The trend is growing for bigger housing associations to gobble up smaller landlords by merging. But does bigger always mean better? Carl Brown reports.
A theory is developing in some quarters about how the social housing sector in England will look in coming years. Housing associations, with less capital grant to rely on from the government and greater pressure from the regulator to become more efficient, will increasingly become more like large private organisations.
Many of today’s 1,200 organisations will be gobbled up until a smaller number of larger groups remain. This will achieve better economies of scale and boost borrowing power, seeming to become ever more efficient in the process - or so the theory goes.
Spate of mergers
The logic underlying this theory appears already to be driving change in the sector. The past 12 months has seen a slew of large-scale mergers. In April last year Liverpool landlords Vicinity and Contour merged to create 38,000-home landlord Symphony, a group of landlords - Prospect Homes Group and Trans-Pennine Housing Chevin Housing Group - came together to create 33,000-home Yorkshire based landlord Together Housing Group, while most recently, Harvest and Arena announced they will marry in a 32,000-home merger from April. Even the government appears to subscribe to the theory that bigger is better. The English housing strategy, published in November, said: ‘An increased focus on value for money could result in more subcontracting of services, partnership working and mergers.’
But is this theory really sound? A Chartered Institute of Housing report published this week, entitled Does size matter - or does culture drive value for money? argues not. It claims that scale does not automatically provide efficiency and mergers are no guarantee of improvement in services. The CIH report uses data from the Tenant Services Authority and benchmarking company Housemark, to show scale does not automatically provide efficiency.
The report finds there is ‘no evidence that larger associations benefit from economies of scale or better performance… It is not the size of the merger that enables cost savings but how the organisation operates and changes in consequence,’ it says.
The report’s co-author Joanne Kent-Smith, senior policy and practice officer at the CIH, says: ‘We are saying take a second look if you are thinking of merging. Scale for the sake of it is unlikely to improve performance - you need to be very clear about what you are doing.’
Bjorn Howard, chief executive of Aster, which is in merger talks with fellow southern England landlord Synergy, says the merger will create £8 million of efficiencies over five years and create ‘tens of millions’ of pounds in extra borrowing capacity. He also reckons it will allow them to use more resources, such as appointing a head of research and development. ‘We will be able to provide a better quality and value for our tenants,’ he insists.
Despite the value for money outlined by advocates such as Mr Howard, it is easy to find examples of organisations unconvinced mergers will deliver efficiency - particularly among the medium-sized organisations owing between 5,000 and 15,000 homes.
Tony Stacey, chair of the Placeshapers group of 70 community housing associations and chief executive of South Yorkshire Housing
Association, is adamant big is rarely better. He says: ‘There is no such thing as value for money through scale.’
Sums don’t make sense
He says 6,000-home SYHA has been approached about mergers twice in the past six years and turned it down both times. He says once you factor in re-pricing costs the amount an organisation saves is small, but the disruption can lead to poorer service and cost more in the long run. He cited SYHA’s high customer satisfaction rating of 88 per cent for overall service as proof small is better.
Richard Peacock, chief executive of 5,500-home landlord Soha Housing which contributed to the CIH report, is another landlord that believes there is no business case for merging.
While Mr Peacock and Mr Stacey have shied away from mergers so far, they’re worried that the social housing regulator may be about to pressurise organisations like them into merging.
The TSA’s proposed regulatory framework, out for consultation until 10 February, requires landlords to ‘assess options for value for money improvement, including where there are potential benefits in alternative delivery models that may involve partnerships, mergers.’
This mention of mergers specifically should be removed from the regulation, Mr Peacock argues. ‘It should come out. That is a prescription, [and] I thought we were moving away from that.’
Julian Ashby, currently deputy chairman of the TSA and from 1 April, chair of the new Homes and Communities regulation committee, which will regulate landlords, insists the regulator is not advocating mergers. He maintains the regulator merely expects landlords to demonstrate an understanding of the value of their assets and that they have thought about options to improve value for money.
‘It is for boards to determine their value-for-money strategy and how that meets their strategic aims,’ he says.
Aside from the business effects of merging there are the possible consequences for tenants.
Michael Gelling, chair of the Tenants’ and Residents’ Organisations of England, believes many smaller associations provide a top quality, localised service which could be reduced in the event of a merger - especially if the new organisation cuts back on local offices.
‘One of the dangers of mergers is that the highly professional, personalised local services that they provide will disappear,’ he says. ‘Tenants should therefore also have the right to vote on mergers.’
Another unintended consequence of mergers is that the need to assess assets to find value for money could, ironically, lead to some organisations selling off less valuable stock in outlying areas. Home Group has embarked on a 6,000-home stock rationalisation programme, while London & Quadrant is looking at selling stock which is costly to maintain David Montague, chief executive of L&Q has said 75 per cent of L&Q’s £140 million a year maintenance budget is spent on just 15 per cent of its stock.
James Tickell, director at consultancy Campbell Tickell, believes it is only the current re-pricing policy of banks that is preventing a large move towards mergers as banks invoke clauses allowing them to reprice in the event of a merger. ‘The position of the banks is actually suppressing the demand for mergers,’ he concludes.
While this position does not look likely to change anytime soon, the underlying drivers of mergers have never been greater. As a result of the new regulatory framework and limitations of grant funding, landlords can no longer afford not to ask themselves, honestly, ‘does size matter?’