Counting the cost of social housing

With funding for social housing set to be cut by more than 60 per cent the sector is facing a period of austerity the likes of which have never been seen before. So where will future financing come from and how will social housing organisations survive? Michelle McKenna reports

Not all landlords are funded in the same way and the sources of cash differ for ALMOs, local authorities and housing associations. But while there are differences in the way that they are funded they are united by their uncertainty over where the cash will come from in future.

Housing associations mainly rely on a combination of bank loans and grant funding from the Homes and Communities Agency (HCA). With grants being cut there will be a tendency to rely more heavily on loans but credit is no longer available at the low rates that housing associations once enjoyed.

As Anne Turner, finance director for the Orbit Group, explains: “There has always been a limited number of banks and building societies who would actually lend to the sector. Up until two years ago we had exceedingly beneficial loan terms. The funders have always looked very favourably on the sector because we are regulated by the TSA and because we have got a guaranteed rental income, the majority of which is paid through Housing Benefit.”

While companies tend to borrow at LIBOR or base rate plus a margin of two to four per cent, housing associations have traditionally borrowed at margins of around 0.25 per cent. But rising margins over the past two years have seen housing associations pay more on top of LIBOR /base rate.

“Now there is the double whammy of there being less funders – some of whom have less appetite to lend to housing associations any more – and significantly increased loan costs,” says Turner. “Not only are margins materially higher, but arrangement fees have risen from 0.25 per cent to one per cent. I f you are borrowing £100 million that is a lot of extra money.”

Orbit has still got loans available to it, which were arranged before the margins went up but any new money that it borrows will be on higher rates.

Chester and District Housing Trust would also have to “weigh up the cost of increased margins” before borrowing in the future, says its director of finance and new business Andrew Williams. He believes many organisations will look outside of the traditional banking sector for alternative funding sources and move towards the bond market and institutional investors. He suggested that social landlords may start to build community buildings or houses for outright sale, alongside their affordable offerings, to boost the coffers and predicted more organisations merging – a move being considered by CDHT and Cosmopolitan Housing Group.

As a gap funded housing association Liverpool Mutual Homes (LMH) follows a different financial model to some of the older, more well-established housing associations, as its director of corporate services Peter Fieldsend explains: “You put your business plan together and see what you can get from funders and borrow commercially and the gap is the difference between what you can borrow commercially and what you need. Essentially the Government provides the funding to close the gap and make the plan viable.”

LMH’s required gap is £130 million – one of the largest in the country – and it has an agreement with the Government to receive that amount over its first eight years of operation. “We only have an annual commitment so fingers crossed the Government don’t cut it,” says Fieldsend. “At the moment there has been no mention of any cuts in gap funding but who knows because everything is up for grabs.” Not only is funding harder to come by but it would appear that funders are nervous over the potential impact of proposed changes in benefits, and Housing Benefit in particular, on people’s ability to pay their rent.

Neil McGrath, director of resources at Halton Housing Trust says: “At the moment the Housing B enefit is paid directly to us as the landlord for the vast majority of our customers, and that gives us confidence that we can get the income, but also provides our funders with confidence that we are getting the income. If there is any change – maybe it goes directly to the customer and we are reliant on the customer paying that to us through the rent – I think that could have a potential adverse affect. Again it would reduce and weaken funder confidence in the housing association sector.”

With 70 per cent of Orbit and LMH’s rental income coming from Housing Benefit, it’s an issue that concerns Turner and Fieldsend too. “The fact that we needed such a large amount of gap funding to make our business plan work in the first place means that it is very sensitive around reductions in income so any reduction in Housing Benefit receipts could have a big detrimental impact on our viability,” says Fieldsend.

ALMOs and local authorities are also concerned about potential changes to Housing Benefit. “I think the benefit changes and the impact that will have particularly on authorities bordering London is a huge concern,” says Paul Price, head of housing services at Tendring District Council and ARCH (the Association of Retained Council Housing) executive board member.

“Locally we have got Boris Johnson in London talking about 200,000 people being forced out of Central London because of the benefit changes – where are they going to go? My own authority is fairly close to London, we are anticipating a lot of people coming our way who have been displaced by the knock on ripple effect out of London.”

Price questioned where these people would live with local authorities not having the resources to provide more affordable housing and private landlords potentially being driven out of the market.

Gwyneth Taylor, policy director at the National Federation of ALMOs (NFA), said that the changes to Housing Benefit for people who have been out of work for a period of time were of particular concern and could lead to an increase in arrears and to problems in terms of additional homelessness as well as reductions in the income of ALMOs affecting the services they offer.

Plans to link rents to the Consumer Price Index (CPI) rather than the R etail Price Index (RPI) have also been met with trepidation. LMH’s business plan works around rent increases based on RPI plus 0.5 per cent. “RPI is traditionally higher then CPI , so our business plan is predicated on RPI rent increases,” says Fieldsend. “If it moves to CPI increases we will have to do something about our costs as it will give us a serious gap between our income and cost increase.”

As public bodies ALMOs and local authorities are unable to access loans from banks like their housing association counterparts and rely on Government funding for their Decent Homes programmes.

This is a major disadvantage according to the NFA, so much so that it is working on a radical model of ownership. As Taylor explains: “We are looking at a model whereby the local authority may be the minority owner and the residents may become the majority owner and what that would mean is that we would then be able to access both public and private sector funding so we would be able to top up the public sector funding. The problem is we would still be subject to the Housing Revenue Account (HRA) subsidy system but we would be able to top that up and therefore we would be much closer to the housing association model.”

The HRA subsidy system, in which local authorities and ALMO s have to pay their rental income to a Central Government pot – receiving a share of the cash back – has long been an unpopular policy.

Price explains: “At the moment the local authority sector is quite tightly constrained by the Government in terms of how we are funded because we have a very complicated rent setting regime and an extremely complicated and convoluted subsidy system.

“ARCH has been arguing for a number of years for a fairer funding system as at the moment a substantial number of us are in what we call negative subsidy, so the Government effectively takes money away from us every year to plough back into other sectors. My local authority loses about £2 million a year and when you try to explain that to councillors and tenants that we don’t actually keep the rent we collect, that we give £2 million of that back every year to the Government, they look at you in complete disbelief.”

The HRA system is to be dismantled but there is residual debt in the system so organisations will have to, in effect, buy their way out of it. Although on the plus side they will have certainty over future funding.

The announcement that the Treasury will in future keep 100 per cent of Right to Buy Receipts also has the potential to impact on the ALMO and local authority sector. Although both P rice and T aylor agree that it is unlikely to have any effect at the moment, as sales simply aren’t happening.

“The issue with that is still not very clear whether it is a short-term or long-term proposal because in the original prospectus they were going to go back to the local authority and it was all part of the local authority being able to use their own rent and capital receipts, so as a matter of principle we don’t like the idea because it goes against the point of self-financing and the point of localism, which is local decision-making,” says Taylor.

“In terms of the actual impact on the ground immediately there is very little Right to Buy happening, therefore if it was just a temporary measure for a temporary period of time, it is probably something we could live with providing we get them back eventually.

“Right to Buy receipts tend to be cyclical and at the moment there are very little Right to Buy receipts so it is not as though we would be losing a huge amount of money but later on when self financing is implemented and local authorities and ALMOs get to grips with managing their own income it could potentially dramatically affect the kind of things they can do to improve their estate.”

So what can the Government do to ease the financial burden? For many housing associations the amount of VAT that they pay is a major drain on resources, as Turner explains: “Another issue we struggle with is the VAT position of housing associations. If you are a local authority and you want to incur costs to maintain your homes or provide services, you can recover any VAT paid. However, we can’t. For example our maintenance expenditure is about £50 million to £55 million a year and 17.5 per cent of that is VAT. We could save significant sums of money if we could recover the VAT in the same way that local authorities do which could then be ploughed back into enabling us to deliver more homes.”

Williams agrees and says that the change in VAT rate from 17.5 per cent to 20 per cent next year will lead to additional costs of £250,000 per year. The lack of clarity is making it difficult for all social landlords – be they local authority, housing association or council to plan for the future.

“It is a bit like trying to look in your crystal ball at what could possibly happen and what decisions we can take now to try and get ourselves in the best possible position to mitigate the impacts of any adverse changes in the future,” says McGrath. “I think for our sake and for our funders’ sake, we would like some clarity of what the future is going to look like. Whatever they put in place we would like to see remain in place for a significant period of time rather than chopping and changing every year – consistency so we can then plan and our funders can then have some confidence in our financial projections.”

Taylor is prepared for tough times ahead but thinks that the Government has made quick decisions that haven’t been thought through. “We know we are all going to have to tighten our belts and pedal harder, and we are up for that and we can do that, but equally we need to make sure that the resources are directed in the right way, rather than such resources as are available being potentially ineffective,” she says.