Investment and Funding – The funding markets are in a complex position. In recent years, the bond markets became the principal sources for HA development funding. Since the rent reduction announcement, there have been few bond issues, mainly at higher cost than before. Funders like index-linked income, and while Government has said the rent reduction is for four years only and will then return to CPI +1%, that is seen now as doubtful. The rating agencies have been issuing warnings for some time about the sector. The assessments vary between ‘Negative’ and ‘Stable’, but there is seemingly no definitive view of the whole sector, as distinct from views of individual RPs, with larger, more diverse organisations seen as lower risk. There is a likelihood of reduced credit ratings for many RPs, leading to higher borrowing costs.

There are plenty of funders – banks, institutions, private money – but investors will be choosy about where they put their money. As for HCA and GLA grant, beyond existing funding commitments, most future monies will be for home ownership initiatives, with some for supported housing.

Homelessness – There are clear signs of homelessness rising, for people inadequately housed and at the extreme street homelessness. There are clear links to the affordability problems cited above. Many believe the reduced benefits cap combined with Universal Credit could lead to more rent arrears, more evictions, more homelessness.

Care and Support – Care sector costs have risen (including with the coming National Living Wage). Government currently shows no sign of implementing the Dilnot recommendations to cap individuals’ future care costs. Various private providers are potentially under threat, the latest being Four Seasons. Among not for profit care providers, there is a growing number of mergers and takeovers, smaller/medium providers giving way to larger providers aiming for £100m+ annual turnovers. Years of council spending cuts have seen Supporting People budgets slashed or merged with Adult Social Care. Various substantial HAs have exited supported housing. Other providers are seeking to exit council contracts. A critical issue here is whether supported housing will be exempt from the rent reduction and the Local Housing Allowance limit on Housing Benefit.

Retirement housing is a key area meanwhile, with over one-third of social housing tenants above 65, and significant increases projected over the next decade. Only 2% of new build housing is currently targeted at older people. LAs and HAs are starting to address these matters, looking at their sheltered housing provision and whether it needs to be remodelled. Some providers are considering retirement villages largely funded by lease sales. But providers will increasingly have to deal with tenants growing frailer physically and mentally, and with greater incidence of dementia.

So what now? – The relatively benign environment afforded HAs in the past is over. The sector can no longer rely on the funding and support it has had. Associations have shown themselves able to adapt and change in the past. Now they must find ways to take control of their destiny and shape their agenda, demonstrating entrepreneurial skills while continuing to focus on those parts of the community they were established to serve. It will not be easy, but a failure to take the initiative and grasp opportunities could leave them in a progressively weak and increasingly irrelevant position.

Greg Campbell is a Partner at Campbell Tickell. For more information or to discuss this article, please contact greg@campbelltickell.com