How are Housing Associations tackling the rent reductions?

Sweyn Close

What to do when the Chancellor of the Exchequer lops millions off your annual turnover in the space of a short announcement at the House of Commons despatch box?
When George Osborne, the former tenant of 11 Downing Street, announced in July 2015 that he was cutting social housing rents by one per cent per year, for the next four years, to reduce the country’s benefit bill, housing associations had to think and act fast.
Headlines at the time predicted a fall in the numbers of affordable homes being built. These fears may have stemmed, at least in part, from the shock the sector felt that the previous government settlement that rents could rise in line with the consumer price index (CPI) of inflation plus one percent until 2026 was no more. Since that deal was only agreed with Whitehall two years earlier, in 2013, the reaction at the planned-in growth quickly turning into a significant cut was understandable and genuine.
Housing associations, however, had to think on their feet if they were to be able to continue to meet the ongoing need for affordable housing.
One such organisation was Flagship Group, the housing association with developments across East Anglia and into Cambridgeshire and Essex. In common with many similar sized, regional HAs but in contrast to some of the larger London concerns, Flagship was not at the time fully geared up to move into a position of acting as a quasi-property developer.
Fortunately, according to Tony Tann, managing director of Flagship Homes – Development, Flagship had already been making plans to build some homes for sale.
Residentially asked Tony what the organisation did to react to the rent reduction; how it is faring now, 17 months on from the announcement, and what lessons have been learned along the way. ‘The rent reduction forced the business to think differently about how they could carry on with an affordable housing programme that suited the stature that Flagship has,’ he says.
‘The way the business works is that each individual scheme has to stand up and be viable and the rent reduction meant that all those schemes that were viable suddenly weren’t. So we had to have a root and branch review of everything we were doing.
‘There was already a desire to look at housing for sale and generate additional money into the business because, notwithstanding the rent reduction, the grant money for rented housing was virtually non-existent in new schemes going forward.
‘The strategy that we settled on from March 2016 was a three pronged one – we had a number of affordable housing sites that had stuck primarily as a result of the rent reduction and as a team we needed to find ways to get those sites unstuck. That was priority number one.’
‘Priority number two was to generate development schemes on land that Flagship already owned that had previously been identified as having development potential, together with land that Flagship had purchased specifically for development. These schemes covered all tenures and are scheduled to be the first to provide homes for sale’
‘Stage number three was to look at a mid to long term strategy – land option agreements with landowners, development land purchase from the open market, joint ventures with developers and contractors all of which are on sites that are slightly bigger so we can get some scale into the business.’
As this strategy has moved into reality and with the focus now moving to stage three what has been the outcome for Flagship? The most obvious is now the scale at which the business is now operating with funds from the sale of their homes eventually being ploughed back into supporting the provision of affordable housing. In 2017/18 they are planning to generate 300 homes; in years 2018/19 and 2019/20, 400 homes and subsequent years 500 homes. Looking at the years in which Flagship intends to generate 500 homes, the split will be around 150 for market sale; 100 for shared ownership; 200 for general needs rent and 50 for private market rent. And what lessons have been learnt? Tony says setting the right strategy and pulling together as a company are all important. He adds: ‘The important bit was putting the strategy into bite sized chunks and putting resources into the part that mattered most at the time. The business had come to the conclusion that they needed to do a housing for sale programme and they’ve found ways to help and be available when sites need appraising, do some really important critical questioning, have an open mind and listen to the answers. That has helped massively. ‘Our programme in three years’ time will have increased considerably from where we were, if we carry on as we forecast’
Given this experience in adapting the focus of the organisation, how would Tony advise housing associations considering a similar move and who may be casting around for partner companies to work with? He says: ‘The principal advice I would give is choose wisely and the business you choose as a partner has to be a similar type of business. For instance, you need to have similar funding arrangements. ‘The other good partner to choose is one that can do the things that you can’t. So for instance, we can pick up the affordable housing and a developer in partnership can do the construction. Where we join in the middle is how we market and develop the site and do the selling. Picking a partner that complements what you do is massively important.’
What of the future – does this government intervention, and subsequent reaction by the affordable housing sector, herald a new more difficult trading environment for large and medium-sized property developers? Tony thinks not. ‘Flagship have built for a while but mainly affordable homes and not homes for sale,’ he says. ‘So despite our aspirations for a varied and growing programme the national developers will not be worried about our growth because the sites we are looking at will typically be smaller than their target market. ‘We will compete with the mid-size developers who will do sites of a similar size to us but generally, I think there’s enough of this type of site to go around and more coming through the planning system.’

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