Riding the wave? Grant, profit and the future of housing associations in England; the case of Fizzy Living Peter Williams, CCHPR and City Futures, UNSW The Context • In summary; • Cuts in government grant for development (60% cut), cuts in welfare support for tenants via RSRS, CTB, Benefit Cap and more • Substantial undersupply of homes in all tenures –annual requirement in England of at least 220,000; currently 120,000 • Decline in home ownership – down from 71% to 63%, rise in PRS to 18% • House prices rising, new rents rising • Funding for social housing via the Affordable Housing programme (affordable rents on new homes /conversions up to 80% of market) and new Guarantee programme The Context • Pressure to move up market/widen sources of surplus/profit • Through disposals/rationalisation; efficiency savings/VFM, through joint ventures, acquisitions and new activity • Cross subsidy for social housing, underfunded by govt. • Issues with that in principle; mission creep; charitable rules • Big issues re skills/capacity, understanding of new markets • Issues too of scale, competition, and most notably of risk • HCA rules consultation on use of social housing assets (http://www.homesandcommunities.co.uk/sites/default/files/ourwork/130404_regulatory_framework_discussion.pdf). • Off/On balance sheet The Context • • • • • • • • • Many associations have rejected diversification CCHPR JRF project on Business plans and poverty Diversification; up 25% to £2.3bn Disposals/Sales in a bouyant housing market The global accounts http://www.homesandcommunities.co.uk/sites/default/files/ourwork/global_accounts_2013_full.pdf In 2013 recorded an aggregate surplus of £1.9bn; 9% over 2012 via turnover/rent increases and improved operating margins Reserves increased by £2.7bn, to £23.3bn. The total net book value of the sector’s fixed assets increased by £5.2bn, to £76.4bn. Total debt increased by £3.6bn, to > £52bn. £3.2bn of bonds issued in the year, 66% of new debt facilities arranged. The Context • • • • Choices – refocus on core business and/or diversify? Some chosen former and rent reductions Much turns on local markets/opportunities But also governance/control/purpose • So to a case study - Thames Valley Housing Group. • Chair for 6 years and subsequently Deputy. Completed 9 year term. • Always diversified –rental/shared ownership • Then student/hospital accommodation • Joint ventures, PFI and Fizzy • Not been distracted by mergers and focussed on organic growth Portfolio Size target 1,000 apartments •Acquisition Period; 2012 - 2014 •Portfolio Total Cost approx, £240,000,000 •DEBT, 60% £144,000,000 •EQUITY, 40%, £96,000,000 (less TVH £30M) •Target Initial Net Yield 5% •Geared IRR Target 12% with 7-9 year hold •Income partially underwritten by TVHA • TVHA is establishing a Private Rental Portfolio of about 1,000 apartments • TVHA has committed £30m equity to the project • The Target Market is young professionals, the ‘RENTYSOMETHINGS’ • The initial target area is London and the South East • TVH will manage and let the apartments under the FizzyLiving brand • TVH will manage project development as appropriate • UK Demand for NEW homes – 240,000 pa • Supply at around 100,000 pa • Compounding Issues; Limited Mortgage Availability (FTBs) and High Deposits (particularly FTBs) • London population will grow by 1m in next 10 years • Supply chain not working • FTB average age close to 40 • Demand for rental stock is growing • PRS is the solution • Safe & Secure NEW Buildings of C 100 apartments • 1 Beds C 30%, 2 Beds C 55%, 3 Beds C 15% • Sizes – 1 Bed – 500 sq ft • 2 Bed 2 Bath – 800 sq ft • 3 Bed 2/3 Bath – 1,000 sq ft • Adjacent to Transport Hubs • Comprehensive Local Amenities • Exemplary Management via ‘Bob’ • Communal Facilities where appropriate • Purchase discounts minimum 10% on Red Book (1520% OMV) • Initial rental voids 6%, reducing to 3% PA • Gross to Net Rent discount target 25% • Average development cost estimated at £20-30m • Hold Period 7-9 Years • Variable Exit Routes • Target Equity/Debt ratio 40:60 • Suitable for Joint Venture structures Conclusions • • • • • • • • • • • Needs must? But not without its tensions Slow return and Board patience Impact on resources Impact on skills/retention/wages/incentives TVH plans an exit and to continue Covered the risks both in terms of reserves/alternative plans Separate company – one nation two systems dilemma Not the sole strategy And in a good market –not universal Not all got commercial boards/skills Conclusions • • • • • • • • • • This is not the cavalry for the sector Clearly does take subsidy to produce social housing Risks challenging the countercyclical nature of sector Politicians currently vying to produce plans for more homes But also all are pledged to reduce budgets Real risks to Recycled capital grant fund? Real risks to mission Real risks to the poorest Boards have a considerable challenge before them End up on a different beach? Peter Williams; consultpwilliams@btinternet.com