Landlords set to reach loan limits by 2015, survey reveals
Survey warns of 10 year drop in development
Housing associations plan to reduce the number of homes they build for the best part of the next decade.
In a survey of the 50 biggest housing associations in England, 73 per cent said they would build fewer homes between 2011 and 2015 than in previous years following severe grant rate cuts.
More than 60 per cent of respondents to the capacity survey, carried out for Inside Housing by consultancy Altair, said they would build fewer homes still after 2015, when the current funding round ends. The results indicate that individual associations’ build levels might not return to the level of the 2008/11 national affordable housing programme until 2019. The Homes and Communities Agency funded almost 103,000 housing completions in 2009/10 and 2010/11.
Housing associations’ ability to build is being eroded by the need to borrow more money for development following cuts in government grant from a national average of £60,000 per home in the 2008/11 programme to £25,000 from 2011/2015.
Under the HCA’s new £1.8 billion ‘affordable rent’ regime, housing associations must let most of their new homes at up to 80 per cent of market rates. Almost 90 per cent of those polled said this new regime would increase their risk and all of them felt planned cuts to housing benefit would do so too. Because there is less grant per home, associations are encouraged to borrow more to fund development. Landlords fear proposals to pay housing benefit directly to tenants could see arrears jump.
Forty-two per cent said they would be within 20 per cent of the borrowing limits set by three of more of their lenders by the end of the 2011/15 development programme, suggesting they would have little additional borrwing capacity by 2015.
Meanwhile, 84 per cent of those polled said they were considering a bond issue. In addition, more than half said they might enter new business areas to raise cash, with 55 per cent expecting the private rented sector to make up 10 per cent of their income by 2015.
More than four fifths thought they would need higher grant rates, 42 per cent suggested higher rents and half wanted greater freedom to sell homes to raise cash.
Fifty-three per cent said they were planning tenancies of two to five years for homes built under the ‘affordable rent’ regime.
Geoff Pearce, director of development and asset managaement at 13,500-home East Thames, agreed that grant cuts meant organisations would have to borrow more and would reach the limits set by their lenders on gearing (borrowing to income ratio) faster than under the old regime. ‘By 2015 we will be hitting the peak,’ he added.
Dale Meredith, development director at 25,000-home Southern Housing Group, said the HCA recognised associations would only be able to fund new homes at current borrowing levels until 2015. After that the government would have to reconsider social housing funding or see fewer homes built. ‘We need this debate to happen preferably not too close to the end [of the programme] because people will be reducing [their development] activity because they won’t know what is coming next,’ he said.
The survey confirms figures in Inside Housing’s survey of the top 50 developers in June, which showed many would scale back development between 2011/15.
Evasive action: how housing associations will respond to funding changes
55 per cent
proportion of associations expecting to start providing private rented housing
17 per cent
proportion of associations considering pulling out of supported housing
17 per cent
proportion of associations which assume 41 per cent to 50 per cent of their existing tenancies will be converted to social rent over the next five years
11 per cent
proportion of associations considering leaving the care home sector
Housing associations are looking beyond government grant to fund development
The introduction of the government’s affordable rent programme has proved that social landlords are prepared to sharpen their pencils and sweat their assets that little bit more. The wide range of players bidding for development grant shows that there is still very healthy competition among providers, though some have scaled back their development ambitions while they wait to see how the dust finally settles on affordable rent.
We spoke to the 50 biggest developing housing associations in the sector and it is clear that many were more cautious this time around. Some believed that bidding too aggressively for the 2011/15 £1.8 billion programme now would burn out their build capacity for future years, and a few were looking beyond Homes and Communities Agency subsidy for their future development programmes.
Pretty much every assocation we polled acknowledged that previous grant rates are gone for good, and so the biggest question is where future capacity to continue developing will come from. Looking at all of their assets is on association agendas. This includes selling homes and swapping properties with other landlords to concentrate in particular areas, and engaging in more commercial and other non-core activity to generate surpluses to plough back into development.
A few associations are revaluing existing assets to boost borrowing capacity. Renegotiation and consolidation of lender covenants, particularly around gearing, will be key for many. There is also talk of off-the-balance-sheet companies being set up to borrow solely against rental streams.
Mergers and acquisitions are back on the agenda and there will almost certainly be some consolidation of housing providers over the coming years; it makes business sense.
Most associations were still positive about continuing development, which is good for the government. But our fear is that some may forget that development is a risk-associated business and that, as with any investment, the higher the return, the greater the risk. Get it right and it’s good news for growth. Get it wrong and there could yet be tears before bedtime.
Steve Douglas is a partner at consultancy Altair