The rationale for stock rationalisation

Children up and down the country are busily swapping football stickers ahead of the Euro 2016 kick-off next month. It’s a pastime that young people have enjoyed for decades.

For almost as long, housing associations have been playing a similar game, swapping and selling homes up and down the country. It’s called stock rationalisation.

They’re not in it for the fun, though. It often makes sense for a social landlord to trade homes that are geographically isolated from the rest of its stock, or unusually expensive to maintain.

Keeping an eye on whether stock is suitable is something that the Homes and Communities Agency (HCA) has been promoting since it was set up in 2009, and was championed by its predecessor, the Housing Corporation Cases such as Hulme caused consternation - an area of Manchester where at one point 1,000 social homes were split between 12 landlords.

“In a tougher financial world, housing associations may need to copy some techniques [from the private rented sector].”

L&Q report

But more recently the topic has come to the fore again, and there’s no surprise why: financial efficiency.

The savings to be gained - for example from reduced maintenance of far-away homes - are more tempting than ever as housing associations face four years of 1% rent cuts.

Already some are acting - last November, East Thames told its intermediate rent tenants to buy a share in their homes or move out, as it wanted to reduce the types of tenancy it owns.

In a report on the future of housing published last year, 70,000-home L&Q noted that it is common for large private residential companies to review their stock every year, “with around 5% of the stock sold off annually to increase efficiencies, reduce long-term costs and make way for investment in new homes”.

“In a tougher financial world, housing associations may need to copy some of these techniques,” the report continues, pointing out that in the 2010/11 financial year, 15% of L&Q’s stock accounted for three-quarters of its spending on maintenance.

The report suggests that one option would be to convert some properties in particularly strong markets to private rent, although it adds that “rationalisations of housing association stock need to avoid creating adverse social impacts”, and notes that it is “vital” for low-paid families that housing associations continue to maintain homes in expensive cities.

Money-motivated?

The financial case is therefore front and centre, but when it comes to talking about specific deals, Joyce Onono, L&Q’s head of asset management, is adamant that the decision to rationalise some of its stock two years ago wasn’t just about money. The motivation was “putting the needs of residents at the centre of stock ownership decisions”, Ms Onono says.

“We rationalised our stock in a multi-landlord estate in order to help support and facilitate the regeneration of the area,” Ms Onono explains.

Southern Housing Group recently wrapped up a three-year rationalisation process. But those hoping for a tale of pounds saved will be disappointed.

Alan Townshend, the 28,000-home housing association’s group director of development, says: “For us, it was about looking at the number of boroughs where we’ve only got a small amount of homes. We took a view that it would be best for us to dispose of them to another housing association which is more locally-based and more active in those areas.

“At the same time, we’ve been looking to acquire stock in areas where we’ve got quite a large housing presence.”

“Transfers and mergers, especially in the housing association sector, have continually disengaged with tenants.”

Michael Gelling, chair, Tenants and Residents’ Organisations of England

Before stock rationalisation, Southern owned 16 homes in Croydon, south London. “We sold some there,” Mr Townshend explains. “We had 15 rented homes in Milton Keynes. So we sold some homes there. We’ve bought homes in places like Ashford in Kent, where we’ve already got quite a lot of homes. We bought 168 homes in Ashford.” Since rationalising their stock, the number of local authorities Southern works with has dropped by 11.

Despite this, Southern argues that the expense of maintaining and repairing disparate stock was not its motivation, so much so that the housing association tells Inside Housing that it didn’t keep tabs on the financial benefits of selling it. 

Landlords insist that they undertake stock rationalisation to better serve their tenants. But not everyone agrees that this is always the result.

Michael Gelling, elected chair of the five million-strong Tenants’ and Residents’ Organisations of England (TAROE), points out that a change in landlord isn’t always for the best. Stressing that stock rationalisation is “nothing new”, he says: “It affects tenants negatively if tenants haven’t been involved in the process.

“If I had a great landlord who was 50 to 100 miles away but the service was first-class, and I was going to get passed on to another landlord without having any say in it whatsoever, how do I know I’m not going to get a below-standard service?”

He continues: “Transfers and mergers, especially in the housing association sector, have continually disengaged with tenants and that is not a good thing.

“Tenants are part of the whole matrix. If you’re only running a housing organisation for money, well, you’re in the wrong business. Social housing is supposed to be different from that. If you don’t engage tenants, it’s all about profit, pay and pensions.”

Both Southern and L&Q confirmed to Inside Housing that they have engaged their tenants throughout the rationalisation process. Abigail Davies, policy advisor at tenant organisation TPAS, acknowledges that there is “tension between what seems like a financial decision and the tenants [who] wish to have some say over who their landlord actually is”.

But she urges caution against being too hasty to condemn social landlords’ efforts to engage tenants. “When they do appraisals of whether to keep hold of stock or not,” she says, “they do take social factors into account, and they may well decide to sell if they see that they’re not able to give a good enough level of service, or if their performance in one area is falling below their overall average.”

Tenant involvement

“People generally do go for the highest price.”

Richard Petty, lead director in the residential advisory business, JLL

The social landlords Inside Housing spoke to reported writing to their tenants and holding meetings to keep them informed, but Ms Davies recommends going one step further. Landlords are quite used to asking tenants for their views when establishing service contracts, for example, she points out.

“The same kind of mechanism could transfer over to stock rationalisation, where it affects a reasonable number of tenants, and where there is a choice of who could potentially purchase the property,” Ms Davies argues.

Despite none of the housing associations we spoke to admitting to the need to save money as a motivation, companies active in the market cite saving on maintenance and housing management, or in terms of avoiding a capital investment, as drivers.

“If you would follow that through you would simply sell your stock to the best manager,” notes Richard Petty, lead director in the residential advisory business at JLL, a property services firm which arranges stock transfer deals. “People generally do go for the highest price.”

Paul Butterworth, a partner at TLT solicitors, agrees: “I do think in the last two years it has become about saving money. Obviously there have been some government policy initiatives which have forced [housing associations] to look seriously at how they are managing their housing stock.

“If you do rationalise and transfer stock which is more expensive to manage, it means they can save an awful lot of money by transferring stock to someone else.”

Regardless of the reasons why associations decide to undergo the process, it’s clear that fewer housing associations should rule it out. “Housing at the moment is fluid,” says Mr Butterworth. “I don’t think businesses can afford to be static and not at least consider stock rationalisation as an option.”