08 December 2016

Blog: A Quiet Revolution

by Scott Fulton | 8 December 2016

It is often said that it is the quiet ones that you have to watch. This is never truer than in the case of revolutions. Such may be the case with Housing Associations. While commentators have focused on the rising house price and the threat Brexit poses to new home development, the Housing Association sector has experienced a number of significant, but largely unremarked, changes. Together, they could materially enhance the sector’s ability to support the growth in the UK’s housing stock over the coming decade.

The Housing and Planning Act 2016 was designed to “kick start” the current Government’s aim to build “1 million homes by 2020”. While the headlines were grabbed by 200,000 starter homes and the right of Housing Association tenants to buy their properties at a discount, a little heralded change to Housing Association’s status appears to be the most far reaching. Under the Act, the Housing Associations’ regulator, the Homes and Communities Agency (HCA) lost the power of consent over mergers and disposals.

Although the actual deregulation does not come into effect until April 2017 it has prompted a round of combinations within the Housing Association sector. On 30th November, Affinity Sutton and Circle Housing Group announced their plans to create Clarion Housing Group. This is now the largest Housing Association in the UK, managing 125,000 rental properties across 176 Local Authority areas, representing assets of over £20bn. Accompanying the merger, Clarion announced that it planned to build 50,000 new homes by 2026.

More recently London & Quadrant has announced its combination with East Thames, creating a Housing Association managing 93,000 homes, owning 50,000 plots for development and a plan to build 10,000 homes per year for the next decade. Finally, today (8th December 2016) sees the announcement that Peabody Trust will merge with Family Mosaic to form a London-focused Association managing 55,000 homes within a £6bn asset base.

These are just the higher profile examples of an increasing trend to scale within this sector. Freed from direct regulation but retaining their “NGO” status, Housing Associations are increasingly looking to combine in order to take advantage of the other significant change; cheaper access to debt finance.

In a revision to its £10bn stimulus package, the Bank of England recently announced that Housing Association bond issues would be included in the buy-back programme. At a stroke, this is expected to reduce the cost of these bonds which have been an increasing source of finance for the sector. So far this year, Associations such as People for Places and London & Quadrant have raised almost £1bn in bond issuance at coupons below 3%. Using their “quasi-public” status, Housing Associations are looking to increasingly reduce their reliance on direct public funding.

This is an important trend as it speaks to the final change within the sector; the preparedness to undertake “mixed tenure” developments where the sale of private homes cross-subsidises the provision of affordable tenures for rent and/or shared equity. True to their status as landlords and, increasingly, asset managers, the Housing Associations have turned to private entities with whom to partner in this provision. The growth in Partnership Housing within companies such as Galliford Try*, Kier* and Countryside Properties is a testament to this structural change.

In their last reported results, Galliford Try reported a 19% increase in revenue from mixed tenure partnerships, Kier a 63% gain and Countryside’s revenue from this area rose by 10%. While the actual scale of these operations remains small in comparison to private home development sales, the pace of growth is eye catching and, according to most commentators, is likely to remain high in the medium term.

Quietly, the UK Housing Associations have embraced a series of regulatory and financial changes to create a sector which is able to manage its asset base more effectively and source low cost, non-public funds. As a result, it appears to be planning significant increases in its development programmes within structures which look to utilise partnerships with companies such as Galliford Try and Kier; to the benefit of both.

Alongside the continued – and apparently surprising – resilience of the UK’s private home builders, those involved in working with Housing Associations could be facing considerable and sustained upside over the next 10 years.

*Capital Access Group acts as an adviser