Understanding the true value of your assets

Understanding the wider market context for social housing assets has been largely irrelevant in the past.

Rents and rental growth were regulated, grant funding supported the delivery of new homes, making up for the shortfall between the cost of delivering a home and the value of the future rental receipts.

Today the business environment for housing associations is very different in the wake of the reduction in rents and the impacts of welfare reform. Lower levels of grant funding and an emerging focus on the intermediate housing market as a core component of new housing delivery appears to be policy focus.

All this while the regulator pushes the sector on value for money and operational efficiencies.

Housing associations have responded through a better understanding of their assets to inform asset management decisions through net present value (NPV) modelling.

Surpluses from fixed asset disposals have doubled in the last four years. Development programmes are also expanding through redevelopment of existing estates and purchase of land in the open market.

As the sector gets more proactive around its asset base it is vital that boards and executive teams understand how their assets align to the markets in which they operate.

The imperative to understand the market context has applied to developing housing associations and their market sale and market rent programmes.

“Creating more homes with built-in flexibility will be an important feature in future”

Tracking trends in house prices, sales rates and the affordability of different tenures compared to other housing choices in a local area are essential to managing risk.

Now is a particularly important time for those developing in London where pricing, after eight years of strong growth in rents and capital values, is set for a period of re-adjustment in the face of weaker demand and affordability pressures.

An important lesson from the last cycle was that just because a tenure is called ‘affordable’ it doesn’t immediately follow that there will be a ready pool of demand, and development programmes need continued evaluation against saleability of homes.

Regional development markets are on a much stronger footing although the ‘affordability gap’ between incomes to rent and buy is smaller than in southern England, meaning tenure choices may be more constrained and require testing against the local market.

Understanding pricing levels for assets and wider housing market dynamics is no longer just a requirement of developing housing associations.

The slow move away from the ‘binary’, dispose/retain approach to asset management creates the need to consider the full range of options for assets with increasing focus on the options to keep property within the sector but via an alternative tenure.

Piecemeal disposals can also limit the ability to regenerate an area at a point in future.

The range of options available vary greatly and are largely informed by differences in capital and rental values at a localised level.

Our analysis of discounted market rent and shared ownership products shows that these tenures can play an important role enfranchising the squeezed middle who sit between social rented and outright ownership across large parts of the country whilst the registered provider retains a social asset on an optimised revenue stream.

The viability of these tenures varies across markets and within individual local authorities.

For example, based on a 40 per cent share and 75 per cent loan-to-value, shared ownership works across England, with the exception of two London local authorities, requiring an average gross income of £25,000 and deposit of £15,000.

Discounted market rent enfranchises households on similar incomes to shared ownership who are unable to afford the deposit to buy/part-buy, but at the cost of lower land values compared to shared ownership.

Where associations are regenerating areas or re-using land they already own, this viability consideration becomes less important and it enables organisations to build homes without grant and where flexibility can be built in for the future.

The potential for housing associations to broaden their housing offer to help them meet their long-term objectives is growing.

Creating more homes that have built-in flexibility to change tenures and rent levels to meet local requirements will be an important feature of business plans in future.