Opinion: Growing signs of commercialism in social housing
Published by Max Salsbury for 24dash.com in Housing and also in Finance
By Paul Patterson, managing director, placesrp
The big risk in 2014: Welfare reform or development growth?
In 2013, the scars of unprecedented change were evident. The bedroom tax continued the fragmentation of the social housing business model; housing benefit reductions, for the first time in the sector’s history, led to tenants making consumer choices; housing associations across the country reported that tenants were leaving them and moving to the private rented sector to acquire cheaper accommodation.
In the same year, isolation from competition faded as new entrants came into the sector. The Homes and Communities Agency’s register increased with profit-makers, strategically positioned to grow consumer-led affordable mixed tenure housing solutions, targeting future profit from capital value and revenue growth.
This year, organisations will continue to concentrate on welfare reform and prepare growth plans that may not have the hallmarks of a changing affordable housing sector. Don’t lose sight of the sector’s commercialism: if 60% of customers are housing benefit-dependent and they have started making consumer choices, what about the self-sufficient 40%’s flexibility as the PRS competes with new affordable housing products and services beyond 2015?
As profit-makers increase their grip on the affordable housing market, and with the HCA increasingly entering the private rented market through the £200m build to rent fund, competition for the housing market, through innovative development models, competition for the right land location and mixed tenure solutions, could hit the sector’s income and viability hard. This is where, potentially, the real battleground for housing organisations survival will take place.
Do not assume the forecast of the balance sheet and the financial business plan seem to be fine. It’s now about business acumen and how you defend and grow your position in the affordable housing market, based on your customers’ housing purchase behaviours. Failing to scan the external environment and introduce the commercial disciplines to match this new environment, or think you can deal with changing demand or financial issues as they appear, will be catastrophic.
Defend and grow
In 2014, development strategies will need to grow new characteristics. This is about understanding what products being currently developed meet the changing aspirations of customers. New land, procurement and partnership models will all form part of a housing association’s development strategy transformation to deliver new supply.
Defending income and growing housing stock will be a crucial ingredient of an organisation’s growth strategy. A defend and grow policy could be through trading stock (reducing investment risk), creating capital for development growth, restructuring and innovation.
These are typical asset management and development strategies of private sector developers to replenish funds to innovate and develop property portfolios, led by market conditions. They are practices that seek to mitigate risk against market shifts in demand, income loss and asset investment liabilities. Housing associations, through their growth and development transformation, could introduce business development as defend and grow, creating a self-financing culture that improves surplus from investment liabilities and generates new income streams.
We need to have a greater understanding of housing market predictions and financial management in the face of consumers’ wants and needs: the business acumen practices of corporates such as Virgin, Marks and Spencer, or Barratts and Redrow.
In the new affordable housing economy, executives and board members will require a greater understanding of the external environment to navigate business growth solutions. It represents a shift in strategic thinking of where to build, what tenure and what product solutions - including operational planning and reporting of business outcomes that centres on business acumen increasing surplus or profit for reinvestment, acting as a buffer against potential risks.
Development strategies will need to be commercially strengthened by addressing business questions such as these:
• What are the future plans for marshalling new build activity and what form of commercial and financial strengthening will be required to marshal and deliver new development opportunities?
• Will the business development strategy be location and consumer market driven to manage development risk, and to improve surplus or profit?
• What housing product range and occupier segments should be targeted to create new income streams from general needs housing to care and support, beyond 2015’s HCA grant?
• What new relationships and partnerships will be required with the public and private sector?
The risk of not getting housing development right
In the private sector, the rate of change in the commercial landscape is nothing new. However, housing associations dealing with the new affordable housing market will find that this new operating environment to be linear and continuous, or exponential and abrupt.
As the private sector draws closer to housing association products, competition is likely to get fierce. The key for housing associations will be to understand their competitors around their business development activity, consumer offer and pricing. Therefore, no single aspect of housing associations’ commercialism will be more important than evolving their strategic business direction and financial acumen.
If the company’s assessment of the external affordable housing landscape (how the current operating model and financial efficiency fits the patterns of converging and diverging trends of affordable housing) is inaccurate, housing associations’ strategic positioning will likely be wrong, and could faced income or loan covenant crisis. The result will mean decision-makers may be tempted to develop the wrong capabilities, hire the wrong people, or focus on the wrong non-money making parts of development and investment.