Route finders

It’s been a great New Year’s Eve and the party is still going on. But it’s getting late, the booze is running out and the revellers face a decision. Keep going, or call it a night?

One by one, arm’s-length management organisations are reaching a similar point of reckoning. They were formed to bring council-owned stock up to the decent homes standard, and since the first eight opened for business in 2002 one question has loomed: what happens afterwards?

There are now 69 ALMOs at various stages of their life cycles. By the end of this year £4 billion of government cash will have gone their way. Two were launched last year, while others have only recently won the two-star rating from the Audit Commission necessary to access decent homes cash.

The government remains ‘committed’ to ALMOs, according to a Communities and Local Government department spokesperson, who adds that they are ‘well-placed to meet the new challenges and priorities that are emerging’. But on the ground ALMOs are beginning to address their post-decent homes futures.

Some courses of action have already crystallised. First Choice Homes Oldham became the first ALMO to choose stock transfer (Inside Housing, 28 November 2008), followed by Golden Gates Housing in Warrington and Tristar Homes in Stockton. But what works in one area might not work elsewhere.

‘The thing to remember about the ALMO movement is that its strength is its ability to respond to local circumstances, but that also means it is not one-size-fits-all,’ says Gwyneth Taylor, national policy officer at the National Federation of ALMOs. Funding per home for the first two rounds of ALMOs was less generous than later handouts. Some ALMOs, such as Ealing Homes in west London, have a fraught relationship with their parent councils (Inside Housing, 27 June 2008). And the condition of arm’s-length stock varies, too, meaning costs for repairs and maintenance are greater in some areas.

Nor are the financial uncertainties faced by ALMOs restricted to poor performers or struggling councils. Golden Gates Housing is a three-star landlord with excellent prospects - and yet, as a spokesperson for Warrington Council explains, its end is nigh.

‘The only way forward is stock transfer. There is no meaningful alternative,’ he says. ‘Decent homes funding has run out. The average tenant’s weekly rent is £59 - of that, £11 is taken by the government in reverse subsidy. It’s a big gap.’

That gap represents around £5 million a year in lost income for Golden Gates.

Now that it has spent the decent homes cash in Warrington the ALMO, like many others, has found itself at the mercy of the Byzantine housing revenue account system. This siphons off rent revenues from local authority landlords which make a surplus, to subsidise those that don’t.

Research carried out for the Communities and Local Government department last year found an average 40 per cent gap between what councils and ALMOs need to maintain their stock at a decent standard, and what they are left with following payment of reverse subsidy. This funding hole lies at the heart of the issues surrounding ALMOs’ futures.

In the red

Poole Housing Partnership, another three-star landlord, has found its hands similarly tied.

‘The brutal facts are that post-2010 we cannot continue without top-up funding,’ says Joe Logan, chief executive of PHP. ‘At the moment we are paying £3.5 million in negative subsidy. We collect £16 million in rent… had we kept that in-house, that would close our funding gap. Money in needs to equal money out.’

The decent homes standard was only ever a halfway point, never a final destination, as David Hall, a director at consultancy Tribal Group, points out: ‘[Decent homes funding] doesn’t cover all the investment needs a local authority might have. Once they have realised decent homes, there is an awful lot of investment still to make.’

Bricks and mortar, like the gleaming new kitchens provided by the decent homes programme, begin to deteriorate from day one. Repairs and maintenance is an ongoing and substantial expense for every landlord.

Mr Logan agrees. ‘What we don’t want, what our tenants don’t want, is to see the stock deteriorate - the death by a thousand cuts that stock has suffered in the past,’ he says.

ALMOs will feel this sooner and more keenly than other social landlords, Ms Taylor believes.

‘ALMOs are in the main managing the most difficult stock in terms of its age, type and repair history,’ she says. For those councils that wanted to keep their stock in public ownership, but were unable to achieve the decent homes standard because the condition of the stock pushed it out of their reach, ALMOs were, she adds, ‘the last option’.

All of which makes the sector’s successes more impressive and, perhaps, more poignant given the funding situation and the deadlines it faces. If ALMOs are ultimately for the good of tenants, and if many have become good or excellent landlords, why must they now be disbanded?

‘There is a degree of frustration among ALMOs,’ says Phil Davies, chief executive of Derby Homes. ‘The movement has been really good, especially for tenants.’

As of July last year, according to the National Federation of ALMOs, 90 per cent of those ALMOs inspected by the Audit Commission achieved two or three stars.

But there is still some hope that many ALMOs will be able to continue as is. This spring, the government’s HRA review is due to report. Local authorities will discover whether the problematic funding gaps created by the reverse subsidy system are to be closed. If not, decent ALMO stock will deteriorate, says Ms Taylor. ‘Unless you’ve got the increase through the subsidy system to do repairs, you’ll end up back at square one. The whole thing hinges on the subsidy review in the spring,’ she adds.

So it’s about timing, too. In Poole, PHP has begun an options appraisal on its future. It is scheduled to coincide with the publication of the review, because it will only be able to offer an option to continue the ALMO if the subsidy regime changes to allow councils to retain rent receipts.

‘We are optimistic there will be change,’ says Mr Logan. ‘But in the current environment, with the credit crunch and pressure on the economy, and specific commitments the government has given to health and education, I’m worried about how the government could find the money to invest in stock.’

For others, including Golden Gates, spring is too far away. ‘Throughout the review [of whether to do a stock transfer], the HRA was uppermost in people’s minds,’ says a spokesperson for Warrington Council. ‘If it reports significant change, the council will reassess. But the council has such a significant shortfall that it felt it couldn’t wait.’

Golden Gates’ tenants are, he adds, ‘very positive’ about the proposed transfer. They aren’t the first to make the switch. In September 2007, tenants of Salford’s struggling ALMO voted for stock transfer after four years of their ALMO failing to reach the two-star standard necessary to release decent homes cash. The difference now, of course, is that organisations such as Golden Gates - and First Choice Homes Oldham and Stockton’s Tristar Homes, which are also pursuing stock transfer - are performing well.

It takes all kinds

But as Ms Taylor points out, ALMOs operate under widely differing circumstances and what suits one may not suit another. While stock transfer may be grabbing the headlines, many ALMOs have been looking at a different path towards long-term sustainability. According to Ms Taylor, 22 have now pre-qualified for social housing grant ‘and we can assume they are all looking at new build’.

The rationale is persuasive. Derby Homes is about to start work on a £5 million development of 40 new homes across four council-owned sites in the city. The project is bankrolled by social housing grant and money borrowed by Derby Council. Amid market meltdown the ALMO is taking a risk: ten of the properties will be for Derby Homes’ tenants, the remainder will be sold at market rates or through shared ownership.

Crucially, income from the development - capital receipts from sales as well as rents - will remain out of the Treasury’s grasp. One way to circumvent the strictures of the HRA is for ALMOs to take their business outside it.

‘The new build will be outside the HRA and the problems it brings for many councils,’ says Mr Davies. ‘We are owned by the council so the properties will be on its balance sheet. We are looking at a really exciting prospect.’

New build will also mean long-term savings on repairs and maintenance. ‘It’s about increasing stock, but much of our stock is not really going to meet long-term local need,’ explains Ms Taylor, although she adds that given the current economic climate and dearth of private lenders, development will not always be straightforward. Stock condition will play a part, too. If housing is of poor and worsening quality it will prove harder to secure loans on it.

The success of Derby’s scheme is based on cross-subsidy, where homes on a scheme are sold to pay for the social and affordable element. This is a model that the largest developing housing associations have described recently as ‘broken’. Mr Davies admits it is a ‘traditional kind of deal… [of the kind] that have suffered from the credit crunch’. His organisation’s timing might not be ideal, but time is not a luxury many ALMOs can afford.

‘In the short-term we have enough money to keep on top of maintenance,’ says Mr Davies. ‘But we are starting to struggle with modernising properties that are coming through… In the long-term we will have problems maintaining the decent homes standard. We can see some serious problems looking ahead.’

If development or stock transfer are not viable, what then? Diversification has been tried successfully by some high-performing ALMOs. Four years ago Inside Housing reported that two London ALMOs had set up a joint venture company to generate efficiency savings and even to manage stock on behalf of housing associations (Inside Housing, 31 October 2005). But, as PHP’s Mr Logan explains, efficiencies are to be expected of any organisation worth its salt - and they have not been enough in Poole.

‘You can’t be a very good landlord unless you have used the money you have really well,’ he says. ‘But it doesn’t close the [funding] gap. You can take in extra work, but it doesn’t close the gap. We can’t cut back on finance anymore. Prices are going up. It’s got to be done one way or another.’
Could there be another way? According to Sir Simon Milton, London’s deputy mayor for policy and planning, Bolton At Home is exploring the possibility of leasing properties from its council long-term, enabling it to access private finance, although the ALMO itself remains tight-lipped.

‘Bolton is currently looking at a model which involves the leasing of properties for a period of time,’ is all a spokesperson will say.

Despite an array of options, ALMOs’ futures look shaky. If ALMO tenants reject stock transfer, ‘we could get back to where we were before decent homes’, predicts Ms Taylor. ‘That is where we will be again if the subsidy review does not deliver a sustainable alternative.’

Mr Hall, a member of the HRA review committee, says good progress has been made but its end result is not yet known. The time of reckoning is close at hand for some and in the post for others. Once again it is the vanguard from the ALMO movement’s early days which is leading the way into the unknown. Auld lang syne, anyone?

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