RUSSELL BRAND may be called on to speak out again for the country’s most vulnerable tenants.
Last year the comedian became the unlikely hero of housing association tenants on the New Era estate in Haggerston, near his east London home, when he campaigned against proposals by their landlord to triple rents.
Now the housing association sector is reeling under a string of challenges that could keep Brand busy for a decade.
The onslaught began with George Osborne’s budget in July. First the chancellor promised housing association tenants the right to buy their homes at a discount, a move that would lead to the associations losing stock that has been built up over decades. Then he said the associations would have to reduce rents by 1% a year for the next four years.
Other big changes are afoot. A plan called “pay to stay” will see tenants on higher incomes paying a market rent. Annual caps on housing benefit payments to landlords are also reducing income.
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Osborne’s budget intervention was an abrupt reversal of a 10-year deal struck in 2013 that would have allowed associations to raise rents by inflation plus 1%. The new rent cap is aimed at reducing the government’s housing benefit bill.
The ratings agency Moody’s said housing associations’ income will be cut by 7%, or £5.4bn, over the next four years. Robert Grundy at Savills puts the real-terms hit to income at 3% a year, or 13%-14% over four years. One immediate consequence of the new deal was that Moody’s changed the outlook for the sector from stable to negative. Operating margins, Moody’s suggested, will fall from 30% to an average of 26%.
For a sector that depends on long-term debt funding, largely from institutional investors, such as pension funds and insurers that require a stable source of cash flow to match their liabilities, this is a big problem. Not only is the ability to attract funding thrown into doubt, so is the sector’s raison d’être.
Housing associations built 40,000 much-needed homes last year. But the squeeze on income could lead to delays and cancellations of developments.
“There is a national housing crisis and housing associations are an important part of the solution to that. Over the past five years they have built one in five homes. They also represent incredible value for money. For every £1 the government puts in, the sector puts in £6,” said Clarissa Corbisiero, head of policy at the National Housing Federation, which is putting the sector’s case to the government.
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The associations are also counter-cyclical. When private development fell off a cliff in the financial crisis, they carried on building, and even increased their output in 2007-9.
Alex Gipson, lending manager at Legal & General, one of the big lenders to the sector, said that both the new rent policy and the right-to-buy proposal, set to be published in a housing bill this autumn, represent an unexpected degree of interference. “To change an agreement that was to stand for 10 years after just one year is quite a challenge,” he said. While Legal & General remains committed to the sector, it can see that some new or overseas sources of funding may now be deterred.
Spreads for the sector have already widened — from an average of 80 basis points over gilts to 150 points — indicating that investors want a higher return for the money they invest.
Housing associations are rapidly redrawing their business plans. Richard Parker, a partner and housing specialist at PwC, said: “Unless the sector responds positively to the challenge ahead, it faces an existential crisis.”
All ideas, it seems, are up for consideration. PwC is advising several parties about mergers. Talks between two of the sector’s stalwarts, Circle and Affinity Sutton, thought to have foundered, appear to have resumed.
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David Montague, chief executive of one of the UK’s biggest housing associations, L&Q (formerly London & Quadrant), which has 70,000 homes in London and southeast England, has spent the past few weeks looking at how to respond. Its plan to invest £12bn developing 50,000 homes over the next 10 years is under threat. “We have looked at building fewer homes and considered whether we could continue developing affordable housing at all. But we remain committed to a programme of social development,” Montague said. L&Q, he argued, learnt how to make money in the post-financial crisis years and, unlike many associations, can continue to expand without grants.
Some associations may yet go further in thinking the unthinkable. Before the full force of the 2008 financial crisis hit, Places for People, another large housing association, held talks with the precursor to the Homes and Communities Agency about floating on the stock market. That radical step, which would have required repayment of the grants it had received since it was founded, came to nothing.
L&Q’s Montague said: “People have talked about it for years, but it changes your purpose. I am not sure how you can satisfy shareholders by building property for rent at sub-market levels.”
One association, Genesis, has said it will focus on building homes for sale, or part-buy, part-rent schemes. Others are said to be looking at deregistering, freeing them from regulatory requirements. Another idea is to ask long-standing tenants to pay means-tested rents.
Meanwhile, there is a new landlord at the New Era estate, after not-for-profit housing association Dolphin Living acquired 96 units from American investor Westbrook. Dolphin’s chief executive, Jon Gooding, began a voluntary initiative last week to introduce means-tested rents, and the reaction has been surprisingly positive.
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For Gooding, it is a necessary step to secure affordable housing for people on modest incomes who need to live in the capital. “If we don’t do that, London will end up like Paris or Venice, populated by just the very rich and the very poor.”