In this interview with Housing Today, CT Partner, Greg Campbell sets out the various factors driving housing associations to merge.
By Carl Brown, Assistant Editor, Housing Today
Few people know as much about mergers and restructures in the housing association world as Greg Campbell. Here the experienced consultant talks to Housing Today about the factors driving the next generation of mergers.
Housing associations are disappearing, will they become endangered?
Well, that’s quite an exaggeration, but the number of registered providers on the Regulator of Social Housing’s (RSH) books has fallen quite a bit in the past few years. According to an RSH statistical summary published last year there were 1,424 providers registered with RSH across England as of 31 March 2020.
This compares to 1,570 five years ago, meaning the total number of associations registered fell by 9% between 2016 and 2020. The reason for this? The RSH says this drop is “mainly driven by a number of mergers seen over the last five years.” And it would seem that we are by no means done yet.
Peabody and Catalyst are pressing ahead with plans to form a 104,000-home merger with Catalyst by April 2022. At the same time Riverside and One Housing Group are working through their new strategy after joining to form a 75,000-home association last month. And on top of this there are understood to be numerous other discussions ongoing around the housing association sector about potential mergers and restructures.
So what are the drivers behind current and future merger activity and what trends are we likely to see? Greg Campbell, partner and co-founder at consultancy Campbell Tickell, regularly advises associations on merger and restructuring activity.
Here, Greg talks through some of the current drivers pushing associations to look at mergers and trends.
1. Merging to deal with increased cost and complexity in the short to mid-term…
As others have noted, notably Geeta Nanda, chief executive of Metropolitan Thames Valley, the next generation of mergers is likely to be driven by reasons other than to increase development pipelines, often cited as a factor in many mergers in years gone by.
Indeed, Lord Kerslake, chair of Peabody, in August revealed that the enlarged Peabody group will not build any extra homes beyond those already in Peabody and Catalyst’s combined planned development programmes. Ian McDermott, chief executive of Peabody, told Housing Today in October, however, that the merger would allow it to deal with “the headwinds” and increased costs coming down the line without having to “throttle back on development.”
“We’ve got all of the post-Grenfell stuff, the Fire Safety Act becoming law last April, the Building Safety Bill is rolling around parliament, all 218 pages of it, we’ve got new regulators coming down the line and we’ve got decarbonisation,” says Campbell. Savills last year estimated the cost of achieving net zero by 2050 to the social housing sector would be £3.5bn a year.
Throw in stronger consumer regulation with an enhanced role for the Housing Ombudsman and on the way with the Regulator of Social Housing, as well as the ongoing issues around cladding remediation, and it is perhaps not surprising some associations are reducing their development programmes and instead looking at ways of coping with extra asset management costs, suggests Campbell.
“It is a real trade-off, are you going to look after the existing homes? Or are you going to develop new ones? To what extent can you do both? And that feeds into thinking about mergers and restructures,” he says.
2. …as well as a pandemic-induced concern about resilience in the longer term
Campbell also suggests that the Covid-19 pandemic has spooked associations into thinking they need to be stronger to cope with the unexpected.
“There is a general issue around the fact we don’t know what the next disaster is going to be – it could be a financial crash; it could be another pandemic; look at all the flooding we’ve seen recently; and there’s a strong sense that organisations need to be bigger to be able to cope” says Campbell.
3. Taking advantages of management opportunities from new entrants
A current trend in the housing association sector is for institutionally-backed new registered providers, such as Legal & General Affordable Homes and ReSi Housing, to acquire grant-funded or section 106 homes in developments.
Typically, the new entrants, at least until they are more established, then look for housing associations to manage their stock for them on a contract basis. L&G Affordable Homes, for instance, has a panel of 14 management services providers, primarily housing associations.
Campbell says that the housing association sector is now embracing these management opportunities as a business stream in a way they were less likely to do five years ago.
“There is less emphasis on always having to own, as opposed to managing stock” says Campbell.
“But it is generally only organisations of a certain scale that can access these sort of opportunities, such as delivering management and maintenance contracts with the likes of L&G.”
4. Competing with new entrants
It will be a mistake to assume that some of these new for-profit providers backed by investors will be content to outsource management to housing associations forever. Why not build up management capacity yourself without having to pay a registered provider to do the work?
Perhaps a driver towards merging for bigger housing associations is the fear that these new entrants will become fully fledged players in the registered provider world, competing for land and development opportunities. ReSI Homes, for instance, is looking at its capacity to manage stock in-house, chair David Orr said in September.
“Some of these new entrants are quite substantial funds and intend to provide maintenance and management of the stock as well,” said Campbell. “There is sense that in order to keep up with these organisations, housing associations need more scale and financial clout.”
5. The challenges of the grant regime
As anybody will tell you, social housing grant isn’t what it used to be. Grant in the 1990s would cover around 70% of scheme development costs. This has since plummeted first to around 40% in the late 2000s and then to 14% in the 2010s. Associations are now expected to leverage their own balance sheets to fund development.
Despite this drop, the restrictions and conditions tied to grant are still there, arguably more than ever. The 2021-26 affordable homes programme, for instance, includes changes to shared ownership that introduce much more cost, administration and complexity. The changes include giving housing association tenants the right to shared ownership on most new build properties, allowing smaller initial stakes, and requiring associations to pay the full cost of repairs and maintenance on properties for 10 years.
Campbell said: “There are an increasing number of larger providers who are saying that, because of the number of hoops they now need to go through for not much grant at all, it’s not worth their while to bid.”
Similarly, there is evidence more organisations are also moving away from delivering homes through section 106 planning contributions, under which they purchase new-build homes from other developers to fulfil affordable housing requirements on schemes. Instead, more are looking instead to land-led schemes, i.e. buying land and delivering schemes themselves.
A report by Savills in November forecast section 106 volumes are expected to fall 10% over the next five years to 25,000 homes, as a larger proportion of affordable homes are delivered directly. Once again, this can only be done on scale by organisations of a sufficient size.
6. Carrying out low margin activity
A final driver towards merging, says Campbell, can be explained by the need for some organisations to be able to carry on with their core low-margin activities, such as provision of care and support, in an environment when commissioning local authorities have had their funding cut and costs are rising.
“Some associations will want to merge to diversify, so they are not overly reliant on business streams that deliver modest returns,” says Campbell. “In other cases, where organisations don’t want to move away from care and support provision, they may judge that they need greater scale in order to make those low margins work.”
To discuss further, do feel free to contact Greg Campbell on: greg.campbell@campbelltickell.com
This article was first published in Housing Today (18th January 2022)
