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/our- work/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/our- work/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 (15- 20% 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
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