Southern Housing reduces development to just 250 starts a year

Earlier this week, PA Housing (which operates across London, the South East and the East Midlands, though is not a G15 member) was downgraded to BBB+ by S&P, over higher than anticipated fire safety costs.

Mr Hackett said that many of the levers that in the past were available to be pulled in tough economic times are now no longer feasible.

For example, reducing operating costs is now not feasible, given all the cost pressures the landlord is facing.

Building more for market sale is not a good option in this market either, because increasing exposure to market sale is seen as credit negative by the ratings agencies, he said.

In addition, Mr Hackett said that mega-mergers are no longer possible. This is because since 2016, there has been considerable consolidation among large providers, particularly within the G15, and once a housing association reaches a certain size it becomes much more difficult to have a merger of equal size organisations because of the impact of refinancing and the size of the exposures of lenders on both sides.

“What we need is a radical policy response,” Mr Hackett said. “And it’s not just housing associations – councils, for-profits, build-to-rent providers, are all equally affected by the impact of rising borrowing costs.

“And house builders are impacted by rising mortgage costs, depressing house prices, increased build costs – therefore, there will be a lot less Section 106 over the next few years.

“So, all of the above adds up to housing supply falling off a cliff. And in particular, the supply of affordable housing being really badly affected. So, it’s highly unlikely that the sector can achieve what the first question posed to us without radical policy changes.”

In its unaudited results for the year to 31 March, published at the start of June, Southern Housing revealed it was reducing development to build out financial resilience and focus on its existing stock.

The landlord said while remaining firm in delivering all its existing commitments, it is “significantly reducing” the rate at which it will commit to new developments.

The association said that until it sees compensating increases in grant availability across a range of housing activities, or a significant fall in land prices, it will have to move funds that were set aside for new developments to invest in its existing stock.

Speaking at the conference, Mr Hackett said that Southern Housing has to increase investment in its existing stock and this investment is non-negotiable so the provider can reduce discretionary spend.

Mr Hackett said that Southern Housing will continue offering services such as hardship funds and financial inclusion but other areas such as jobs and training programmes are probably more at risk of associations cutting.

He said: “I think there is a risk that those types of initiatives could suffer potentially. But providing jobs and training are linked to funding conditions.

“So, there are lots of potential knock-ons, there are going to be incredibly difficult decisions to be made in the boardroom.”

The regulator’s viewpoint

Speaking on the same panel, Jonathan Walters, deputy chief executive at the Regulator of Social Housing, agreed that levers will have to be pulled.

He believes there is going to have to be a broader discussion between government and the sector about how providers manage through with rents, with funding for new affordable homes and funding for retrofit.

“All of those things are part of a positive solution about how you keep housing associations continuing to build,” Mr Walters said. “I think the sector has got wired into its DNA a desire to build new homes. There are a million people on waiting lists in this country.

“So having housing associations continuing to build is an incredibly important thing. But we all know over the last sort of five, six, seven years in a world after Grenfell, the sector has had to have a really long and hard look at the quality of existing homes and how safe are they.

“How are they on the journey to zero carbon? How well are they meeting EPC [Energy Performance Certificate Band] C standards at the moment? The kind of major repairs figure in cash flows and in business plans has become much more volatile, the period from 2010 to 2019.

Mr Walters added: “The sector is still, as far as we can see, doing everything it can to protect supply, but Paul [Hackett] gave you a review with examples of some of the trade-offs that are having to be made. The sector cannot continue to build as many homes as it has built in the past and invest in stock as it has done.”

Mr Walters said that boards and senior management teams are having to make “some very difficult decisions” about their focus over the next five, 10 and 15 years. He said the regulator’s view is not that providers should focus on one thing over another.

Mr Walters said: “Beyond that there are some things that are non-negotiable, and safety is non-negotiable. Making sure you’re providing good quality homes is non-negotiable. There are lots of choices that boards have to make.

He added: “So, as the regulator we want to see boards making those choices, understanding and communicating them well, and understanding the risk.”

Mergers

Gemma Bell, partner at Devonshires, said that a lot of the conversations the law firm is having around mergers at the moment is about making decisions around resilience, rather than additionality, for the business going forward.

She said that she personally is currently working on eight mergers, meaning 16 housing associations “in quite developed conversations”.

“So, collaboration has to be one of the answers,” Ms Bell said. “I know it’s not the answer, but it has to be one of the answers.

“There are things we can undoubtedly do together.”