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Clarion CFO: we have to be self-reliant

News26 Jul 2019Luke Cross

Stability and social purpose have been front and centre for Clarion’s chief financial officer since he joined the UK’s largest social landlord.

Mark Hattersley, chief financial officer at Clarion

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Clarion focuses on stability and social purpose in another year of change, as it plans for 80% of new build to be affordable and drops major drive into ‘build-to-rent’ #ukhousing #socialhousingfinance

Mark Hattersley concedes that the 124,333-home group has fallen behind on its new build plans, but tells Social Housing: “I’ve now got confidence that we’re absolutely on the trajectory of delivery. It’s the start of a journey now where we’ll ramp up quickly.”

The group’s ambition to deliver 5,000 new homes per annum – of which 80 per cent will be ‘affordable’, including shared ownership – is likely to “take a few years”, he says.

The group released its 2018/19 financial results today (26 July 2019), confirming that it completed 1,243 homes in 2018/19 – of which 94 per cent were affordable – and made 2,663 starts.

Mr Hattersley – who joined the group from Sovereign and started at Clarion earlier this year – does not envisage the profile of the organisation changing significantly in the years ahead, and rejects the suggestion of Clarion becoming more like a house builder.

“Yes, we are going to do more development activity – but what I can see at Clarion is the primary driver here is our social purpose.”

He says the group has 110,000 social homes and 360,000 residents who “rely on us for homes as security”, adding that a major drive into sales is “not in our genes, make-up or strategy”.

Clarion’s sales income will not rise above 40 per cent, of which the majority will be shared ownership, he says.

“Yes, we are going to do more development activity – but what I can see at Clarion is the primary driver here is our social purpose”

Mr Hattersley adds that a ‘differentiator’ for Clarion is that it is not a London-centric, premium house builder, but a national developer targeting the mid-market, which means building at anywhere between £200 and £800 per square foot rather than £1,000 per square foot in the capital.

The CFO also points to the £12m invested in its charitable foundation Clarion Futures in the year, one of the country’s biggest jobs and training providers that has helped 4,000 people into work.

“We don’t shout about that enough, and that means we don’t get the credit for it and it becomes quite easy to knock us.”

So who is the ‘social purpose’ message aimed at?

“[The message is] to residents in terms of support, to politicians in terms of how they see HAs and to the sector in terms of ‘let’s raise the bar on how we talk about ourselves’.”

When it comes to a new government, Mr Hattersley says he naturally backs recent calls for billions of pounds of capital grant funding from both the Greater London Authority and National Housing Federation, but that HAs also need to be able to stand alone.

“We have to be self-reliant – and we are and we will be. However, that will not meet the ultimate need of the country in terms of social or affordable housing or subsidised housing of some form.

“We will do our bit. What we’d like to do is do more, and that means we’d need more grant funding of some form.

“If you give me more grant I can convert more of that provision to social rent or I can do more, and that’s the choice we have.”

One particular area of stabilising the group has been the continued focus on its repairs services.
Legacy problems with Circle’s repairs services, which had resulted in a non-compliant governance rating from the Regulator of Social Housing, had continued following its merger with Affinity Sutton in 2016, when Clarion was created.

In-house company Clarion Response now provides repairs to more than 90,000 homes across its regions, completing over 1,000 jobs a day, with 600 members of staff.

The in-sourcing follows the same approach as Mr Hattersley’s former HA, Sovereign, which it called Sovereign Response.

“Organisations our size will make mistakes and you will find people who have had a bad experience – that’s regrettable and we want to improve”

The group reports that during the year, 97.4 per cent of responsive routine repairs were completed on time, and 89.4 per cent of residents were satisfied. The annual report describes an “exemplary” repairs service.

Mr Hattersley says: “I’m a real advocate of in-sourcing core maintenance services; there’s a financial efficiency to be delivered but 50 per cent of the benefit is about having our staff going into our properties.”

Mr Hattersley says that the group is “far from perfect”, but that its reputation has been “much improved”.

“Organisations our size will make mistakes and you will find people who have had a bad experience – that’s regrettable and we want to improve.

“That’s not what we aspire to but it’s not representative of 99 per cent of the service.”

In terms of the wider efficiency across the group, Clarion’s operating cost per unit was £4,441 in 2019, with plans to reduce this to a target of £4,000 per unit, which would take it more in line with Affinity Sutton’s pre-merger level.

The CFO says it will take “a few years to get there” and may well be impacted by the post-Grenfell landscape, resident focus and what results from the ongoing government reviews.

The group reported £12m of savings in the year. Pre-merger, Affinity Sutton had planned to deliver £12m in savings by the end of 2020, while Circle planned £46m by full-year 2019.

“Yes it will [exceed it]. But time moves on and the world changes – the savings target at one time doesn’t always reflect the changing need.”

Another major part of the integration story is the transition to its new enterprise resource planning (ERP) systems.

Phase one of the ERP integration focused on what was the Affinity Sutton side of the business, but saw a “challenging few months where service levels took a dip”, which meant investing more time and money. The change in rent collection resulted in a £4m rise in bad debts to £8.7m, and arrears reached 4.8 per cent against a target of four per cent (as a percentage of social housing rents) and required a system redesign.

Mr Hattersley says it may take another 12 to 24 months to get the ERP systems in line, and that while it has been a big investment, it was “the right thing to do”.

“That [then] gets us onto a single platform and we can start leveraging benefits.”

Investing in safety

Clarion continues to work to a £60m budget for remedial works and safety costs, with a £20m spend in the 2019 financial year.

That overall plan includes works already done on 42 buildings with more than 10 storeys, and 153 buildings taller than six storeys; and fire safety work at 550 sheltered accommodation and supported living sites and street properties.

While Mr Hattersley says sprinklers would be expected in new build towers, the group is not committing to installing sprinklers on all existing blocks, but is being “pre-emptive” in its approach.

It has been piloting a misting system at a sheltered housing scheme.

“This is not £60m correcting major faults and problems with stock. There were some areas where we had to step in and improve things, but much of this is about getting ahead.

“There’s a danger in getting ahead, because you have to make sure you do the right things.”

There is no plan to retrofit sprinklers in existing tower blocks, which he says would mean “committing tens of millions of pounds at this point in time when we’re not sure what the requirements will be”.

“This is not about an unwillingness to invest, but it’s about making sensible investment decisions while always mindful of the risk to residents.

“We don’t believe we are putting residents at undue risk – they are our priority.”

Ramping up development

Mr Hattersley concedes that Clarion’s new build performance in the year is “not a great number for the size of our organisation”, but he says it is now the start of a ramping-up of what Clarion has been talking about for some time.

That could mean 2,000 completions this year, pushing up to 3,000 in 2020 – subject to market conditions. It also has £2.6bn of regeneration schemes in the mix.

“The move from Section 106 to land-led [development] is a big change and either you do it quickly and probably regret it at your peril – we could have thrown lots of money at it, bought lots of land and be regretting it now.

“What we did instead is took our time to build a team and took it easier in terms of development and land acquisition – what that means is we are a bit behind where we wanted to be.”

Land-led means more of a focus on placemaking and taking more control of design and quality, he adds.

“We don’t believe we are putting residents at undue risk – they are our priority”

Joint ventures – which in financial terms saw a swing from a deficit in 2018 to a £13m surplus in 2019 – will play a part, but based around “better partnerships and relationships with a smaller set of partners”.

That means having a 50/50 say and not being seen as a ‘funding partner’, as some HAs have in the past.

Clarion’s development division, Latimer, while mainly funded by loans from the group, has done its first project finance with plans for it to raise its own finance and reduce reliance on group, so it becomes more ringfenced.

However, the group is now pulling back from plans to create a 3,000-home build-to-rent portfolio worth £800m, which it announced in April 2018.

Mr Hattersley says build-to-rent works as long-term investment by tying up significant capital and requiring critical mass to make it work efficiently – meaning thousands of units.

While it is still likely to feature in mixed-tenure schemes, he said it has been reviewed against the business priorities with a view that it is not a prime focus.

“There is a shorter to medium-term need for us to focus on,” he adds.