Government announces measures for housing and growth

HRS Review No. 35 — Finance and Development — October 2012

Mark Prisk appointed new housing minister

Editorial 2

Value for Money 4

Development 6

Treasury 8

Financial planning 9

Risk assessments for a typical association 11

2

September has seen a number of significant events

affecting the affordable housing sector, many of them

positive. In particular, the government has taken more

positive action to increase the supply of new homes. It also

appears to be viewing housing associations as part of the

solution in achieving its objectives, rather than contributing to

its problems.

The ministerial reshuffle at the beginning of

September saw Grant Shapps finally promoted from his

housing brief to become Co-Chairman of the Conservative

Party and Minister without Portfolio. On 4th September

Mark Prisk, the MP for Hertford & Stortford, became the new

Minister of State for Housing & Local Government. Two days

later it was communities secretary Eric Pickles who informed

parliament about a range of new initiatives aimed at

increasing the rate of house building, while at the same time

boosting the economy.

Although the measures included allowing developers

to renegotiate Section 106 agreements on stalled sites,

potentially reducing the delivery of affordable homes, it could

be argued that many of these developments would not have

taken place without the change. On the plus side, an

additional £300 million of capital funding will be made

available with the aim of funding a further 15,000 new

affordable homes and bringing 5,000 empty properties back

into use.

A further £200 million will be made

available to accelerate the provision of new

market rental homes, in order to start the flow

of institutional investment into this sector. In

addition, a total of £10 billion of loan

guarantees will be provided to support the

delivery of the additional affordable and

market rent properties. The announcement

also included:

• £280 million to extend the FirstBuy equity

loan scheme

• Working with local authorities and

developers to unlock large housing

developments

• Accelerating the release of surplus public

sector land.

There will also be greater pressure on local authorities to

improve the speed and quality of planning decisions, with the

threat of transferring decision making powers to the Planning

Inspectorate in cases of poor performance.

In terms of affordable housing, the government

announcement could be viewed as neutral, with units

probably lost from Section 106 agreements replaced by those

generated by the additional capital funding and loan

guarantees. The release of additional public land and the

attempt to speed up planning decisions should result in an

overall positive outcome for development in this sector.

The intervention in the market rented sector will

provide new opportunities for housing associations. Those

taking these opportunities will also need to face new risks but

we believe that, with careful management, many associations

will have the capacity to take on these risks and should be

able to use their size, profile, community links, financial

capacity and housing management expertise to make a

success of operating in this sector. A number of associations

are already doing so.

Speaking at the NHF Conference on 17th September,

the new housing minister Mark Prisk urged social landlords

to "take a leap of faith" by bidding to take advantage of these

new initiatives to build more rented homes. That doesn’t

sound like a very prudent approach to strategic risk taking,

but we would urge associations to consider the risks and

rewards of a meaningful participation in this sector.

Editorial

3

This arrangement would put the development

capacity of the landlord at risk from a reduction in the

earnings of its tenants, so would give housing associations a

direct financial interest in maximising the employment

participation rate of their tenants. While this would be a new

risk, it should be noted that this is all up side risk as

compared with the current situation since, in the worst case

scenario, the tenant returns to paying the social rent while the

association would benefit from increased income from

tenants on higher incomes.

Aside from the increase in gearing, there would be

cyclical movements in the value of the SEF as the proportion

of residents with higher earnings fluctuated with the

economy. To a certain extent, this would be balanced by

movements in the prices of land and labour, which would

affect the cost of new developments, but a large loss of jobs in

a locality could sharply reduce the value of the fund, so care

would need to be taken not to over-commit.

In conclusion, housing associations will need to take

more risk to play their part in delivering the additional homes

the country needs. There will be new mechanisms to achieve

this and the PWC / L&Q document makes an important

contribution to the debate as to how the additional capacity

may be created.

Elsewhere at the Conference, we were warned that the

economic recovery was still vulnerable and reminded that the

pain of adjustment would be felt more keenly in the north

than the south of England. One association operating

exclusively in the south east is Moat Homes, whose Chief

Executive Brian Johnson told delegates about his association’s

heavy involvement in intermediate housing, particularly low-

cost home ownership, and his ideas about making the

subsidy to affordable housing residents “pop out” when they

no longer need it. He envisaged that this would work by

requiring residents to demonstrate periodically that they

continued to require low-cost housing.

The Numbers Game: Increasing housing supply and

funding in hard times,* a report published by L&Q Group and

Price Waterhouse Coopers on 24th September is thinking

along similar lines This report said that housing supply could

be increased through the formation of a new sector,

straddling the social and market rented sectors, with greater

security and affordability for families than the existing

private rented sector. The report proposes a new funding

mechanism, the Social Equity Fund (SEF), which would

generate capacity by allowing rents to rise to 35% of net

income over ten years. The fund could be further enhanced

through full or partial sales to tenants. Rent increases could

be restricted to residents not dependent on Housing Benefit,

which would avoid increasing the welfare bill at the cost of

reducing the size of the SEF. The report sets a medium-

target of 170,000 homes per year, the highest level

achieved in recent years, but below the 240,000 homes

required to meet the formation of new households.

Taking these two ideas together, it is possible to

imagine a scenario whereby social tenants not claiming

Universal Credit would be charged the market rent but

would be able to apply for a rebate from the landlord

such that their rent did not exceed 35% of their net

income. Target Rents would continue to apply to

Universal Credit claimants so there should be no

adverse impact on the cost of welfare benefits. There

would need to be some fine-tuning to avoid a big hit on

the finances of those just outside the Universal Credit

system and a mechanism to deal with those once again

needing to claim this benefit, having been paying a

market rent (with or without rebate).

4

We believe that the approach set

out in Social hearts, business heads has

much to commend it and suggest that you

consider using this methodology as the

basis for your strategic direction on VFM.

What is not in the document (and was not

included in the presentation of the

document to the NHF Conference) is any

guidance on how to measure social value.

Among the methods we have found are

Cost-Benefit Analysis, Social Return on

Investment, Social Accounting, Cost-

effectiveness and Triple Bottom Line

Accounting.

In the standard version of the HRS

risk database, we attempt to equate

financial and non-financial impacts, so a

financial loss of between 3% and 10% of

turnover has an equivalent impact to being

put in supervision by the regulator, losing

all planned growth over the medium term

or a fairly widespread adverse effect on

tenants. The measurement of social value

would require something a little more

sophisticated than that, in order to

differentiate between different types of

positive impact, such as an improvement

in the environment and amenities on an

estate versus helping a number of tenants

back into employment. But the approach

should be kept as simple as possible, and as

understandable as possible to staff, board

members and tenants.

On 11th September, the NHF and HouseMark published

Social hearts, business heads: new thinking on VFM for housing

associations. This sets out an approach to Value for Money

(VFM) based on business effectiveness and incorporating

measures of social and other non-financial value. It is designed

to meet the latest regulatory requirements, while going further

in helping associations evaluating their value creation and with

strategic decision making, as well as driving cost reduction.

The starting point is that housing associations are social

business that exist to produce social value, which accrues from

core activities like development and housing management, as

well as “added value” activities. VFM is about optimising that

value, ensuring it is delivered economically, efficiently and

effectively. The approach requires each association to define its

social values, set objectives, allocate resources and evaluate its success in meeting

those objectives.

To achieve VFM requires an organisation to do the right things, invest in the

right assets at the right price (procurement), do things right (delivery) and evaluate

success in terms of outcomes. One of the biggest challenges is to reflect and weight

the varying value perspectives of different stakeholders, for example in choosing

between social and affordable rents or between fixed-term and lifetime tenancies.

Enabling tenants to contribute to this process will be important and boards will need

to understand the cost and anticipated value of a proposed course of action.

Measuring VFM involves assessing the business case before commencing the

activity and evaluating its effectiveness afterwards. As well as financial benefits to

the organisation, outputs may include social benefits, economic benefits (to

individuals or communities), consumer benefits (service quality) and environmental

benefits. Other options should be considered before commitment and benchmarking

undertaken for comparison with other organisations. Decision making should be

transparent and the business case for strategic decisions, including cross-subsidy and

disinvestment, understood by the board, taking account of the social value.

VFM involves having the right assets, both housing assets and operational or

human assets. The former will be controlled by your asset management strategy;

interestingly the document accepts that it may be better to dispose of properties with

a high market value but low yield and reinvest the proceeds, as recently advocated

by the Policy Exchange. The latter will involve challenging the existing delivery

model, considering outsourcing or extracting more value by selling services to

others. Effective procurement should consider the potential for added social value,

such as local employment.

The right delivery involves smart business processes, a productive workforce

and a range of effective business practices, including risk management. In all areas,

it involves being prepared to challenge how things are done.

If all of the above are in place then the right outcomes should be achieved, so

effectiveness should be evaluated by assessing whether the anticipated value been

achieved and how the organisation compares with others. A system is needed for

measuring outcomes and assessing VFM.

Value for Money

5

A positive aspect of the approach,

from our perspective, is that it runs

through the organisation’s business

strategy, forming an integral part of the

corporate plan, with no requirement for a

separate strategy on VFM. It would be a

good test of your current business plan to

see if it provides the information on

inputs, outputs and outcomes that would

enable the new VFM approach to be used.

Value may be measured in various ways. In addition to financial measures,

social and economic value may be measured by improvements in quality of life, such

as the number of people moving into employment, while environmental value could

take account of the impact on fuel poverty. Consumer value would be based on

performance indicators and satisfaction levels. The organisation must also measure

return on assets. In terms of physical assets, an appendix written by Savills suggests

that properties should be valued on a vacant possession or market rent basis when

making asset management decisions, which would increase the rate of disposals.

The production of a VFM self-assessment has become a regulatory

requirement but is also provides the opportunity for the sector to document and

publicise how it creates and maximises social value. It should evaluate the success of

the organisation in delivering its strategy and mission, not only cost reduction and

efficiency improvements. It should include the following components:

• Definition of VFM in context of your purpose and objectives

• Strategic approach to VFM and the use of resources, including the relationship

to the business plan and other key strategies such as procurement, the

involvement of tenants and the board in developing the approach and the

business case for your mix of activities, resources and planned outcomes.

• Delivery arrangements for VFM, incorporating governance, performance

management, financial stewardship and the adoption of good practice.

• Achievements against the plan, for both physical and operational assets, taking

account of costs, efficiency gains, value created and performance improvements,

highlighting weaknesses as well as strengths, as

learning for the future.

• Future plans, incorporating the business case for

addressing specific areas of VFM and the planned

additional value to be created.

• Assurance, including the information gained by the

organisation on its VFM performance and the

challenge provided by the board, tenants and third

parties.

One way in which housing associations may

reduce costs is through outsourcing or sharing services

with other organisations but until recently this route

had been affected by the requirement to pay VAT on

the cost of the externally-provided services. On 29th

August, HM Revenue and Customs published

guidance* on the VAT Cost Sharing Exemption, under

which housing associations may be able to achieve

exemption from VAT on the labour element of

outsourced services, through the use of a cost-sharing

group. The guidance applies from 17th July, so

landlords may move ahead straight away with plans to

set up the appropriate structures to obtain exemption.

In terms of recent performance on the delivery of new affordable homes, it is

widely recognised that levels are much reduced and overall housing supply is way

below that required to keep up with the formation of new households. According to

figures* from the DCLG, housing starts in the second quarter of 2012 were down

23% on previous quarter to 3,080, while the latest data from NHBC,* released on 24th

August, showed that public sector registrations for the quarter ending July were

down 42% on 2011 at 7,377. As previously reported, there is also concern that the

Affordable Homes Programme (AHP) will not be completed as planned by 2015;

only 20% of the HCA programme (which excludes London) was confirmed as ready

to start on site by the beginning of August.

In response to this, both the HCA and the Greater London Authority (GLA)

have been reported to be discussing with providers their ability to deliver the current

programme and their capacity to deliver additional units if others were failing. Both

bodies have also introduced incentives for developers to bring forward the

development of new homes into the current financial year, with the HCA offering

50% and the GLA 75% of grant at start-on-site for each home started in 2012/13.

The volume of new house-building, in particular affordable housing, has

become a more important political issue over recent months. The proposals in the

Montague report to release developers from their obligation to provide affordable

housing were criticised by the G15 group of London-based housing associations on

the grounds that private housing is particularly unaffordable in London.

After a battle, Section 106 agreements are set to remain under the latest

proposals, although existing agreements may be renegotiated, reducing or removing

the affordable housing, in order to incentivise developers to proceed with schemes.

The ability to renegotiate these agreements was criticised in some quarters. Kate

Henderson of the Town & Country Planning Association said that bypassing local

authorities could lead to local communities being marginalised, while Simon Dow of

the Guinness Partnership predicted that his organisation’s development programme,

42% of which is dependent on Section 106, would be disrupted.

A different way to fund the development of new affordable housing was set

out in a Policy Exchange report, Ending Expensive Social Tenancies: Fairness, higher

growth and more homes,* which called for high value social housing units to be sold

when they become void in order to fund the development of more units in lower

value areas. Interestingly, the concept received some support in the recent NHF

publication on value for money, although not for the scale envisaged by the think

tank. The report’s author, Alex Morton, later called for housing to be given its own

government department, saying that the DLCG “doesn’t exist to build homes.”

Provided that the development

capacity is available, the agreement to pay

a significant proportion of the grant much

earlier in the process is a significant cash

flow incentive, which associations should

use to their benefit.

The effect of the government

announcements on 6th September (see

page 2) are to transfer the conduit for a

good proportion of new affordable housing

from Section 106 to grant funding. This

will benefit those associations already in a

contractual relationship with the HCA so

organisations not currently part of a

contracted consortium should consider

joining one.

Many housing associations have

been disposing of units on an individual

basis where the overall value in the private

market exceeded the value (including

social value) to the association. A specific

example in the VFM document described

above would lead to the same course of

action. But this is not the same as a

blanket policy of disinvestment from high

value areas, which might reduce the

opportunities for low-paid workers to live

close to their work, putting pressure on an

already over-stretched transport system.

A balanced approach is needed, taking

account of the benefit to the wider

community of having affordable housing

in more expensive areas. Your policy in

the end will depend on the extent to which

you value that benefit.

6

Development

Much of the government’s recent attempts to increase housing supply have

centred around reform of the planning system. A possible future reform was

proposed in a paper* issued by the Infrastructure Forum in August. Compensating for

Development: How to unblock Britain’s town and country planning system proposed that

those affected by proposed developments should receive compensation, in order to

reduce objections to planning applications, as already takes place in Holland.

Liberal Democrat MP and then DCLG Minister, Andrew Stunell got involved

in the debate when he said that the protection of the green belt was part of the

Coalition Agreement. He then lost his job in the ministerial reshuffle at the

beginning of September as his party issued a policy paper,* setting a target of 300,000

new homes per year.

Housing associations have been responding to the changing political

environment both individually and collectively. In August, it was reported that a

number of associations in the north of England were revising their development

plans to build a greater proportion of smaller properties because of under-occupancy

penalty. Meanwhile, a Smith Institute report,* seeking to address the low level of

funding from the AHP in the East Midlands, noted that no large housing association

was based in the region and recommended that associations should engage in

greater collaboration between themselves and with private house builders. In

response, a group of eight local authorities in the region established a task force with

the aim improving the funding position and working with housing associations to

maximise the number of new homes built without grant.

At the individual level, the Guinness Partnership completed the merger of

four subsidiaries into a single association in July. This had the benefit of releasing

additional borrowing capacity, enabling it to deliver its AHP commitments without a

further bond issue. Moving in a different direction, following merger with Chester

& District Housing Trust, Cosmopolitan reduced its HCA programme, from 1,058

units to 699, foregoing around £7 million in grant, in order to focus on maintaining

services for existing tenants.

In addition to the many strategic risks associated with the development

process, there are also compliance risks. In August it was reported that Swan

Housing Group had returned some grant payments to the HCA and suspended

three members of staff after an investigation alleged that staff “had deliberately

subverted the operating system” in order to claim grant early. This was said to be to

meet internal targets rather than for personal gain and no public money had been

misused.

Your community through a lens

7

Further reforms to the planning

system could help to accelerate supply but,

as a couple of speakers at the NHF

Conference identified, a sticking point is

that the public do not trust developers to

create a quality community. The

implications include a need to provide

appropriate designs and quality standards

on new developments by housing

associations and for an appropriate choice

of tenants to be made, thus ensuring that

the quality of neighbourhoods is protected.

It appears from the Smith Institute

report that the presence of one or more

large housing associations in a region

brings expertise and lobbying power that

can help to lever in investment from

external organisations. Going forward

these organisations are likely to include

institutional investors as well as

government agencies. Where no large

association is in existence, the small and

medium-sized players must act collectively

to maximise the benefit to their area.

Depending on your geography and

culture, it may be a valid strategy to

reduce the size of your development

programme. But given the recent low

volume of delivery and opportunities now

available, we would expect many to be

seeking to increase their programmes.

At your next scheduled

development audit, it would be worthwhile

checking that grant claims have been made

properly and on a timely basis, neither too

early or too late.

8

Housing associations now generally include a section on risk in their

financial statements and these are likely to acknowledge that treasury remains a key

risk area for the sector. As an example, Affinity Sutton’s 2011/12 accounts* identified

the following among their significant risks:

• Higher levels of debt due to participation in the Affordable Rent programme

• A fall in property market causing impairment, loss of sales income and

ultimately breach of covenants

• Difficulties accessing new funding and the possible re-pricing of existing loans.

In terms of the cost of existing finance, the base rate remains at 0.5% and the

median forecast from HM Treasury’s latest comparison of independent forecasts* is

for it to remain at this level until at least the end of next year, rising to 0.85% in 2014,

1.90% in 2015 and 2.84% in 2016.

Turning to the actual rates paid by housing associations, 3-month LIBOR

continued to fall throughout the last quarter, down from 0.89% at beginning of July

to 0.74% at beginning of August and 0.68% at beginning of September. On the other

hand, longer term rates have begun to rise. Between 23rd July and 23rd August, the

10-year swap rate rose from 1.85% to 2.10% and the 10-year gilt yield rose from

1.42% to 1.60%, while the 30-year gilt yield, a benchmark for many housing

association bond issues, rose from 2.86% to 2.99%.

This increase should help to reverse the position during the quarter to June

where, according to the latest HCA quarterly survey,* the total sector mark-to-

market exposure on free-standing derivatives rose from £1.1 billion to £1.4 billion.

The margins paid by associations above the gilt are currently of the order of

2% but could be reduced dramatically after the government announced on 6th

September that it would issue a debt guarantee for up to £10 billion to support the

delivery of new rental homes. The DCLG later clarified that “These new offers are

not available to fund the building of homes already committed to through existing

government schemes, or to refinance existing debt.” The guarantees could have the

unintended effect of reducing demand from some existing investors, with Georg

Grodzki of Legal & General commenting that his organisation might look elsewhere

to invest, adding that if it wanted to buy government debt it would buy gilts.

Meanwhile, it is thought that an aggregator, such as THFC, could be used to bring

the debt of smaller associations to market.

According to the latest HCA quarterly survey, new loan facilities in the

quarter to June totalled £1.7 billion, of which £1.5 billion came from the bond

markets. Details of the capital market deals reported in the last quarter are set out in

the table below. All £50 million of the Raglan issue was placed with the Pension

Insurance Corporation, making it the first housing association to raise credit through

the issuance of a bond gained from an independent bulk annuity provider.

The capital markets have become a

more flexible provider of funds in recent

times, with associations able to seek

smaller tranches of funding either through

private placements or by retaining a

proportion of their own bonds at the point

of issue. These may then be sold on at a

future date, during which time the yield

will have moved up or down. In the case

of Genesis, the movement was in their

favour, enabling them to net an additional

£5 million above the face value of the

reserved bonds. However, given that gilt

rates are currently very low, there is a

strong possibility that bond yields may

rise over the next couple of years, thus

reducing the value of retained bonds. If

considering following this approach, you

should check the impact on profitability

and loan covenants of a reduction in the

value of these bonds (e.g. following a rise

in interest rates) and whether there would

be any implications for loan covenant

compliance arising from movements in the

value of these retained bonds.

Treasury

Association Issue date Amount

raised

Term Rating Yield Notes

East Thames 15th June £250m 30 years Aa3 5.486% £106.5m used to repay existing bank debt

Genesis 26th July £55m 27 years A1 5.31% Sale of reserve bonds, £50m face value

Midland Heart 13th September £100m 32 years Aa2 5.087% £50m retained for future issue

Raglan 18th September £50m 30 years Aa2 5.034% £50m retained for future issue

2012 Bond issuance is likely to exceed

the RBS forecast made in May

9

The comments of Alison Cambage

on the attitude of US investors illustrates

the need to balance risk taking with risk

capacity in your corporate plan, and to

have a clear narrative as to how your risks

will be managed. If lenders / investors

perceive a higher level of risk than they are

comfortable with, the cost of borrowing

will be higher and financial capacity

eroded. On the other hand an unambitious

plan with lots of spare capacity may not

achieve as much social benefits as a plan

including the provision of new affordable

homes.

Further club bond deals may be expected in the not too distant future,

following the achievement of a credit rating by GB Social Housing. Standard &

Poor’s awarded the company an A rating. This is worse than the A+ rating of its

existing competitor THFC, although the agency commented that GBSH would be

able to meet demand for more flexible covenant structures.

In HRS Review 34, we reported on two private placement deals, one of which

raised £61 million for Bromford Housing Group. Commenting on the deal in Social

Housing, Bromford’s Alison Cambage said that US investors were taking a “wait and

see” attitude towards investing in UK housing associations because of uncertainty

over regulation and welfare reform.

Another potential source of funding for affordable housing in the Real Estate

Investment Trust (REIT), with the government recently consulting on changes to the

regime to make this sector more attractive to investors. However, Adrian Joliffe of

David Tolson Partnerships commented in Social Housing that it would be difficult to

attract investors to a social housing REIT because yields would be only of the order

of 2.5%, rather less than that achievable through bond financing.

In attempting to gauge the housing

market risk, we look at six different

indices and it can be confusing to

differentiate between them or to determine

whether the market is actually rising or

falling. When using the indices, you

should note the different areas of coverage

and that the mean house price used by the

first two indices in our table may be

skewed by the inclusion of some very

expensive properties, while the

“standardised” approach involves tracking changes to the index for one or more

archetypal homes. The Halifax and Nationwide indices only involve properties on

which they are providing mortgages, so exclude cash purchases, while all headline

national figures obscure significant regional variations.

Some of the indices include regional data, which demonstrate these

variations. According to the Hometrack figures for August, an average time for a

property to be on the market varied from 5.4 weeks in London to 12.7 weeks in the

East Midlands. The ONS data showed that prices rose in 8 of the 9 English regions

over the year to June, with London growing at 6.5% to £392,000 while prices in the

North East fell by 1.3% to £144,000. Similarly, the Land Registry found a 6.5%

increase over the year to July for Greater London to £367,785, while average prices

fell in the North West by 3.9% to £109,235 and in the North East by 3.8% to £98,557.

Source To end

of

Coverage Basis Value Annual

change

ONS June England Mean £240,000 +2.8%

LSL / Acadametrics July England & Wales Mean £225,769 +3.2%

Land Registry July England & Wales Standardised £162,900 +0.3%

Hometrack August England & Wales Standardised - -0.5%

Halifax August UK Standardised £160,256 -0.9%

Nationwide August UK Standardised £164,729 -0.7%

Financial planning

10

As well as regional differences, there are also variations in the level of activity

in different segments of the market, with the LSL / Acadametrics report commenting

that “Much of the buyer activity is being driven by the top end of the market”,

adding “Unlocking the lower tier of the housing market remains key to seeing

volume recovery and much rests on the success of the Funding for Lending Scheme

and traction of the NewBuy initiative.” The New Buy product itself was boosted by

a 1% cut in interest rates by NatWest (RBS) to between 4.49% and 4.79%.

A different measure of housing market performance is provided by the RICS

UK housing market survey, which produces a score by comparing the percentage of

surveyors reporting rising and falling prices. The overall figure for England & Wales

improved from –23 to –19 in the quarter to August, although the balance varied from

+17 in London to –44 in the West Midlands and East Anglia. Respondents to the

survey are hopeful that the “combination of a more stable economy and an

improvement in the funding climate” will increase activity, although London is the

only area where prices are expected to rise.

At the end of June, the number of unsold affordable home ownership (AHO)

properties was 4,170, almost unchanged on the March figure, although those unsold

for more than six months increased by 15% from 1,306 to 1,500. The HCA’s quarterly

survey also revealed that the pipeline of AHO properties for the next eighteen

months had risen slightly from 13,050 to 13,185. After a spike in the previous

quarter, total asset sales fell back to £393 million, producing a surplus of £85 million.

The generally weak housing market is reducing the impact of the increase in

the discounts available for Right to Buy. On 23rd July, Grant Shapps launched a new

call centre and website to provide social tenants with advice and information about

the scheme. In a policy paper* published in August, the Liberal Democrats proposed

allowing local authorities to vary discounts according to local need and to retain all

the proceeds for investment in affordable housing. More recently, Conservative-

controlled Wandsworth Council lobbied the government for the discount to be given

in the form of a deposit in order to increase demand. For the moment, demand

remains suppressed with Inside Housing reporting only a 4% conversion rate from

enquiries to completions in the last six months.

It is tempting to assess the state of

the housing market on the higher indices

in the table on page 9. However, these

tend to be inflated by a relatively small

number of very high-priced properties in

London bought by foreign investors. The

market for LCHO properties is likely to

bear a much closer relationship with the

indices using the “standardised” approach.

Your strategy for taking sales risk

should take account of national and

regional trends, but also of the market in

the specific location in which you intend to

develop and for the particular property

types you are planning to build.

Given the current economic

conditions, with house prices falling

slowly in many areas, it is unlikely that

there will be a huge increase in the volume

of Right to Buy transactions in the next

couple of years. If current plans provide

an increase in supply, this would have a

deflating effect on prices so this issue may

not become the risk that it was once

thought to be.

The selling of expertise and excess

capacity to third parties is another possible

way to generate additional income which

can be used for social benefit. This is likely

to increase across the sector, while changes

to the tax rules on cost sharing provide

further opportunities in this area. Once

again, you need to be clear about your

products and markets, ensuring that any

such move is within your risk capacity and

tolerance, before commitment.

Graph taken from Brian Green’s blog*

11

The top two risks for a typical

association remain unchanged; rent

collection remains high due to the impact

of welfare reforms, while an unforeseen

change in the external environment

remains a possibility, with the economy

still fragile and the government struggling

in its attempts to reduce the deficit.

The next risks in line cover the

areas of pension contributions, the

financial performance of providing care /

support services and the compliance with

loan covenants, which has a very low

probability but potentially disastrous

impact.

The remainder of the high-level

risk schedule for a typical association

includes:

• Disaster affecting the housing stock

(further flooding incidents have taken

place)

• Neighbourhood decline

• Efficiency / Value for Money

• Health and Safety

• Use of assets to meet social need

• Governance

• Strategic direction

• The availability and cost of additional

finance.

We have made only a small number of changes to the assessments of the

existing risks this quarter but have added a couple of new risks to the standard risk

map, while amalgamating some others to maintain the size of the risk map at a

reasonable level.

In the category of Business Continuity, we have incorporated HRS Risk 7,

regarding the inability of a significant proportion of the working population to

attend work into HRS Risk 5 regarding disasters affecting key office buildings. The

new HRS Risk 5 now refers to the inability to maintain continuity of service.

The changes in the Development category include the amalgamation of HRS

Risk 15 regarding compliance with HCA contractual requirements into HRS Risk 13,

which covers delivery of the current programme, and whose name has now been

amended to incorporate contract compliance. In addition, a new risk has been added

(HRS Risk 16) to cover the risk of failure to deliver regeneration schemes on time and

within agreed resources. This has been evaluated at the same level as development

scheme delivery at present, although the specifics will depend on your particular

exposure to regeneration projects.

In the Income Planning & Performance area, the rent collection risk (HRS

Risk 37) was recently increased due to the impact of welfare reform. We have now

increased the impact of HRS Risk 38, relating to service charge recovery, because of

the trend towards a narrower definition of service charges eligible to be covered by

Universal Credit.

With regard to Leadership and Governance, we have added HRS Risk 56 to

this category, covering the failure to maximise the benefit of the organisation's assets

and other resources to meet housing and other social need. This issue was discussed

in the Editorial for HRS Review 33 and relates to maximising the generation of social

value. HRS Risk 61 regarding the effectiveness of risk management has been

incorporated into HRS Risk 60, covering the appropriateness of strategic direction,

and HRS Risk 57 on the effectiveness of governance.

The final change is a reduction in the impact assessment for HRS Risk 64,

regarding the financial performance of new business. This takes account of the fact

that new business in intermediate / market renting was moved into a separate risk

(HRS Risk 91) in March.

Changes to the standard sector risk assessments

Risk ID

Risk Name Before

After P I T P I T

5 Failure to prevent or recover quickly and effectively from disasters affecting

maintain the continuity of service from key office buildings

2 4 6 2 4 6

7 Significant proportion of working population unable to attend work 1 3 4 0 0 0

13 Failure to deliver the planned development programme, achieving compliance with contractual requirements and relevant standards, within agreed resources

3 3 6 3 3 6

15 Material failure to comply with the terms of the Delivery Agreement with the

HCA

2 3 5 0 0 0

16 Failure to deliver physical regeneration projects on time and within agreed net resources

0 0 0 3 3 6

38 Service charge recovery rate less than planned 3 2 5 3 3 6

56 Failure to maximise the benefit of the organisation's assets and other resources to

meet housing and other social need

0 0 0 2 4 6

61 Lack of a robust and effective risk management framework 2 4 6 0 0 0

64 Failure of new business activities to make the planned financial contribution to the business

3 3 6 3 2 5

Hargreaves Risk and Strategy

48 Broomfield Avenue

London

N13 4JN

Email:

John Hargreaves: j.hargreaves@HargreavesRS.co.uk

Chris Mansfield: c.mansfield@HargreavesRS.co.uk

Sharron Preston: s.preston@HargreavesRS.co.uk

Website: www.HargreavesRS.co.uk

Strategic choices for future development

• Social rent—based on the Target Rent regime; no grant currently available but could be provided using

cross-subsidy from sales.

• Affordable Rent—at up to 80% of the market rent, although a lower percentage may be necessary to

remain affordable in London; some additional grant now available to organisations with an HCA contract;

Section 106 remains but likely to be very restricted in the current climate.

• Flexible rent—would begin on an Affordable Rent but would automatically increase to the market rent

after a fixed period unless the tenant could demonstrate a requirement for continued subsidy; a rebate

could apply to maintain the rent within specified affordability limits, e.g. 35% of net income.

• Intermediate / sub-market rent—at similar rent levels to the Affordable Rent product but developed

without grant outside the HCA framework; it may be possible to fund the lower rent levels through

efficiency / economies of scale, giving the landlord a competitive advantage over private landlords.

• Market rent—considerable government support now available, including loan guarantees; this product

would help to bridge the shortfall between current rates of house-building and the number of new

households being created; more flexibility over allocations and rent levels than the subsidised products.

• Rent to HomeBuy—beginning on similar terms to the flexible rent product, this would give the tenant the

option to buy after a fixed period; they would be expected to save for a deposit during this time and could

lose future subsidy if they don’t purchase when they are able to.

• Shared ownership—selling an initial tranche according to the financial circumstances of the residents;

staircasing currently at low levels due to the weak housing market, the terms may need to be amended to

require the purchase of further shares if they are affordable; mortgages available but limited.

• Outright sale—used to generate subsidy for other products and to produce mixed communities; at

greatest risk from changes in the housing market so choice of locality and property type is crucial.