The merger between L&Q, East Thames and Hyde Group housing associations is the latest in a string of unions that has created capacity, clout and capability across the sector.
Considering the state in which housing associations found themselves after last May’s election – with rents going down, grants cut and Right to Buy eating into stock – it is an impressive turnaround. Rather than fade away, some are finding a secure place in the market.
David Montague, chief executive of L&Q and chief executive designate of the new company, says that after the Budget “our world changed”, but that since then there had been a recovery of ambition and a re-commitment to purpose.
The L&Q deal alone will create the fourth-largest housebuilder in the country, with a total value of more than £30bn and the potential to deliver 100,000 homes over the next 10 years.
The new organisation said it would use private sales and rental income to finance about 50% affordable units.
Other mergers, while smaller in scale, will still have significant clout. The rationale is straightforward: bigger organisations are better suited for long-term development and can access cheaper finance and operational efficiencies.
“Financially, if you can unlock greater capacity, you have the ability to do more,” says Geeta Nanda, chief executive of the Thames Valley Housing Association.
“One of the opportunities provided by a merger is using your combined skills to achieve more,” she says.
This could create some significant competition for housebuilders.
Larger HAs will be able to build more, while business models that provide multiple tenures – housing for sale and rent alongside affordable options – can take longer-term views on sites and develop during economic downturns. This is possible because shareholders are not involved: all housing associations are listed as charities, so all profits are ploughed back into building.
But they can also raise funds in the bond market. L&Q currently has 74,000 homes valued at £17bn that produce a predictable annual income, which it can use as collateral in the bond market.
As a result, it is AA-rated, and its last issue was four times oversubscribed.
“It gives us a real advantage: long-term, low-cost money. It means we do not have to make short-term decisions based on share price,” says Montague.
This form of financing aids the development of larger sites, on which housebuilders with long-term financing and rates of absorption would struggle.
Barking Riverside is a case in point. L&Q has taken over the 11,000-home scheme from Bellway, saying it will quadruple the rate of housebuilding by investing in infrastructure, but also by providing a mix of tenures that can be absorbed more easily.
“If there are larger land opportunities and projects that may go over a longer period of time, you can more easily finance them,” says Nanda.
And more such behemoths could emerge in the future.
“There are a lot of mergers on the cards at the moment, and I think we will see more of this throughout the year. The G15 – London’s top 15 HAs – will likely be reduced in size, down to the G10 or the G9,” says David Jubb, greater London director at JLL residential.
However, as housing associations compete more and more with housebuilders, they will have to maximise profits from their market sale and rental portfolios. So just because a housing association opts to develop homes, it does not necessarily mean that the homes for sale will be discounted.
Those not eligible for affordable housing yet still not earning enough to get on the housing ladder may continue to struggle.
Housing association mergers
Genesis Housing and Thames Valley Housing
The boards of Genesis Housing Association and Thames Valley Housing Association approved an outline business case to merge the two organisations to create a 47,000-home organisation in November 2015. The merged organisation planned to build 3,000 homes a year, around 1,800 of which would be affordable. It would be in the largest 10 housing associations in England.
Affinity Sutton and Circle Housing
Two of the largest associations in the UK announced their merger intentions in summer 2015. The pair have the potential to create an association managing 127,000 properties housing half a million people, with the potential to deliver 5,000 annually.
L&Q, The Hyde Group and East Thames
The three organisations say they will be able to deliver 100,000 new homes across London and the South East over the next 10 years, representing an investment of £25bn. The £30bn company would manage around 135,000 homes nationally, and would aim to build 50% affordable homes, 25% for market sale and 25% for market rent.
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