The for-profit director tasked with buying homes from housing associations

Housing associations are selling a mix of portfolios and lone empty ‘void’ properties. “Very often those homes are sold because they are too expensive to retrofit,” she says, but they then end up in the private rented sector, probably without much improvement work yet let at higher rents. (Social landlords are only required to notify the Regulator of Social Housing after they have disposed of social homes.) “A model that sees those homes retained in some sort of social housing use would be far preferable if we could create that.”

L&G’s stock acquisition strategy has several aims. First, it is a growth strategy. L&G has amassed 6,500 homes across a structure of nine for-profit providers since 2018 and is on course to hit 10,000 homes under management by the end of the year. Almost all of these have come from new build channels such as Section 106 purchases or land-led delivery.

“We will continue with that sort of activity,” Ms Raynsford says. “But what we see in stock acquisition is the opportunity to step-change that growth – in due course, to be acquiring each year as many homes as we’re developing.” Going by this year’s development pipeline, that could be as many as 3,500 homes a year.

Stock transfers give the organisation the ability to scale faster. Scale helps to build a more efficient operating platform, more concentration of stock and therefore more efficient delivery of services to residents. 

Acquisitions are also a chance to help traditional housing associations recapitalise, Ms Raynsford argues. “I’ve looked at the sector for a long time now and seen debt levels climbing and organisations being more and more thinly capitalised,” she says. “This, for me, is a strategy that enables an organisation like ours to put more capital into the sector.”

Housing associations can use the proceeds from the sale of their homes to deleverage, spend on their remaining homes, or develop new homes. “If they are reinvesting in more development, you’ve got a clear and direct link between the disposal and the new delivery.”

Might housing associations that were considering deals with for-profits now turn away, having secured a favourable package of government assistance at the June Spending Review? No, Ms Raynsford says, because grant rates do not cover the full cost of building new social homes.

“Most large developing registered providers are fairly close to their debt ceilings. So even if you have more capital subsidy, you are still in a position where spending the grant requires you to extend your debt effort, and you may or may not have capacity to do that.” Likewise, Warm Homes retrofit grants must be match-funded by social landlords.

More government grant, therefore, does not remedy the capacity issue facing social landlords. Debt ceiling and EBITDA MRI “continue to be the binding constraints for the sector”, she says. “What we’re talking about in… an institutionally backed for-profit sector is new equity. So it does create genuinely new capacity.” 

The bit that Ms Raynsford likes the most about L&G’s stock transfer strategy, however, is the retrofit angle. “If we buy brand new stock from an association, it does all the things that I’ve described but it doesn’t fundamentally improve the quality of their estate.

“If we buy older homes that require some sort of improvement… and we can do that stock improvement work, they then have a portfolio that no longer carries the burden of the need to retrofit that stock, and therefore it creates a positive impact on their side,” she says. “If you acquire the more EBITDA MRI-negative stock they’re holding, the benefit is greater to them.”

L&G is currently doing lots of preparatory work into the type of green upgrades it can deliver most cost-effectively and which types of homes are best suited for retrofit.

An easier place to start is houses as opposed to high-rise flats and rented tenures, she says. Shared ownership and leasehold homes are trickier because you cannot compel a homeowner to retrofit their home. “It doesn’t mean that we won’t engage with [mixed-tenure or leasehold] stock [but] it is easier if you start with a rented housing typology initially. So that’s where we’ve been focusing.”

L&G is looking at “tried and tested” retrofit measures that can be delivered with residents in situ. “You’re insulating lofts, you’re replacing windows, [adding] solar PV [photovoltaic panels], an air source heat pump. But you’re not necessarily doing more complicated things initially.”

It is looking to start with post-1960 homes with cavity walls, meaning they are cheaper to treat and do not require external wall insulation. “What we’re trying to do is walk before we try to run,” she says.

This brings us to a crucial question: how big is the risk appetite of for-profits like L&G as they look to buy homes for retrofit? The topic came up earlier this year when Ian McDermott, chief executive of Peabody, revealed that his organisation had tried to sell a portfolio of homes to a for-profit, but the deal fell through because the buyer felt there were too many homes rated Energy Performance Certificate Band D and below.

If L&G won’t buy, say, shared ownership homes that need retrofitting, who will? “I am really keen that we move to a place where we can be as broad as possible in our activity,” says Ms Raynsford. “But also we’ve got to take our own organisation on the journey as well. And this is a place that organisations like ours haven’t really gone to just yet.”

“We’re probably in a space where you’re talking about the role for government,” she says. “At the moment, we’re focusing on low-rise rented flats, probably mono-tenure. Does it solve all of the problem for everybody? No. But I see our role as innovating in the interests of the sector and those residents who benefit from what we’re doing… The fact that we can’t make it work for all properties and all tenures at the beginning, I don’t think should be a barrier to doing it.”

While many housing associations are considering sales and partnerships with for-profits, there is still some nervousness around the concept of ‘wholesale privatisation’ of housing association homes. In January, for example, Kate Henderson, chief executive of the National Housing Federation, told MPs that for-profit providers are not “the answer to the social housing crisis”.

“We are all registered providers. The fact that some of us are backed by different sorts of capital isn’t, from a customer perspective, probably the main question. It’s: is my home safe and decent and energy efficient? Do you deliver my services properly?”

“A healthy questioning of the motivations of any actor in the sector is important,” says Ms Raynsford. “But what I think we should always focus on is the outcomes for customers.

“We are all registered providers. The fact that some of us are backed by different sorts of capital isn’t, from a customer perspective, probably the main question. It’s: is my home safe and decent and energy efficient? Do you deliver my services properly?

“If we framed the debate in that way, rather than having a slightly more polarised discussion about where proceeds went to, it would be a healthier debate.”

L&G manages its homes via a network of different organisations, including some housing associations. This presents an opportunity for long-term partnerships with non-profits as opposed to outright selloffs. “If we were acquiring a portfolio outright, the natural manager for that portfolio would be our local management provider in that location, unless the RP who was selling wanted to continue to manage,” says Ms Raynsford. “But the idea of owning in partnership is a really powerful one.

“If you’ve got a provider who is selling homes because they need to recapitalise, as opposed to exiting a geography, they could effectively recapitalise by selling to a jointly owned for-profit [and] continue to manage the homes. From the customer’s perspective, they have the same manager, same service provision. Their home is part-owned by that provider and part-owned by an organisation like ours. The RP has the benefit of that additional capital, but retains the homes under management.”

London landlords have got a “particularly difficult situation” because they’re dealing with building safety issues, Ms Raynsford says. “It’s the nature of their estates.” But many own portfolios of homes outside the capital that could be sold to for-profits.

“You might, in order to complete those works, decide that you are selling a portion of your homes, and you’re taking those proceeds, and you accept that if you’re a 90,000-home landlord, and you need to sell 10,000 homes in order to make sure that your remaining 80,000 are absolutely as you want them to be, then [that] sees the organisation shrinking.”

Or, she posits, “you could decide that you want to work in partnership with an institutionally backed RP, and you sell those homes into that entity. You recapitalise only half the proceeds, but you don’t shrink in that situation. You have the same number of homes under management [but] you don’t wholly own all of them.”

L&G is unlikely to set up such a long-term partnership to manage 100 homes, however. “These things inherently work better when you’ve got scale and when you have an ambition to continue to work together in the future.”