Shaping housing's future: 'How can we build more homes?'
At the first of two Social Housing roundtables supported by Places for People, and taking place around the November 2015 spending review, leading figures from across the housing and infrastructure sphere gathered to debate and address the impacts of a new world of housing policy – and the ways in which housing providers can work to meet the challenge.
Where now for affordable housing?
MB: My own view is that government doesn’t know [what affordable housing is for], although it’s erring to the view that rent is the last resort for the most vulnerable only.
The sector must try to shape the debate itself. If we leave it to the government, the result may not be something we like.
My guess is that we will end up moving activities outside of the regulated sector increasingly to shape our own offers for our own markets, possibly using some of the balance sheet capacity we have already.
NH: I agree with a lot [of that]. But we need to change the debate and rather than talk about affordable housing as what we’re all here to do, [talk about] a mission to help people access housing at different price points, not just at the ‘bottom end’ but across all types of tenure and housing products.
We should evolve into that role and not see our function solely as providers of social or affordable housing.
AS: There are a variety of people who are in need.
The [political] direction of travel is towards homes for sale. But I think a different financing model and organisational structure is required. Equity financing and moving to what others have done, water and telecoms – there’s a strong sense that could be the direction of travel.
CM: The critical objectives to this government are home ownership and increasing supply. We need to increase delivery across a whole range of tenures.
The challenge for this sector is that it has clearly demonstrated that affordable housing is profitable over a long period on time. But as it stands, balance sheets will be constrained and it still requires an element of equity in there.
We’ve done some comparisons with utilities. If you look at their balance sheets they are not that too dissimilar to housing associations and yet they can raise equity to fund regulated activities.
DC: For many decades we have confused overall supply with tenure: they are not the same thing.
We have to focus firstly on how we produce the number of properties we want and then in parallel, I would say secondarily, work out how people access them.
The question is how do we accelerate that process? The answer is we become asset managers. If you don’t have subsidy, you need a different model – and the only model you can have is to aggressively asset manage to provide opportunities for people to access housing.
Secondly, housing cannot be offered in perpetuity; the idea of having housing for as long as you like doesn’t work. You have to have control of those assets – equity won’t come in unless that [control] is there.
CW: The government’s push for home ownership is not just ideological, it’s part of a strategy about trying to get housing benefit expenditure down.
We are clearly seeing a broadening of what affordable housing is, more recently in part driven by government’s desire for home ownership and we expect to see more on that in the spending review.
It’s also that we have an overall housing shortage and it’s not just a wider affordable offer, it’s about a wider offer to more people, as those further and further up the income scale are finding it difficult to access housing.
Equity investment is an essential ingredient in helping that to happen. The investable proposition is much more a home ownership and shared ownership proposition which provides an equity return on a much quicker basis.
Our social purpose is to help people – by whatever means we can commercially – access the housing that works for them.
AS: If you are unfettered you can do a lot more that isn’t in line with the traditional [regulated] stuff that we have to do now, and that could look completely different.
If you look at the water industry, they have a licence for the bit that is regulated, which is like the social housing part of our business. But the other parts of the business are enormous.
I can’t see [the government’s ambition of] one million homes being delivered without something big happening and equity rather than more debt has to be looked at.
MB: You would have to do it outside the regulated entity in non-charitable offshoots – but equity should not be the starting point; equity will come in if there’s an investable proposition.
To create an investable proposition, you need to take some of the arbitrage in the existing balance sheet. Without subsidy from s106 or grant, affordable housing is not a profit-making enterprise over any reasonable timescale. And the idea you could swap non-coupon bearing equity in the form of grant for an equity demanding a return on a sub-market product – with all the uncertainty over future rent and welfare – is for the birds frankly.
AB: Housing associations have massive embedded equity. RTB is in a sense unleashing an enormous amount of that embedded equity. It is completely changing the EUV-SH valuations. So the equity problem isn’t there.
That brings us to this blunderbuss approach of controlling the rent subsidy; which is to control a random framework of rental levels and squeeze them down. That’s the big one – if they’ve squeezed the rents once, and that just leads to people cutting costs, guess what comes after that…
TK: There is no shortage of global equity supply, the problem is that equity wants 8-9 per cent through cycle yield, perhaps risk-adjusted downwards depending on investors’ perception of risk. You can bring that down further with gearing to 5-6 per cent.
But you still have to generate that yield through the cycle post-tax and post-costs and still have money left over to reinvest in the business and repay the equity provider. I’m not sure if the solution that the water or energy industry has found is one we can easily adopt. Their input costs and factors of production aren’t as intensely focused as ours are on land.
Because of its scarcity, the cost of land is so high that financial engineering is not enough to sort it.
Role of the housebuilder
CW: Volume developers are only ever going to build 150,000 maybe 160,000 homes. We need to build 240,000 so the question becomes where the other 100,000 is going to come from.
Housing associations are absolutely instrumental in that, which is partly why it has to be a mixed [tenure] offer.
Then the question becomes ‘how do we enable them to build those 100,000 homes?’ And I think equity investment is absolutely essential in that.
GO: Volume housebuilders won’t fundamentally increase production – the gap between the big six and the rest [is vast]; there’s a massive skills gap and need for infrastructure.
But to be able to do a mixed tenure scheme and outbid the volume builders is practically impossible.
There is an ask – we do need to see a reduction in the regulatory framework
CD: National housebuilders are not going to increase supply because the margin or the return on capital isn’t available. They haven’t got the [volume of] skills and it takes three to seven years for trained staff to come through.
They are saying the maximum they can do is a 10 per cent year on year increase…so talk of 250,000 a year is several years off, even if they were very motivated and there’s tons of available finance.
Also, the average cost of capital is low. If we see interest rates and risk-free rates [of return] rise, there is going to be a considerable impact. That emphasises the need for flexibility.
Operating outside of the regulatory space is really important to get private equity in. The more that people in this industry ringfence away from political risk, the better.
DC: We have to mitigate against the boom and bust [house building] process and train our own people.
JS: There is no such thing as the [house building] industry, there are 2,500 companies.
You have three very large companies – two are going hell for leather – but some were very scarred by the downturn so are naturally cautious going forward.
Of the next group, a number have expanded rapidly and continue to do so. Then the SME sector has seen an 80 per cent decline.
It‘s partly about the planning system, but overall you have an industry doing the best it can with its size and structure, and a significant increase in numbers is going to take time.
Most housebuilders have the same business model, most are pure housebuilders. If you go beyond a certain size you would look at a different model beyond that, such as a joint venture. I think some of the housebuilders will add variations to their business model to go to larger numbers and reduce that risk.
It’s quite clear from government that they will require a section of Starter Homes on pretty much every site, and that will be considered as affordable.
TK: I’m very interested in finding out where we do agree with government, and what we do have in common?
NH: We agree that we have a desire to do more, and act as asset managers rather than old style maintenance providers, a willingness to create our own cross-subsidy both by churning high value assets in London and undertaking market tenure developments in London.
But there is an ask – we do need to see a reduction in regulatory framework.
Why don’t we follow more of a deregulatory path to make sure the framework we get is proportionate to the work we have to do going forward, and not be stuck in the 1970s and 1980s protecting tax-payers money that was invested 40 years ago?
MB: The regulatory construct has certain things that are fundamental to the model: nominations agreements mean local government dictates who we house to a significant extent; the government – through the regulator and now primary legislation – determines the price of most of the properties we rent; and through the consents regime the government or regulator could effectively have an asset lock on the sector, should it choose to do so.
If you were to revisit the model, you would have to look at all three of those things and make progress on at least one of them.
It may well be the future for the sector is to go back to its charitable roots and to take on the responsibility for price setting and managing its assets.
Something for something?
NH: We’re talking about regulatory reform [not deregulation]; there’s an understanding that there always needs to be some form of regulation.
It’s appropriate for the government to have a view on whether we are sound and well governed but beyond that, do we need intervention from a regulator? Why are we not allowed to dispose of our assets as long as we account for them to the regulator?
The regulator used to go around saying our job is to protect social housing, but the social assets are about to be sold to the tenants [through RTB]. Thinking needs to move on.
MB: There are two routes out of rent regulation; one being the absence of government control on the net income we receive from the regulated properties, and the other being the lifting of the asset lock, so you could choose to put voids into a separate vehicle and offer them on a different basis. The second is more plausible.
As a sector we need to be clear about what we want and why. Just saying ‘get off our turf’ will not be met with that much sympathy from HM Treasury, and I’ve had this conversation.
DC: A third option – in an environment where local and central government are doing a whole series of deals – is to have an organisational deal structure, where government says ‘you can have this if I get that’.
What that might do is create some real pressure on middle and small operators. The other alternative is to create a set of paradigms with individual deals and organisations, where you say ‘what can you do for me if I do that’ and you open it up.
Otherwise you will get a whole lot of people doing all sorts of interesting things to survive – which won’t build much in the form of additional housing.
AB: We are to some extent the product of the coalition government’s experiment with local government – where they squeezed and squeezed. And after the initial shouting, they began to get a complete change in attitude in large areas of local government where they did things that were previously unthinkable. There was a real gain in activity and a real gain in innovation.
HB: It seems to me, your regulation doesn’t work. Social housing needs to be regulated because you need to protect your tenants.
In the infrastructure world you are allowed to charge a certain amount to the water consumer and you are allowed to make a return. The regulated entity makes a sum of money for itself and doesn’t lose money.
Part of what you need to do is strip away some of this and work out what you need to fix.
You have a head start though, because you already have existing assets so you have the ability to create asset management companies to manage the existing assets.
Solutions to supply?
CW: Fundamentally the volume developers are margin developers: they are about maximising their returns and their profits: and there’s nothing wrong with that.
The distinction between them and HAs is that HAs are fundamentally about maximising housing delivery.
I think an ‘investable proposition’ [debate] moves us to a home ownership proposition.
MB: Mispricing of risk is very dangerous. [Housebuilders] price risk at 20 per cent for a good reason, because the system is prone to boom and bust. I would tread warily on pricing [sales] risk at 5-6 per cent.
LM: I would somewhat argue it’s not mispricing of risk, it’s the mispricing of reward. Where does that 20 per cent come from – a lot of cases it’s the shareholders of those companies and what housebuilders think they need to pay back to shareholders.
I wonder whether there are partnerships where you do tie up with private shareholders or equity investors who have a very different risk/reward concept and can afford to weather some of the storms housebuilders have traditionally because you have a longer form of capital.
DW: The reality is, it’s a hybrid mess. To make that yield work, you have to do both.
You’re looking at two sets of risk; a sales risk with 20 per cent on it to generate a profit which you may use to make the yield a bit sweeter for an investor on the market rent, or the affordable housing.
As asset managers [the sector] has to find a way to make it a proposition that works for everyone concerned – with the risk understood at each component part. Our mixed tenure Aberdeen council project is the sort of process I see us developing into.
What government has done will increase the HB bill as the number of sub-market homes goes down
Our social purpose – because we still have one – is to try to help people, by whatever means we can commercially, to access models that work for them and for as long as they’re needed.
Some of that will be for the long-term, because there are some people who will need that long- term operation.
Can everybody do that? Categorically no.
Whether government can even be in this market any more is another really interesting question – I think the answer is no.
AB: Housing associations are converting from property investment trusts with a secure income into asset managers and traders. They are doing that because you have Right to Buy so they can no longer expect to sit on a house in perpetuity.
CD: It should be a hybrid approach. I think there’s a place for off-balance sheet equity.
AB: Outside of the top 20, mergers and amalgamation are becoming much higher profile than they have been before.
A lot of medium and smaller sized associations are looking at whether they need to get some form of development partnership because they can’t do it on their own.
I think the most dramatic change will be if we have a code of conduct on mergers. I think the big step forward is driving a seriously, publicly accountable merger process.
MB: If supply is the top priority, we need to unlock some of the equity in the existing balance sheet, and accept there’s a trade off in that.
The more flexibility government gives this sector to do that, the more latent capacity can be unlocked.
The 100,000 homes will come from sweating the asset base, and if you sweat the asset base there are fewer homes for people on housing benefit, and the housing benefit bill is in theory what drove the government to reduce rents.
In the medium-term, what [government has] done will almost certainly increase the housing benefit bill as the number of sub-market homes, and the level to which they’re subsidised, goes down.
As an individual organisation, you have to do what’s right by our charitable object.
But there is a missing piece to the jigsaw, that eventually this political risk – and absence of any coherent strategy for housing for people in need or people who can’t afford to get a decent outcome in the market – will come back to bite us.