Top 50 developers 2010

Uncertainty has always been the watchword for housing association development prospects, but the current gloomy economic climate makes it even more so in 2010. And yet looked at in isolation, the immediate outlook - perversely for the current financial year - suggests relative stability.

While there is a moratorium on new funding allocations by the Homes and Communities Agency following the new government’s pre-Budget announcements in May, most allocations under the current £8.4 billion 2008/11 national affordable housing programme have already been made and most funding is in place.

True, most developing associations are beginning to reveal smaller development pipelines. In part, that reflects caution towards the operating environment, but would probably be the case anyway in the final year of a three-year programme, before associations know what to expect.

Lack of mortgage finance for shared and outright ownership is less of a problem than a year to 18 months ago, according to Richard Hill, director of housing growth and affordability at the HCA. ‘In January 2009, 10,000 [shared and outright ownership scheme] homes were unsold - now it is less than 5,000,’ he says. ‘The market is much stronger.

‘It still takes longer to sell and for people to get mortgages, and there are fewer off-plan sales. There is also greater interest in buying in London and the south than in the north.’

Some of the pressure was relieved by the HCA allowing housing associations to switch ownership schemes to rental, but this has also changed. ‘In 2008/09 we switched 4,500 homes; it has been nowhere near that in 2009/10, probably less than 1,000,’ Mr Hill says.

Another indicator is grant rates, which went up significantly in 2009/10 to 50 to 55 per cent; in the past six months they have started to come down.

The rise in grant rates reflected developing associations’ inability to cross-subsidise schemes through shared ownership and outright sales as they did prior to the property bubble bursting in 2007. Section 106 schemes, in which developers agree to fund local infrastructure as a condition for the development going ahead, were another cross-subsidy route which has suffered.

But Mr Hill argues that ‘the death of section 106’ was overstated. He says that while there are fewer section 106 schemes, the model is now different - it has moved towards smaller sites. Much of this bypasses the north where the sales route is less viable and the HCA has concentrated more on rental schemes.

Obtaining development finance has also become easier over the past year. ‘Pricing is higher than two years ago, but lower than 12 months ago,’ says Richard Williams of consultancy Beha Williams Norman.

‘Before the credit crunch, margins went down to as low as 25 basis points above Libor [the rate at which banks lend to each other]. They rose to 200 basis points in 2009, but now it’s possible to get loans at less than 150 basis points above Libor. ‘There is plenty of funding available for those that need it,’ he adds. ‘Investors are looking for secure investment and associations provide that.’

Associations are instead looking at new funding methods, such as equity vehicles. Lenders might take an equity stake in a new funding vehicle, the purpose of which would be to relieve borrowers of some of the risk associated with sales - outright or shared ownership. In return, borrowers would pay a slightly higher interest rates on the finance.

Developing associations are, however, being more cautious about the amounts of money they raise. Whereas in the past they might have rounded up a package from, say, £18.5 million to £20 million to give themselves flexibility, they will now raise only what they know they need.

This caution on borrowing extends to their approach to development. ‘We spent a long time building up our capacity, including private development for cross-subsidy, but we have now slowed that down,’ says Darrell Mercer, group chief executive at A2Dominion, which slipped three places to eighth in this year’s table.

‘The majority of our programme is fully funded. We are still operating at a high level with a lot of grant committed but we are not looking to expand further at the moment.

‘What is clear is that there will be less money around in the future and there’s the uncertainty over property prices. All the other large providers are expecting a reduced programme.’

Cautious approach

Mick Sweeney, group chief executive of One Housing Group, up one place to number 13 in this year’s ratings, echoes Mr Mercer’s comments. ‘We are all more cautious after the last two years,’ he says. ‘From a board perspective, why increase risk, such as through housing for sale, when the market is so fragile? We are all trying to reduce our risk profile.’

But Mr Sweeney says matters have improved: ‘Our shared ownership is doing well; we are meeting targets and people are getting mortgages. We are not out of the woods yet and won’t be until there is a solid property market.’

He notes that the Liberal Democrats have always been positive about social housing. ‘Let’s hope they will hold sway in the new government,’ he adds optimistically.

Mr Sweeney claims that cutbacks in housing could be particularly damaging to the British economy because of the impact on employment, both directly and in supplier industries: ‘The trouble is, capital budgets are much easier to cut [than other types].’

Overall, a temporary sense of relative stability is reflected in the top 50 table: these are the associations that provide the bulk of new affordable homes, and it is unlikely that there will be many newcomers in the future. A few associations have moved up the rankings and others have dropped a bit, but it would be wrong to read too much into those changes, which may be due purely to individual associations’ development cycles.

But the atmosphere of uncertainty will prevail for a while yet. First the sector awaits this week’s emergency Budget with bated breath, and then it must wait on the autumn spending review which leads into the next three-year NAHP - if it survives.

Making predictions is tricky, and some disturbing factors are emerging. Government announcements in the past fortnight amount to a dismantling of the regional planning system and its house building targets. This will mean cuts in new development as many local authorities reduce their plans. In addition, new powers for councils to reject proposed development on gardens will give nimbyism a shot in the arm - and, critics argue, will reduce housing output.

Most experts assume that housing will fall victim to government cuts despite the fact that the amount that can be chopped is tiny compared with the overall savings needed. The housing budget is remarkably small compared with others: spending on every aspect of housing and community amenities in England for all departments in 2008/09 was £9.6 billion - less than 2 per cent of the £495 billion total government spending.

The cuts pose a real threat to the house building and construction industries, and could cause the housing market to fail. In this bleak scenario, it can only be hoped that the affordable housing sector is given the money to resucitate it. It wouldn’t be the first time: affordable housing is used to crises, rescues, cutbacks and booms. There is no reason to believe it will be different this time round.

Top 50 developers table

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