Round the houses: Housing associations are moving into private development to help fund their affordable homes schemes. But as the boundaries of private and public housebuilding blur, will they be able to handle the risks?
Housing associations – registered social landlords – were once the poor cousins of residential property.
Affordable units on a site were farmed out to them, leaving the profitable aspects to the serious developers.
But that is all changing. The organisation that built the most houses and flats in the capital in 2006-07 was not Berkeley or Barratt. It was not a conventional housebuilder at all. It was an RSL called London & Quadrant, which delivered 2,320 units.
A2, another housing association, was a bidder for housebuilder Linden Homes. When it lost out to Galliford Try, it poached the managing director of Cala Homes, John Allan, to run its private division, A Plus New Homes. This already has six schemes to the west of London, in towns such as Reading, Slough and Windsor.
These are not the only RSLs branching out into activities once thought to be the sole preserve of profit-orientated developers.
Richard Prynne is development director of Notting Hill London, the brand name adopted by the Notting Hill Housing Group when it, too, opted to go down the route of what it calls “open-market development”. The offshoot was launched last March.
He explains the rationale behind the decision: “Until now, the group has relied on Housing Corporation funding, so this provides us with an additional source of income. It also gives us the ability to totally control what happens on a site.
“Now we can provide the full range of tenures across the development, from open market to shared ownership to social rent. Any surplus we make is recycled back into the group to fund affordable housing.”
Going private
Its current projects include Whitechapel Depot in east London, where it is converting a former Royal Mail facility into 58 studio, one- and two-bedroom apartments – of which 51 are for private sale. At New Barnet, it is developing an entirely private development of 21 apartments, and has schemes at Isleworth and Streatham.
Indeed, such is the growing commercial clout of RSLs that Savills has set up a new division purely to deal with its private-sector activities.
Peter Sloane, who heads the team, explains: “First and foremost, this is the main way the government can cut grant funding. They are telling the RSLs to fund regeneration through the private sector.
“They also have a taste for the commercial life, encouraged by the banks, which see them as lowly geared. Compare RSLs to developers: developers will hawk the shirts off their back to borrow money. They don’t own assets they borrow, build, and sell on. Housing Associations have colossal assets worth billions of pounds that they can borrow against, and there is no mortgage on them whatsoever.”
Places for People, the UK’s biggest housing association, has one of the largest development pipelines of any organisation in the country.
It has plots for around 12,000 units, putting it in the same league as some mainstream housebuilders – indeed it outbid the likes of Crest Nicholson and Urban Splash to a 650-unit site in Milton Keynes, which it will develop as a 70% private scheme. And it is not the only RSL to bid successfully against private enterprise.
David Shaw, group director for development and procurement at the RSL, says: “It started to become a significant part of the business two or three years ago. It gives us a greater ability to penetrate the land market, and more rapidly.
“It was not so much that we wanted to go into private sale. We were fed up dealing with housebuilders, and picking up the section 106 units wrapped around the sewage works. We wanted influence over the entire scheme.”
Raising quality and quantity
The end aim – and like all RSLs, Places for People is a non-profit-making charity – is to offer people choice, as well as cross-subsidising affordable housing to provide a greater degree of both quality and quantity.
Not everyone is quite so keen to emphasise cross-subsidy, however. Group director of development at Genesis, Steve Coleman, avoids the term. Instead, he says, the move is about raising quality and increasing control across the whole development. It is not a replacement for government grants.
He explains: “The government would say it is not getting enough value from the affordable housing sector, and that a lot of RSLs are not using their substantial balance sheets. Put it this way, if we didn’t have a commercial arm, there are certain sites we would not be able to buy and put affordable housing on.”
Genesis has a pipeline of around 10,000 units, of which roughly 2,000 are for private sale. These are spread across sites in Luton, Newham, Tower Hamlets, and, most significantly, at 150 Stratford High Street, where it is developing 700 homes in a 40-storey tower above what will become the Olympic Village.
Like other RSL development chiefs, Coleman believes that the amount of private homes offered by housing associations will only increase. He believes some will grow as large as niche developers, while others claim that the sector will begin to compete with the housebuilders, particularly as the mainstream developers pull back on land acquisition and development in the wake of the credit crunch.
Richard Petty, head of residential at Drivers Jonas, says: “Traditional developers are more cautious and are sitting on their hands. This has created a vacuum in the market over the past three or four months. The only people to jump in with both feet are the RSLs, who are taking some courageous punts on the way the housing market will move in the next 12 months or so.”
Clearly, the housing associations need to be careful. Allsop’s head of affordable housing, Matt Wisby, is more sceptical of the situation. “They have no track record in private development and are suddenly throwing themselves into the area. They do not have as clear an idea of what the risks are.”
He points to Ujima, which went into receivership in December after defaulting on its loans and transferred by the Housing Corporation to London & Quadrant.
“Lenders have always looked at housing associations and seen them as government-level risk. If housing associations are exposed to the market on a major level – the question is what that will do for their risk profile.”
Cultural differences
Others, off the record, suggest that the culture of housing associations – more akin to a local authority than a commercial organisation – is still not set up for the private market, apart from a few senior staff who have been poached from mainstream developers.
What seems certain, however, is that the market can no longer be divided into housing associations delivering affordable housing and mainstream developers building private homes. At the other end of the market, developers are accessing housing corporation grant to build affordable homes.
The traditional boundaries in the market look set to become even more blurred – if, of course, the housing associations do not get their fingers burnt.
