Leap of faith? Or act of folly?

Housebuilders had better watch out. Registered social landlords are getting bigger and with their size comes a new assertiveness and sharper commercial nous. Now they’re even beating housebuilders to prime mixed-use regeneration sites.

The UK’s biggest registered social landlord, Places for People Group, has recently outbid volume housebuilders for English Partnerships’ Central MK site in Milton Keynes. And PfP is unlikely to be the only big bidder from the affordable sector. The merger between Metropolitan Housing Trust and Hyde Group is expected to create another major player when it goes through later this year. Hyde and Metropolitan are already taking the lead respectively on the regeneration of the South Kilburn and Clapham Park estates in London. It is a trend that housing minister Yvette Cooper and London mayor Ken Livingstone are keen to encourage, which may explain why housing associations appeared to be thicker on the ground than housebuilders at the Mipim property show in Cannes in March. So just what’s in it for housing associations and do they risk stretching themselves too far?

In recent years, associations have tended to be the junior partner on development projects, sometimes forming joint ventures with developers. But leading property agents, several of which have recently recruited ex-housing association staff as executives, report that RSLs have begun to adopt a more aggressive approach over the past year. Adam Pappini, associate director of Drivers Jonas, says: “We are seeing RSLs being incredibly competitive with the private market.” Outside central London, he says, RSLs are able to compete, especially in places where they have a long track record developing and working with the local authority. John Foddy, residential development partner at King Sturge, agrees: “We are seeing more activity by large housing associations looking to compete head to head for mixed-use regeneration sites.”

In taking on these mixed-use sites, housing associations are becoming providers of housing of all tenures, notably market sale. So far, most associations are just dipping their toes in the private market waters. Groups such as Southern, Circle Anglia, Notting Hill Housing Group (see box, page 16) and Family Mosaic plan to carry out about 200 sales a year, in small to medium-sized mixed-tenure schemes. Generally, the proceeds from these homes are used to cross-subsidise the provision of social housing.

But some housing associations have already discovered the downside of property speculation. While the number of homes for rent produced by housing associations has remained fairly static over the past decade, the number of low-cost home ownership units has quadrupled, giving the affordable sector a taste of the market dynamic. Many housing association shared-ownership schemes have been bedevilled by slow sales, although this is more likely to stem from the complex eligibility criteria for the initiative than lack of marketing nous on the part of the RSLs.

Aping the private sector beast

The most nakedly aggressive stance has been taken by PfP. Its development director David Shaw, who was a regional director for Beazer Homes before joining PfP, is one of a number of former housebuilder executives who have moved into the RSL sector. He is unapologetic about the way he sees PfP developing into a much more private sector beast. “Two-thirds of our output will be homeownership of all sorts. There will be other products coming to the market. One third will be for outright sale, one third for wider forms of low-cost homeownership and the balance will be market rent or social housing.”

Cross-subsidy is the name of the game

Any RSL would be foolish to strike out alone on the basis
of their experience of development

Roger Humber, Circle Anglia

Shaw admits that one factor driving PfP down this route is the pressure from the Housing Corporation to reduce grants. The average level of grant per unit is set to drop by about 30% by 2008, compared with 2005.

Rent controls mean that associations are constrained in the extra income they can generate, while many of their assets are difficult to liquidate because tenants are living in them. That leaves cross-subsidy from private housing as the prime source of income, but that exposes housing associations to the vagaries of a market that at the moment is looking far from stable. “More and more RSLs are having to cross-subsidise their traditional social rented. You have to do that because there isn’t enough grant around,” says Roger Humber, vice-chair of Circle Anglia.

Associations have also been driven to take a more acquisitive approach by the corporation’s recently introduced partnering arrangements. The corporation is much more interested in giving grants to RSLs able to demonstrate that they can deliver sites, which makes it important to build up land banks.

The increasingly mixed-tenure nature of residential development is another reason why associations are able to compete with the private sector. Drivers Jonas’s Pappini says: “Planning policy for private-led development requires greater and greater chunks of affordable housing. Private developers could be required to provide 50%, while RLSs can give 100% and get grant. The equalisation of the E E market works in favour of RSLs.”

Ian Perry, chief executive of Harvest Housing Group, believes that associations are often best qualified to deliver a mix of tenures, including housing for sale: “We don’t have an advantage on price, but we understand the needs of the whole neighbourhood. The developer looks at the site and seeks to maximise the return on

the piece of land they have bought.”

RSLs’ financial clout

And, operating on an increasingly level playing field, associations have a number of business advantages. They can, for example, borrow money more cheaply than their private sector counterparts: 30 points above the base rate compared to 120 points.

We don’t have an advantage on price, but we understand the needs of the whole neighbourhood

Ian Perry, Harvest Housing

Pappini says: “RSLs have greater capital than any housebuilder. They are sitting on up to £3bn-4bn worth of assets, much of which is unsecured, and they have the ability to borrow hundreds of millions of pounds. RSLs can borrow as cheaply as the government and cheaper than any of the housebuilders of whatever size and they are not looking to make any money out of it. They don’t have the same profit requirement as the private sector: their margins are lower and they take a longer-term view.” As a result, while private housebuilders will be seeking margins of 20 to 25%, the not-for-profit RSLs typically will be looking for 8-10%, which aids the bidding process.

Housebuilders’ experience counts

However, housebuilders hold a few cards, too. Alan Cherry, chairman of Countryside Properties, says: “When people have tried in the past, it has taken years for them to get the experience in planning and designing and how to structure cashflow and control costs.”

Volume housebuilders generally achieve lower procurement costs, which stem from economies of scale. Even a social housing behemoth like PfP remains a minnow compared to the 22,000 homes a year being contemplated by the likes of the merged Taylor Wimpey.

Cherry believes housing associations and housebuilders should continue to work in partnership. “We have built up very successful relationships with RSLs. We don’t want to harm that and the RSLs don’t want to harm it. We get the RSLs’ experience and competence and they get our commercial experience.” And he warns the RSLs to tread carefully. “RSLs may take on risks that they don’t fully understand.”

Humber agrees: “Developers and RSLs deal with fundamentally different kinds of risk. RSLs have a stable rent, and the calculations that you have to do for viability for social housing are relatively simple compared to the assessments that you have to do for rates of sale. Any RSL would be foolish to strike out alone on the basis of their experience of development. RSLs should not go out and become private developers.”

Professor Steve Hilditch, who has drafted the Greater London Authority’s soon to be launched housing strategy for Ken Livingstone, says associations should not be deflected from their core task of providing affordable housing. “If they are building for sale, that’s fine as long as it’s not excluding the possibility of providing affordable housing by using up their borrowing.”

Shaw is confident that PfP, at least, is prepared for the new environment: “We have been doing housing for sale for quite a long time. If we were a straightforward RSL, it would be completely different. A lot of the people that work here come from commercial development.”

But Brendan Sarsfield, chief executive of Family Mosaic, is more cautious. “You are not a real property developer until you have been through a recession and then we will see who the good housing associations are and how they deal with risk.”