What is the state of the sector’s finances?

For those housing associations outside of London with a smaller fire remediation burden, he believes the numbers stack up, thanks in part to the government’s commitment to £2.5bn of loans at an interest rate of 0.1% and the soon-to-launch National Housing Bank. 

“So you’re going to give me the money to fund 40% of it, you’re letting me borrow money at 0.1%, and I can go and get debt financed that’s got a guarantee on it… if I can’t make that work for new development, I must have something wrong in my maths,” Mr Mallows says.  

“Now the next step is down to the sector to find efficiencies within our own businesses to help create additional internal capacity”

The government’s low-interest loans have been widely welcomed by the sector as a key lever in closing the subsidy gap on new development. In London, where landlords will have exclusive access to 60% of the total pot, G15 finance directors have been “very positive” about the package, according to Mr Hattersley. 

L&Q’s Mr Farnsworth says viability challenges for affordable housebuilding “have almost never been greater”, and the new loans may help shift the dial. “We see [the package] as a real positive to help unlock the delivery of affordable homes because the subsidy gap on building a new affordable home cannot be plugged alone with grant,” he says. 

But finance directors do not expect the funding pot to last very long and hope to see more from the government. Mr Mallows expects the loans to “disappear overnight”, while Mr Hattersley says the cash “clearly will be gobbled, obviously”. He adds that £2.5bn is “just a drop in the ocean” given, for example, that Clarion alone spends £400m to £500m on new development each year. 

Mr Farnsworth says that if the scheme is a success, it “would be great to see that replicated in future spending reviews to allocate more funding through that route”.  

‘Innovative’ funding 

In a recent interview with Inside Housing, Amy Rees, chief executive of Homes England, recognised that “there will never be enough grant” to achieve a generational increase in social and affordable housing. She pointed to the importance of the National Housing Bank and the need to leverage more institutional investment into the sector.  

Coastline’s Mr Mallows believes there is appetite for different financing models, noting that every director on the NHF’s finance policy advisory group is “really committed” to solving the housing crisis. “But it needs packaging and it needs understanding,” he states. 

Mr Hattersley says he welcomes any new funding coming into the sector, from for-profits or elsewhere, but struggles to understand “how it works at scale”.

“If I look at the yields I can get on social housing, it doesn’t cover the funding cost. So if I can’t cover the funding cost, I kind of question how can some of these models cover it?” 

Similarly, Mr Farnsworth struggles to see how institutional investment can generate a return from social housing, which is a subsidised housing model. “I’m not convinced that institutional investment is the answer, especially because institutional investment tends to want to flow into stabilised assets so it’s not taking development risk,” he explains. 

But he welcomes the new bank, which “can only be seen as positive”, and says the sector “should be as creative and innovative as possible”. 

Rationalising stock 

Ms Rees has been clear that the sector now has all the right tools in place, as well as the money, to get on and deliver. So in the face of continuing regulatory pressures and acute viability challenges, where might the sector find extra capacity?  

Mr Farnsworth believes greater rationalisation of stock is one answer, particularly from larger to medium-sized housing associations. “My view is we’ve been dealt a very good deal from government, be it both policy and funding, and therefore now the next step is down to the sector to find efficiencies within our own businesses to help create additional internal capacity,” he says.  

L&Q recently completed a large transfer of 3,500 homes in South Buckinghamshire to SettleParadigm, as part of its strategy to focus activity in Greater London and Greater Manchester. Mr Farnsworth says it “makes sense for those associations that do have development capacity to sell some tenanted stock to those smaller [organisations] that have balance sheet capacity” but perhaps not the capacity to take on development risk.

“I think as a sector, if we could work harder to rationalise our stock, that would be far more efficient, and then therefore we could all build more homes,” he adds.  

Indeed, S&P says that more housing providers are rationalising their stock “in an effort to further reduce funding needs and improve efficiency”. It says this will have long-term benefits, but notes “an increasing reliance on fixed-asset sales to achieve financial targets”.  

“It’s a bit like a snake swallowing a large meal… you need to digest [the announcements] because of the way you were borrowing money and then getting the return on the new homes”

But other finance directors seem slightly more cautious. Mr Hattersley says Clarion has been carrying out a stock rationalisation programme for around seven years, with more than 5,000 homes sold to date. This is “absolutely the right thing to do”, he says, but the market is “quite competitive” at the moment as there are “lots of people looking to sell stock”. 

He also stresses that selling stock is not a necessity for Clarion. “I think perhaps some others are needing to sell more than we do. We’re doing it because we want to do it as a strategic decision, not because we need it from a financial point of view.” 

For other associations such as Platform, stock rationalisation at a large scale isn’t necessary as its 50,000 homes in the Midlands are more concentrated. According to Ms Farrar, the organisation doesn’t own a lot of outlying geographical stock. 

Managing expectations 

It is clear that housing associations are feeling the pressure of government expectations, especially given relentless political messaging around its 1.5 million homes target.  

“I think they’re expecting, ‘Give them certainty, give them this, give them that, and whoosh.’ It doesn’t work like that because we’re a long-term owner of homes,” says Ms Farrar.

She stresses that for social landlords – unlike developers – it can take seven years to get a return, and “the important thing is to protect the financial metrics, to protect your existing homes and continue to grow gently”. 

In this light, the government’s raft of positive announcements over the past year needs to be properly absorbed by the sector – which takes time.  

“It’s a bit like a snake swallowing a large meal… you need to digest it because of the way you were borrowing money and then getting the return on the new homes,” Ms Farrar explains.  

The job now for housing associations is to push themselves to do more where they can, but also to manage expectations through “opening dialogue” with the government, says Mr Hattersley.  

There is no doubt that finance directors are in a better position now to plan their organisation’s budgets than they were a year ago, but one thing they can’t predict is the impact of political change. Mr Farnsworth warns that there is “always future political uncertainty that could happen”, while Mr Mallows says the “wider political uncertainty in the country” doesn’t help with allaying the sector’s nervousness. 

A 10-year rent settlement provides certainty now, but what happens if a new government isn’t so keen on the idea? 

Even before the latest round of economic uncertainty due to the Iran war, Ms Farrar seemed mindful of this: “The government’s given us 10-year certainty, but we don’t have 10-year certainty on what the next government’s going to do. So I might have a little question mark in my head… I’ll try not to be political, but if another lot gets in that really don’t know what they’re doing – and that is a possibility – I don’t count much [for] years five to 10.”