How can housing providers balance the need for commercial investment with their social purpose? Inside Housing and Ark Consultancy bring together a group of experts to discuss. Photography by Jonathan Goldberg
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The Future Shape of the Sector Commission, which represents a cross-section of housing associations and sector experts, published its findings on the role housing associations will play in the 2020s over the summer. Titled Building Homes, Building Trust, it calls on housing associations to double their output to around 80,000-100,000 homes a year, in order to contribute to a new national target of 300,000 additional houses per year by 2025.
The recent lifting of the borrowing cap for councils and a more council-friendly change in the political weather all bode well. Both housing associations and councils now seem to have a clear mandate to build houses and the means to do so.
But how can housing providers chase ambitious development goals while holding on to their traditional values of accountability and social responsibility? A group of 12 leading housing experts gathered in central London to discuss the issues in a session chaired by Inside Housing’s editor-in-chief Emma Maier.
“The question of how to combine development with retaining social purpose is an issue of great concern at the moment,” Ms Maier tells those gathered.
Ian Winslet, director of Ark Consultancy, comments that seeking profit to pay for frontline services that won’t be funded from elsewhere is nothing new to the public sector.
“Councils have been doing this for years. Ark has set up seven trading companies, and one local authority we work with owns 300 commercial properties,” he says. “What is new is the driver, which is this reduction in income through revenue support grant, and that is starting to affect behaviours. We know that the [Chartered Institute of Public Finance and Accountancy] is getting nervous because while there is a lot of good practice there is also some madness out there.”
He also warns that the four-year cycle of elections in local government can lead to abrupt changes of policy direction.
Eamon McGoldrick, managing director of the National Federation of ALMOs, agrees: “You’re two years into a project and the next administration comes in and stops it. Look at Haringey. Abandoning their development vehicle is going to cost them £3m in compensation and legal costs, and they are scratching their heads thinking what are they going to do next for Broadwater Farm. Cheltenham Borough Homes gets £100m to build new homes; in Westminster, Citywest is closing down.”
Carl Brazier, director of housing for Stoke-on-Trent City Council, explains that his local authority enjoys consensus in its housing policies between the two main political parties and firmly stresses social rather than profit-driven values in everything that it does. Two council-owned companies, Fortior Homes and Unitas, have been set up to develop and maintain housing.
Mr Brazier says: “Our Housing Revenue Account will double now that they have lifted the borrowing cap and Unitas makes a profit of £5m a year that goes to the council.” The council’s ambitious projects include a new city centre development including a Hilton hotel, a shopping centre, an arena and a ‘youth zone’.
He adds: “Yes, our approach is about financial gain but it’s also about social conscience. We don’t look to make huge amounts of profit and we make sure that 70% of work goes to local contractors. Our calculation is that more money coming into the local community and providing good pensions will help to reduce costs later to the NHS and for social care.”
Place-shaping at scale
As chief executive of L&Q, one of the UK’s largest housing associations, David Montague is involved in ‘place-shaping’ on a significant scale. He says: “We are valued at £20bn with a surplus of £35m. If we were quoted we would be in the FTSE top 25 but we are not, we’re a charity.”
L&Q has diversified into market rent and sale as well as commercial letting and has a strategic land company. At Barking Riverside it is developing an 11,000-home community, with 65,000 sq m of commercial space, schools and a railway station. “I still feel that we are carrying the same torch as our founders,” adds Mr Montague. “Yes, we have a strong commercial drive but whether you are in sales, land or finance, you go to work because you want to create high-quality affordable places to live in. That’s important.”
“The reduction in income through revenue support grant is starting to affect behaviours.” - Ian Winslet, director, Ark Consultancy
This sentiment is echoed by Victor da Cunha, chief executive of Bath-based association Curo Group. He says: “As a medium-sized organisation our goal, unashamedly, is to generate profit to cross-subsidise services that are no longer funded. We use housebuilding for market sale and supported housing to produce as much new affordable housing as possible. The whole idea is to create income to fund the core social housing proposition. I don’t think we should feel embarrassed about that or that we have to apologise.”
David Bogle, chief executive of housing association Hightown, comments: “My association spends about £100m a year on development. We borrow £60m of that, so we have to be commercially viable and A2 rated, otherwise no one would lend to us. No one should criticise housing associations that are doing market sale and rent. The whole point is to build more houses.”
Sandy Livingstone, executive director of Onward Homes, explains that, merged from five associations and managing 35,000 homes, his organisation is a significant regional player in the North West. He says: “For us, supply is not the issue. It’s quality, location and access to employment. We use councils and developers to access land. Our philosophy is to blend the approach of a commercial organisation with the ethos of a housing association. Market sale schemes are not our goal but we use them to subsidise affordable rent schemes.”
From the evidence of the discussion, this cross-subsidy model – using market rent and sale schemes to generate profit to pay for affordable rented homes – is common among housing associations, even the smallest. While forming the basis of the doubling of output that is now required, it sometimes generates tension.
Olivia Harris, chief executive of Westminster-based Dolphin Living, says: “People often ask us, ‘Why are you helping people on high incomes?’ So, two years ago, we published some research showing the value each intermediate home delivered, compared to a market home. It’s hard to quantify the benefits of what we do. We take commercial risks but do not generate commercial levels of return.”
Sharon Guest, executive director of housing services at Longhurst Group, agrees that managing public perception is important. “Housing is such a hot topic. It’s at the top of the political agenda,” she says. “The public think that loads of people are making lots of money from it and they think we do, too. I don’t think that we communicate enough that our commercial activities bring additional benefits to our social sector.”
Rachael Orr is director of Placeshapers, a network of community-based housing associations. “We are driven by our social purpose but the nut that we have to crack is the perception that we aren’t,” she says. “We really need to sort this out if we are going to meet the challenges of becoming more commercial, which we will have to.”
The political environment may be favourable, but market conditions are tough. Simon Graham, directory of strategy for Network Homes, explains that “the news that funding for social rent is coming back is incredibly welcome but even with grant rates of £80,000 to £100,000 per unit, that still leaves us with a huge chunk to find from income from sales, borrowing and our reserves to keep building those social rented homes”.
“Being a social purpose organisation with a voracious commercial arm which has a different set of values is not going to work.” - Greg Beales, director of communications, Shelter
“Like all housing providers, we have to build across a range of tenures and run a commercial portfolio, which adds £1m to our bottom line. People’s incomes have stagnated, grants have gone down and costs are up but we are still trying to do the same things that we’ve always done.
“Modernising our customer service side is one way to reduce costs. Using data to guide our management systems will be a useful way both to improve our services and to lower overheads.”
Mr Montague agrees: “We are all chasing that digital rainbow. It’s going to be amazing.”
Acquisitive property developer or generous social philanthropist? It’s hard to reconcile these opposites. Shelter’s director of communications, Greg Beales, who has worked for Accenture and at 10 Downing Street, says: “It’s encouraging to see you grapple with this, because you need to be clear about your social purpose. Your standards and values should be consistent. Being a social purpose organisation with a voracious commercial arm which has a different set of values is not going to work. And with the government retrenching from public services, your ability to innovate and to deliver affordable homes, which is your central mission, is becoming even more essential.”
There has now been political continuity in housing policy for the past 18 months, and the market is continually evolving. Equity and insurance companies like Blackstone and Legal & General are recent entrants to the market. Added to this, there are already signs that land and labour prices are rising and that councils and housing associations are competing for development staff.
Meanwhile, social rents will be pegged until 2020. Making schemes add up financially is getting tougher and tougher.
“It needs to be like the Argentinian tango – the only dance in which neither partner leads.” - Carl Brazier, director of housing, Stoke-on-Trent City Council
“I think there is a danger that associations end up competing with councils rather than partnering with them,” warns Mr Livingstone. “We need to explain to them that we are also fundamentally driven by social values. Councils need to see us as associates, not competitors, otherwise we’ll both be chasing every opportunity, and land and building costs will escalate.”
Stoke-on-Trent City Council’s Mr Brazier agrees: “You’re right, there needs to [be] more conversation. It needs to be like the Argentinian tango – that’s the only dance in which neither partner leads. If there’s an honest dialogue, there’s plenty for us to go at. It doesn’t matter who does the development, as long as it gets delivered.”
Director of communications, Shelter
Chief executive, Hightown
Director of housing, Stoke-on-Trent City Council
Victor da Cunha
Chief executive, Curo Group
Director of strategy, Network Homes
Executive director of housing services, Longhurst Group
Chief executive, Dolphin Living
Executive director of property, Onward Homes
Editor-in-chief, Inside Housing (round table chair)
Managing director, National Federation of ALMOs
Chief executive, L&Q
Director, Ark Consultancy