Housing associations struggle through property recession: Accounting & Business

The crisis in the banking and property sectors is having many knock-on effects.  One of the most severe is in social housing, where providers have found capital receipts from sales and joint ventures slow down and in some cases almost completely dry-up.

 

Over recent years, income from sales has formed an increasingly important role in financing the operations of social landlords.  The receipts have come from sales to tenants of their homes, income from shared ownership schemes – where equity is owned jointly by the occupier and the social housing provider – and also through the building of new mixed tenure housing developments, often structured as joint ventures with private developers.  Many of those developers are now in severe crisis, or have ceased trading.

 

L&Q – formerly known as the London and Quadrant Housing Trust – is one of the social housing landlords badly affected.  “The impact of the credit crunch impacted on our ability to sell shared ownership and outright sale stock with gross capital receipts some £34m below forecasts for year ending 31 March 2010,” says Colin Chin FCCA, the head of financial strategy at L&Q.  In addition, the surplus on its sales of housing properties fell by 50% and it lost £2m in rental income because of delays in the sale of low cost home ownership properties.

 

Together these problems took a bite out the association’s total annual turnover of around £300m.  The association, which operates in London and the South East, owns over 60,000 homes in total, making it one of the largest association’s in the UK.

 

Chin says that the association’s size and tight management prevented the problem becoming a crisis.  “Such a loss in receipts had no overall impact on our financial and operating performance,” he says. “Although our sales forecasts were lower than projected and we made some write-downs on our unsold stock, we still managed to post a healthy surplus of £42.5m for year ended 31 March 2010.

 

“This was principally due to three factors.  Firstly, our core business is strong with underlying operating margins on our social housing letting activity remaining over 30%.  Secondly, L&Q, unlike many others in the sector, are able to take a long term view.  We developed a new intermediate market rental package, which allowed our customers to rent a property for as long as they required until they reach a position where they can buy.  Thirdly, we had sufficient liquidity and positive cash facilities – i.e. a war chest – built-up from prudent financial management of previous years’ surpluses.”

 

Other social housing providers were not so fortunate, especially in regions where the property crisis is worst.  The Northern Ireland Housing Executive is itself a social landlord, as well as being the devolved government’s funding agency for independent housing associations.  Belfast and other parts of Northern Ireland had the sharpest boom-to-bust housing collapse in the UK.  This has had a severe impact on the Housing Executive, which found that much of the land it had purchased for housing development plummeted in value and caused a particularly severe impact in the reporting period, 2008/9. 

 

Chairman, Brian Rowntree recalls: “The year saw the Housing Executive’s income from house and land sales fall from over £100m in 2006/07 to just over £8m.  This money had been crucial in funding a range of housing programmes in the public and private sector.  Without this income over recent years we would never have been successful in providing new housing, reducing unfitness to 3.4%, or improving the living standards of our 90,000 tenants. The collapse in the housing market has come at a time when more people than ever before, especially the elderly, need housing help and support.”

 

Would-be homeowners were hit by a double whammy: it was difficult to obtain mortgages and asking prices for properties remained high after a period of runaway property price inflation. Consequently, large numbers of people could not afford to buy their own homes.  In the previous 20 years, 116,000 Housing Executive properties had been sold to sitting tenants, but the change in market conditions led to this falling-off sharply, with just 808 Housing Executive homes sold to tenants in 2007/8 and a mere 54 in 2008/9 – causing a collapse in Housing Executive income.

 

Circle Anglia is another of the largest social housing providers in the UK and it, too, has been badly affected by the property market crisis.  But it says it has managed the impact by a history of prudent financial management practices, good financial risk management, effective communication with all stakeholders and a programme of diversifying sources of income.  

 

Andy Doylend, executive director (operations) at Circle Anglia, explains:  “Circle Anglia has scaled back its development pipeline to adapt to the challenging housing and property market; however, the demand for social housing remains high and we are continually looking to make sure we pursue viable growth opportunities and are committed to providing quality affordable homes. We will be creating over 2,500 new homes, and investing over £300m in existing properties over the next three years.

 

“We are also using our expertise and experience in development to help other housing associations, local authorities and councils to build affordable homes by working in partnership with them as development agents.  Over the next two years through our development agency services we plan to help build over 900 homes.  We also remain committed to our regeneration programme.  For example we are undergoing an £80m, six year regeneration of Orchard Village – formerly the Mardyke Estate – which will see up to 555 new homes built  over four phases.

 

“Circle Anglia took steps prior to the recession in 2008 as part of our financial planning process to ensure that our development pipeline wasn’t reliant on uncommitted grant.  Our development pipeline has remained consistent with the number of new homes we’ve created over the last three years, and we remain one of the biggest developing housing associations in the UK.  Our approach to managing our financial plans within the economic climate means we have been able to maintain our development programme.

 

 “Circle Anglia has a limited exposure to joint ventures with private developers and continues to manage these investments.  The property market remains challenging; however, given the right opportunity and the right location we would still consider pursuing viable ventures that fit within our business plan.”

Surprisingly, one housing association – Places for People – has used the challenging market conditions to its advantage and increase turnover in 2009.  However, its cost of sales almost doubled and group profit fell from £6.5m to £2.2m. 

Steve Binks, Places for People’s group director for finance & IT, explains: In spite of the downturn and some of the toughest market conditions seen for decades, we have taken early decisive and pragmatic business decisions in order to protect our trading position; ensure we are flexible enough to take advantage of current opportunities in a distressed market; and actively plan and position the group for a market upturn.  As a result our turnover has increased by 12%, rising to £284m; rental income has climbed 5% and our asset base is just under £3bn.

We have also continued to position ourselves for long-term growth by focusing our business on the design and construction of our large-scale developments; and delivering excellent place-management services to ensure their long-term success.  As such we have secure funding and cash flows in place, have built up strategic land holdings, and restructured our workforce in order to efficiently deliver these new communities, some of which have now started on site.

Binks adds that the group now sees itself as more than a provider of social housing, but also a creator of places, “where people can live, work, prosper and achieve their potential”.  “To realise this vision it has been our strategy to control large-scale, mixed-use developments,” says Binks.  “This will enable us to make a long-term commitment to place-management on a grand scale, to a diverse range of new customers.  As such we have now secured enough land to build more than 20,000 homes, which will help meet future housing demand and supply, and enable thousands of hard-working families and individuals to access a range of housing options, alongside employment, education, health, and other social facilities.”

This has also meant Places for People restructuring, so that it organises around project teams for each major development, moving away from its previous regional structure.  “We are very clear in our belief that the future direction of housing groups needs to be in becoming the developers and managers of whole places, not just the specialist providers of affordable housing,” says Binks. “This restructure will help us achieve that vision, and enable greater business efficiency.”

Despite this, Places for People expects operating conditions for social housing providers – and others in the property sector – to remain tough.  We anticipate market conditions will remain extremely challenging, and that the housing market downturn could persist for a further two or three years, with strong regional variations,” says Binks.

These are, though, market conditions in which social landlords can exploit their strengths, believes Places for People.  “Despite the housing downturn, we believe that there remains a good demand for affordable homes in good quality places,” continues Binks.  Places for People are ideally placed to help meet this demand in the short term and when the market responds.  We recognise that many people want to own their own home, but are unable to find an affordable option. Our approach has been to move away from solely promoting individual developments via incentives and advertising, to developing products that help people access the housing market.

 “We’ve launched several products which help knock down the housing and financial barriers that many hard working individuals and families face.  For example, we’ve launched our own mortgage range, try before you buy, home exchange, intermediate rent and market rent products, as well as offering mortgage protection and buy back guarantees on some of our properties.”

According to the sector’s representative body, the National Housing Federation, all social landlords need to consider more innovative ways to assist them in coping with, and surviving, the property downturn.  These include not only changing the way they operate and providing a wider range of services to tenants, but also converting subsidiaries into public companies to raise share capital, disposing of some of their property portfolios and undertaking home improvement services to private sector landlords and private homeowners as a means of raising revenue.


The Federation’s chief executive David Orr asserts: “Our sector has a tremendous track record of innovation and creativity in the face of change and we will be called upon to display those qualities once again as we consider the best response to our new operating environment.”

It is clear that social landlords will need to use all their innovation and creativity if they are to survive the recession in good shape.


 

 

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