29 May, 2014
With reports last week of Peabody Trust, a 152 year old Social Landlord based in London, launching a £500 million scheme to sell 1,000 properties on outright sale to generate funds for new social housing, the diversification debate is set to continue for some time. The launch is part of an up and coming diversification strategy which is likely to be employed by many social landlords to generate a profit on private and shared ownership sales, then use the profit made to allow the development of new affordable housing. More than one third of housing associations are now expected to rapidly increase development after 2015 funded by new sources of finance and income from commercial activity.
As an example, Peabody plan to deliver 1,000 new homes per year for the next three years, with the first 1,000 expected to be ready by March 2015. Around 40% of these properties will be open for market sale or shared ownership, with the profit expected to be used to buffer the effect of the reduced grant given by the Homes and Communities Agency (HCA).
Concerns were raised by the HCA about diversification back in 2012/2013 following the collapse of Cosmopolitan's student housing business. They asked providers how they intend to reassure regulators that there will be no risk to social housing that was partly funded through government subsidy, if commercial ventures run into financial trouble. The idea does seem positive whilst there are increases in house prices, but social landlords must also be prepared for what will happen in the event of the market becoming much less favourable.
The HCA in their recent Sector Risk Profile 2013 explained that 'it is not the Regulator's intention to stifle innovation in the sector or reduce providers' flexibility to plan, structure and develop their business in the most effective way.' The publication explains how providers can mitigate the risk to existing social housing assets whilst diversifying at the same time. One of the key issues providers must manage is the education of the boards; they must have the right skills to understand the ever fluctuating markets and make decisions on diversification based on good quality information. With grant rates being lower than they have been in the past a greater reliance is now placed on debt. It makes it more important that providers effectively manage development cash flow. Whilst the sector does benefit from historically low interest rates, business plans need to be 'stress tested' against a number of different variables to ensure the robustness of their financial position.