Why medium-mergers in the housing sector are motoring

It may be the big mergers that have attracted attention. In some cases it has been their failure to complete. It is the medium sized mergers though that are increasingly motoring. The pace of these is likely to increase, with a nudge in the new White Paper, reminding the sector that merger planning should be part of the strategic debate. This links to regulatory pressure to deliver better value for money, as well as noises off from Policy Exchange.

The housing association sector has long shown a tendency to trend: what may start off as a localised initiative, gathers momentum and then extends to the point where all seem to be embracing it (whatever it is). Mergers are no exception. Combined with the undoubted benefits a well-planned merger can bring, this has created new momentum especially with medium sized organisations, many of which have their history in the stock transfer push of the early 90s.

Mergers grew in numbers over the late 90s to mid-00s. Although things went relatively quiet following the election of the coalition government in 2010, with a period of hiatus, as many waited for national housing policy to develop, and a focus on consolidation of group structures.

This has now been replaced by a spirited push for scale since the 2015 General Election and the resulting policies on home ownership, grant reduction and rent calming measures. As a result, financial pressures have increased, development has become harder, and many have sought to manage the greater risks via merger and with that driving higher organisational resilience.

This has combined with the change in regulation – far less prescriptive but actually more challenging, as RPs have to demonstrate how they are effectively governed, understand and manage risk and achieve business assurance. And it has combined with a gradual change in the nature of HA Boards, with increasing numbers of entrants from the commercial sectors, of people who have seen mergers and acquisitions as part of the normal way in which business is conducted.

The current merger trend is driven by various factors:

  • A desire for greater capacity and clout – a perceived need to achieve more bang for the buck – but also greater resilience to negotiate new and potentially greater risks, and the financial strength to provide for more development;
  • Seeing what the larger HAs can achieve – in particular becoming more self-reliant and offering the scale to be able to control their destiny and reduce their reliance on others;
  • Changes in local government as the devolution agenda gathers pace and moves into areas such as housing and regeneration, with a sense that scale is needed to secure a seat at a larger regional table;
  • In some cases fear of being the last one left unmerged in an area – the North East, for example, is consolidating quickly;
  • And in some cases opportunism driven by the retirement ambitions of individuals – which was always a factor in mergers, but has become less significant in recent years, with greater focus on achieving sound business fit.

There is more pre-merger and merger activity in play now than for many years. In our experience, the HAs that are refusing to explore such options, at least in principle, are few and far between. That doesn’t mean that all the options being considered make sense and offer good fits between the prospective partners.

So, what is the best way to approach merger?

The organisation that has decided to explore these options should conduct effective self-examination: what are they trying to achieve and what are the critical issues and requirements for them; what holds them back from achieving their goals; what kind of link-up makes sense, and indeed is merger capable of providing the answers they seek. From there, they should develop criteria for assessing where fit may exist and where it does not.

Having identified a potential partner, it is critical to confront and tackle the showstoppers at the outset, to plan and programme thoroughly, and to ensure that the merger process is sufficiently resourced so that operational performance does not dip.

There are undoubtedly benefits that can accrue for many organisations from the right link-up. But that doesn’t mean they are easy to achieve.

This article first appeared on the Inside Housing website.

Greg Campbell and David Williams are Partners at Campbell Tickell. For more information or to discuss this article, please contact: greg@campbelltickell.com

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