Riding the wave? Grant, profit and the future of housing associations

in England; the case of Fizzy Living Peter Williams, CCHPR and City Futures,

UNSW

The Context

• In summary; • Cuts in government grant for development (60% cut), cuts in

welfare support for tenants via RSRS, CTB, Benefit Cap and more

• Substantial undersupply of homes in all tenures –annual requirement in England of at least 220,000; currently 120,000

• Decline in home ownership – down from 71% to 63%, rise in PRS to 18%

• House prices rising, new rents rising • Funding for social housing via the Affordable Housing

programme (affordable rents on new homes /conversions up to 80% of market) and new Guarantee programme

The Context

• Pressure to move up market/widen sources of surplus/profit • Through disposals/rationalisation; efficiency savings/VFM,

through joint ventures, acquisitions and new activity • Cross subsidy for social housing, underfunded by govt. • Issues with that in principle; mission creep; charitable rules • Big issues re skills/capacity, understanding of new markets • Issues too of scale, competition, and most notably of risk • HCA rules consultation on use of social housing assets

(http://www.homesandcommunities.co.uk/sites/default/files/our-work/130404_regulatory_framework_discussion.pdf).

• Off/On balance sheet

The Context • Many associations have rejected diversification • CCHPR JRF project on Business plans and poverty • Diversification; up 25% to £2.3bn • Disposals/Sales in a bouyant housing market • The global accounts

http://www.homesandcommunities.co.uk/sites/default/files/our-work/global_accounts_2013_full.pdf

• In 2013 recorded an aggregate surplus of £1.9bn; 9% over 2012 via turnover/rent increases and improved operating margins

• Reserves increased by £2.7bn, to £23.3bn. • The total net book value of the sector’s fixed assets increased

by £5.2bn, to £76.4bn. • Total debt increased by £3.6bn, to > £52bn. £3.2bn of bonds

issued in the year, 66% of new debt facilities arranged.

The Context

• Choices – refocus on core business and/or diversify? • Some chosen former and rent reductions • Much turns on local markets/opportunities • But also governance/control/purpose

• So to a case study - Thames Valley Housing Group. • Chair for 6 years and subsequently Deputy. Completed 9 year

term. • Always diversified –rental/shared ownership • Then student/hospital accommodation • Joint ventures, PFI and Fizzy • Not been distracted by mergers and focussed on organic growth

Portfolio Size target 1,000 apartments

•Acquisition Period; 2012 - 2014

•Portfolio Total Cost approx, £240,000,000

•DEBT, 60% £144,000,000

•EQUITY, 40%, £96,000,000 (less TVH £30M)

•Target Initial Net Yield 5%

•Geared IRR Target 12% with 7-9 year hold

•Income partially underwritten by TVHA

• TVHA is establishing a Private Rental Portfolio of about 1,000 apartments

• TVHA has committed £30m equity to the project

• The Target Market is young professionals, the ‘RENTYSOMETHINGS’

• The initial target area is London and the South East

• TVH will manage and let the apartments under the FizzyLiving brand

• TVH will manage project development as appropriate

• UK Demand for NEW homes – 240,000 pa

• Supply at around 100,000 pa

• Compounding Issues; Limited Mortgage Availability (FTBs) and High Deposits (particularly FTBs)

• London population will grow by 1m in next 10 years

• Supply chain not working

• FTB average age close to 40

• Demand for rental stock is growing

• PRS is the solution

• Safe & Secure NEW Buildings of C 100 apartments

• 1 Beds C 30%, 2 Beds C 55%, 3 Beds C 15%

• Sizes – 1 Bed – 500 sq ft

• 2 Bed 2 Bath – 800 sq ft

• 3 Bed 2/3 Bath – 1,000 sq ft

• Adjacent to Transport Hubs

• Comprehensive Local Amenities

• Exemplary Management via ‘Bob’

• Communal Facilities where appropriate

• Purchase discounts minimum 10% on Red Book (15-20% OMV)

• Initial rental voids 6%, reducing to 3% PA

• Gross to Net Rent discount target 25%

• Average development cost estimated at £20-30m

• Hold Period 7-9 Years

• Variable Exit Routes

• Target Equity/Debt ratio 40:60

• Suitable for Joint Venture structures

Conclusions • Needs must? • But not without its tensions • Slow return and Board patience • Impact on resources • Impact on skills/retention/wages/incentives • TVH plans an exit and to continue • Covered the risks both in terms of reserves/alternative plans • Separate company – one nation two systems dilemma • Not the sole strategy • And in a good market –not universal • Not all got commercial boards/skills

Conclusions • This is not the cavalry for the sector • Clearly does take subsidy to produce social housing • Risks challenging the countercyclical nature of sector • Politicians currently vying to produce plans for more homes • But also all are pledged to reduce budgets • Real risks to Recycled capital grant fund? • Real risks to mission • Real risks to the poorest • Boards have a considerable challenge before them • End up on a different beach?

Peter Williams; consultpwilliams@btinternet.com