Social housing has had a ready supply of loans for a long time. But now, under great pressure to develop more homes, some associations will find it harder and harder to
get the money they need. Chloe Stothart reports on some alternative ways to boost the balance sheet. Illustration by Tom Gauld
A divide is opening up in the social housing sector鈥檚 finances. Many housing associations have enough in their piggy banks to build away merrily into the future. But some are rattling their last few coppers.
According to a report by the National Housing Federation, a significant minority of registered social landlords are reaching the limit of what they can borrow 鈥� they have high levels of debt and can鈥檛 afford to take out many more loans. If they were a person, they would be mortgaged up to the hilt.
Smaller and larger RSLs still tend to be popular with lenders; it鈥檚 their medium-sized cousins with 5000 to 9999 homes that will have trouble.
And if the trend to give much larger sums of grant to an ever smaller pool of RSLs intensifies, some of the Housing Corporation鈥檚 70 development partners would need to borrow more to balance out the additional grant. It鈥檚 questionable how far this could go before they hit their borrowing capacity.
For now, RSLs are starting to look at ways to increase the amount they could borrow 鈥� and also at other ways to make money. So here are some ways to boost your balance sheet 鈥� and on page 29, we look at a straw poll of 10 development partners that gives a glimpse of the financial health of the sector.
Get better terms on your loans
Covenants that determine how your properties are valued can make a major difference to the number of homes you need to secure a loan.
Renegotiating old loan covenants is a increasingly popular way to free up security. For example, homes could be valued on their worth as social housing or their worth on the open market. The latter is usually higher, particularly with the house price boom, so it takes fewer properties to secure a loan.
Wandle Housing Association recently revalued some of its homes in this way and was able to borrow more money without putting up extra security. Finance director Malcolm Wilson says: 鈥淚n 12 months we have increased our loan per unit by 33% and it will go up again to more than 50% by the time we鈥檝e finished the process.鈥�
Diversify
Moving into non-core areas such as care, homes for market sale or student accommodation has helped to boost many RSLs鈥� income. Many money-making subsidiaries pass a large share of their profits back to the housing association and some of these activities will not appear on the RSL鈥檚 balance sheet, so borrowing for these subsidiaries will not affect the association鈥檚 balance sheet capacity.
We鈥檙e bringing together finance, development and other central services. By 2006, we鈥檒l have saved about 拢1.5m
Mark Washer, Affinity
Emblem Homes, the market sale subsidiary of Places for People Group, made a pre-tax profit of 拢544,000 in 2002/3 and is expected to make 拢6m in the next five years. A cut of this goes back to Places for People.
However, the risk of these diversified activities has to be considered carefully. Taking too great a risk on them could affect how lenders and credit rating agencies view your entire organisation, which could mean it ends up costing more to get funding. For example, when RSLs run student housing or care homes on behalf of other organisations, lenders often expect a guaranteed minimum number of occupants.
Cut costs
Reducing costs is the theme of the moment and there are endless ways of shaving off the pounds. One is to merge shared functions: Affinity, for example, hopes to make a seven-figure saving by bringing closer together Downland and Broomleigh, the two RSLs that form the group.
鈥淲e鈥檙e bringing together finance, development and other central services,鈥� says Affinity鈥檚 finance director Mark Washer. 鈥淏y 2006 we will have saved something like 15% of the costs of the group鈥檚 centre 鈥� that鈥檚 about 拢1.5m.鈥� The group鈥檚 business plan also assumes that its subsidiaries will make additional savings over five years.
Rationalise
Concentrating your operation in particular geographical areas can save on housing management costs. Many RSLs achieve this through stock swaps. Southern Housing Group, for example, did a swap with Circle 33 a year ago. Southern had been managing Circle 33鈥檚 Timber Wharf estate on the Isle of Dogs in east London and Circle 33 had managed Southern鈥檚 Holly Street homes in Hackney, north-east London.
Southern鈥檚 finance director, George McMorran, says: 鈥淭hey did the management and charged us and we did the equivalent in the homes they owned, so it seemed sensible to get rid of the admin costs by swapping. It saved little bits of a lot of people鈥檚 time.鈥� This added up to a significant amount, he says.
Merge
A merger is a controversial solution but almost all the associations questioned by Housing Today saw merging with an RSL that did not develop but had unencumbered security as a way to boost their own balance sheet capacity. Thus far, though, mergers have tended to be about strong RSLs picking up ones that are struggling, which is not always the ideal way to build capacity.
I see a model of large developing RSLs working with a group of 鈥榩artner鈥� owner/managers as the way forward
David Maitland, West Mercia HA
And to make a merger work, there鈥檚 got to be more to gain for both associations than just a fat balance sheet. Ideally, RSLs need to find a like-minded partner where merger will benefit tenants and achieve more than just a capacity boost.
A database of information would help to speed up the process of finding ideal merger partners, says Claire Davis, finance director of Orbit Housing Group. And Mick Warner, the corporation鈥檚 assistant director of regulation in Manchester, says he is also interested in the database idea, adding: 鈥淲e aim to facilitate mergers and strategic alliances where it is clear that benefits would accrue from such a partnership.鈥�
The Downland/Broomleigh merger that formed Affinity was an example of two strong associations linking up. The two complemented each other well financially, says Washer. 鈥淚nterest cover, the measure of the association鈥檚 ability to repay loans, was stronger in one than the other, but on gearing it was the other way around.鈥�
The group will be able to make use of its strong, post-merger ratios once it starts getting bank funding for the group as a whole rather than for the individual associations.
Some RSLs are eschewing mergers and forming partnerships with smaller players instead. David Maitland, finance director of West Mercia Housing Association, says: 鈥淎n element of merging with small associations is bound to occur, as the number of developing RSLs contracts.
鈥淗owever, I see a model of one large developing association working closely with a group of 鈥榩artner鈥� owner/managers being the way forward for the movement.鈥�
Buy cleverly
Bulk-buying agreements or special deals can help to bring down costs. One rather unusual example is Wandle Housing Association, which found out that RSLs could sign up to a government mobile phone deal with Orange and Vodafone. Now Wandle pays 4p per minute on its calls, rather than Vodafone鈥檚 normal business rate of 8p per minute.
Finance director Malcolm Wilson reckons Wandle has saved thousands through the deal. 鈥淭hese sorts of things are quick hits to bring down costs,鈥� he says, and urges the government to help housing associations get in on its purchasing deals.
You are not alone
What the banks could do to help
Covenants could change further so that RSLs need less security for a loan, perhaps with some of the borrowing unsecured.
Banks could also allow a big RSL to lend some of its money to smaller counterparts in a process known as 鈥渙n-lending鈥�. David Maitland, finance director of West Mercia Housing Association, explains: 鈥淭his would allow small associations to get the economies of scale you get on big deals 鈥� it鈥檚 just as cheap to raise 拢10m as it is 拢1m.鈥�
鈥淚 don鈥檛 think lenders have any major qualms about this,鈥� says Steve Amos, head of the social housing team at Barclays.
Banks are also increasing the amount they allow individual RSLs to borrow. Barclays, for example, has raised its limit per association from 拢100m to 拢150m. It did this partly in anticipation of the demand for large loans from development partners but also because its loan book had grown by 拢2bn.
Dennis Watson, the bank鈥檚 deputy head of social housing, says: 鈥溌�150m out of a loan book of 拢3.5bn is a much more acceptable risk than 拢100m out of a loan book of 拢1.5bn because it鈥檚 a smaller percentage.鈥�
What the government and Housing Corporation could do to help
The ODPM and the Housing Corporation could also help associations by changing the rules on grant and regulation.
Finance directors at the corporation鈥檚 development partners say the corporation should keep grant rate high enough so that the bank loan needed to build the scheme could be secured on the scheme alone without bringing in any extra homes as security. This would leave associations with extra homes to use as collateral on future loans.
The corporation, though, doesn鈥檛 think it necessary to increase grant per unit in future, particularly if development partners get a lot more grant overall.
Mick Warner, the corporation鈥檚 assistant director of regulation in Manchester, says: 鈥淭here鈥檚 no evidence to suggest that this is necessary and, in any event, we monitor housing associations鈥� financial health and viability and invest only in those who we feel have sufficient capacity.鈥�
He does not think it likely the development partners will run out of capacity and adds that the quango would only whittle down the number of partners 鈥� and therefore increase the grant per partner 鈥� if it brought real efficiency gains.
Dean Tufts, finance director of Acton Housing Association, suggests that the corporation should extend to development partners its policy of paying 40% of grant when a site is acquired. At the moment, it waits until work begins to hand over the money.
He says: 鈥淎 significant amount of funds is now required to fund work in progress because so much of the grant is payable at the end of the build process. Hence a lot more security is required to fund large work-in-progress activity 鈥� much more than before.鈥�
Associations also want more freedom to take sensible risks in order to make money and more flexibility on rent restructuring so that they can raise rents 鈥� particularly because the retail price index, to which rents are linked, rises more slowly than house prices.
They also fear that plans to pay housing benefit to tenants rather than landlords could push up arrears and cause lenders to take a less favourable view of the sector.
Maitland suggests an incentive for non-developing associations to join up with partners, which could use their capacity. He says: 鈥淭he Housing Corporation could reduce the burden of regulation on small- and medium-sized associations, who can no longer develop, allowing them to become much more customer-focused, locally managed owners and managers of social housing properties.鈥�
Warner agrees, and points to the corporation鈥檚 plans to give a lighter regulatory touch to the least risky associations. Finally, Wandle鈥檚 Wilson suggests that the government ensure that all councils send housing benefit information electronically to associations rather than on paper.
Such a move would mean RSLs would not need to input the data and would free up one or more administrative staff to do other tasks.
Methods for increasing balance sheet capacity and income often involve saving money or making more of it, so coincide nicely with the government鈥檚 drive for efficiency.
鈥淭he partner associations are looking at it because they have to and the corporation鈥檚 drive for efficiency is going to force most of use to treat efficiency and therefore capacity seriously,鈥� says David Montague, finance director of London & Quadrant Group.
The state you're in
Housing Today conducted an anonymous straw poll of 10 of the Housing Corporation鈥檚 development partners, looking at the figures that determine their ability to borrow. As the table below shows, they have room to move.
Gearing, which shows the balance between an RSL鈥檚 bank debt and its reserves and grant, looks good. The rate for RSLs in the survey varied between 12.61% and 69% with none (bar those formed through large-scale voluntary stock transfer, which are usually highly geared) going above 80% 鈥� a common limit set by the banks.
Interest cover, the measure of how many times an association鈥檚 surpluses and interest received covers its interest charges, also looks good. Interest cover figures in the survey varied from 71% to 394%, but only the LSVT subsidiaries and one group tested the common banking limit of under 110%.
Several of the groups contain LSVTs, which are usually highly geared, so we included a breakdown of group subsidiaries if available.
And one association points out that while their figures seem to show lots of extra capacity, their banks would require them to make a surplus in later years which would take away a little of this space for manoeuvre.
Source
Housing Today
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