Riding the wave? Grant, profit and the future of housing - - PowerPoint PPT Presentation

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