Blurring the boundaries: The future of housing

Published by Julien Tremblin for 24dash.com in Housing and also in Featured

Things were once so clear. Social landlords charged low rents and offered security of tenure. Private landlords charged high rents and offered six-month tenancies.

The boundary between the two has been blurring for some time but could 2012 be the year when it begins to disappear altogether? Jules Birch investigates.

Government policy and the desperate need for new sources of investment for new homes have combined with the state of the wider housing market to create new challenges and opportunities for private and social landlords alike.

High house prices and restricted mortgage lending have priced hundreds of thousands of younger people out of home ownership. The surge in demand for rented homes from Generation Rent has sent rents soaring and created a housing need that existing landlords are struggling to meet.

That creates an opportunity for housing associations to diversify and cross-subsidise their existing business at a time when traditional grant funding is disappearing.

At the same time, with the waiting list for social housing rocketing, government reforms under the Localism Act include allowing social landlords to charge near-market affordable rents and offer fixed-term tenancies and allowing local authorities to discharge their homelessness duty into the private rented sector.

In November the Housing Strategy stated the Government’s desire to ‘stimulate innovation and greater competition by encouraging entry of new providers into the affordable housing sector’.

A reform introduced by Labour in 2010 that allowed for-profit companies to become registered providers of affordable housing got off to a slow start.

However, the Housing Strategy revealed that the regulator, the Tenant Services Authority (TSA), was in advanced discussions with a number of quoted companies that wanted to set up a social housing subsidiary.

One of the firms in the vanguard of negotiations with the TSA is Orchard & Shipman, the largest private provider of temporary accommodation for homeless families.

“The ability to create a private registered provider is very attractive to us,” says managing director John Taylor. “We’ve got specific plans in terms of how we can provide additional forms of social housing that maybe are not coming through in the traditional model.

“We are interested in working with financial institutions to bring new forms of money forward to enable us to develop social housing.”

The idea is to mix different tenures – target rent social housing, affordable rent, market rent, shared ownership and outright sale – for different groups of people and attract investment from institutions that have steered clear of residential property so far.

“We are primarily working with institutional investors, pensions funds and banks that traditionally invested in commercial property. That’s not as attractive any more and they see social housing as a way of getting into residential investment. They are beginning to see it as an attractive proposition if we can structure it correctly.”

Taylor says investors are not put off by the prospect of regulation by the TSA, and by the Homes and Communities Agency (HCA) when responsibility transfers on 1 April.

“If anything it gives them extra comfort because they see it as a way of strengthening the covenant across the whole investment, that there’s an outside body looking at what we’re doing and how we’re managing their investment,” he said.

Another private firm looking at registration with the TSA is Grainger Trust, the largest listed landlord in the country.

“We are still exploring it,” says director of development John Beresford. “There are lots of consultations that we need to get our head around.”

The switch from private to social may not be such a big step for Grainger, since the majority of its private tenants are on regulated secure tenancies. However, the move to register with the TSA is being made with its future development programme firmly in mind.

This currently includes two schemes for 7,000 homes in Hampshire of which up to 40 percent will be affordable.

“As a developer of strategic land why would we want to give away the social housing to someone else when effectively we are a social landlord already?” explains Beresford. “I’d rather Grainger controlled the whole process because if we do we can make sure that the estate is managed correctly and we maintain long-term value.”

Grainger is also drawing on its experience of taking over the 1,100-home property portfolio of the Church Commissioners initially in partnership with housing association Genesis before it bought purchased full ownership in March 2011.

“Questions were asked in parliament about a private sector (provider) getting involved but the TSA can now see that the private sector involvement is not a bad thing,” he says.  

Beresford believes the main barrier to progress is ‘push-back’ by local authorities against affordable rent. “Some of them are saying they would rather have 20 percent affordable housing on the old system than 40 per cent on the new.”

Other firms believed to be involved in discussions with the TSA include housing management firm Pinnacle and housebuilder Bellway.

The TSA is not revealing any details or names yet but confirms: “We have registered six for-profit landlords and we are currently in discussion with a number of other potential applicants.”

Meanwhile, over on the social side of the housing divide, a number of housing associations are looking to diversify into market renting or expand their existing operations.

Affinity Sutton, Circle, Genesis, Network, Notting Hill and Peabody have all joined the private trade body, the British Property Federation (BPF).

Membership brings with it the chance to network with big institutional investors and learn from the private sector.

“A number of housing associations are excellent property managers but not always as clued up as asset managers and it’s vice-versa for our private sector members who are good at asset management but can learn about property management,” says BPF director of policy Ian Fletcher.

Genesis is one of the associations looking to diversify (see box). However, it blurs the boundary between social and renting in more ways than one, not just as Grainger’s partner in the Church Commissioners deal but also as John Taylor’s employer before he joined Orchard & Shipman.

For divisional director Feargal Ward, the real prize from all the changes will be unlocking institutional investment in housing.

“A lot of work has been done by associations and also by the private sector. Obviously the government is very keen too,” he explained.

He cites the way that the student accommodation sector has attracted institutional investment after a slow start. “Exactly the same thing will happen with institutional investors in the private rental market.

“In the UK less than one percent of institutional investors invest in residential, yet if you look at America and the rest of Europe it’s 30 percent.”

In the meantime the boundary between social and private renting will continue to blur as government policy and the acute need for investment bring them closer together.

“I think over the next 12 months this will become much more visible,” says John Taylor of Orchard & Shipman.

“I think it will become very hard to tell the difference between a for-profit RP and a charitable RP or an industrial and provident RP. We are all going to raise funds and deliver services to residents in the same way.

“Some RPs will focus on management and making sure their services to residents are as good as they possibly can be but in terms of developing RPs I don’t think you will be able to spot much of a difference.”

Genesis

Genesis is eyeing expansion in the private rented sector that goes beyond the 7,000 homes – half of them temporary accommodation - that it already has under management.

The housing association is working with an investor which has grant from the HCA to provide 30 units of affordable housing.

The deal will involve a 15-year lease with a five-year break clause and Genesis will be guaranteeing the rent and taking on the maintenance liability. However, it is also involved in discussions with two more investors about another 450 homes.

“We’ve had real experience of the private rental market over the last five or six years,” says divisional director Feargal Ward. “We really understand the needs of the market and so we feel quite comfortable with offering rental guarantees and de-risking it for investors.”

He see this de-risking as vital for investors who are more familiar with the commercial property sector, where the tenant takes on all of the maintenance liabilities for the duration of the lease.

“In residential there are lots of risks and that makes them nervous,” he explains.
Diversification offers Genesis a business that is purely revenue, with no capital investment, and surpluses that can be ploughed back into general needs housing.

But it’s also about meeting housing need. “We talk about Generation Rent who now can’t buy and we see ourselves as an organisation that provides housing solutions from outright sale through to temporary accommodation and one of those is market renting.”

Genesis will offer two-year tenancies in the first instance but also wants to offer other options including furnished and unfurnished tenancies and to build a brand that is trusted in the market.

This article originally appeared in the February edition of 24housing magazine.