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Bigger and better? By Neil Merrick

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18 November 2005

In the 1990s, housing associations were rushing to form themselves into groups. Now the groups are queuing up to merge. Why are they doing it and is this the best way forward for housing, asks Neil Merrick

One of Circle Anglia's first steps after it was created through a merger of two groups was to return to its lenders and ask if it could borrow more money. If all goes to plan, it could become the first registered social landlord to borrow more than £1bn – while saving some £2.8m per year in improved efficiency.

The July merger between Anglia and Circle 33 created a single RSL with almost 33,000 homes in southeastern and eastern England.

Other, even larger, mergers are in the pipeline. One proposed, between the Affinity and William Sutton housing groups, would create an RSL with 52,000 homes, narrowly overtaking Places for People as England's largest group landlord.

Over the past year, 27 housing associations have sought rule changes to allow them to merge or set up new groups, and another 35 are discussing these with the Housing Corporation. Clare Miller, the corporation's director of regulation policy, says that merger activity is 'increasing year on year, but not exponentially so'.

It is unlikely that this urge to merge is merely a response to Sir Peter Gershon's public sector efficiency programme. The chance of getting hold of development grants and playing a lucrative role in the push to build more affordable housing are also powerful incentives.

On the ground, what happens in a newly merged organisation? For the 1,200 staff in Circle Anglia's London and Norwich offices, work has continued much as before. Employees were promised that there would be no compulsory redundancies, but the RSL still expects to save about £1.5m per year in salary costs, mainly through natural wastage and a reduction in the number of senior executive posts.

The installation of a new IT system should save a further £750,000, and borrowing costs are expected to fall, in spite of Circle Anglia's intention to seek an extra £150m on top of loans worth £850m negotiated by the two groups before the merger.

Rosemary Farrar, Circle Anglia's group director of finance, says the RSL should save about £500,000 per year in interest payments and bank fees when the new loans are set up. 'We have the ability to raise private finance in larger chunks and more cheaply,' she says.

By 2007/08, the new RSL expects to increase its annual turnover by £30m to about £165m. But its projected £2.8m annual savings are not enough to satisfy the Housing Corporation.

Howard Cresswell, Circle Anglia's deputy chief executive, says the RSL appreciates that efficiency has moved rapidly up the political agenda since the merger was first suggested in 2004. 'We can see the pressure that they [the Housing Corporation] are under,' he says.

Nevertheless, the corporation's description of the projected savings as 'modest' has created a little tension, since the merger will demand some short-term capital expenditure. 'We were always clear that we were doing it for long-term efficiency,' Cresswell adds. 'In the short term, we are having to invest up front to achieve efficiency. If we wanted common IT systems, there was an upfront cost.'

Farrar points out that Circle Anglia will have at least as many tenants as before. Although it might be able to reduce procurement costs, it will not be able to save large amounts on maintenance. The RSL also plans to acquire a further 20,000 homes over the next five years, as well as building 10,000 new properties. 'There is no proven case that bigger is cheaper,' Farrar says.

A Chartered Institute of Housing study, published in June, supports this view, casting doubt on the notion that a cut in the number of RSLs will necessarily save huge sums.

And in May, the corporation urged RSLs not to rush into mergers simply to increase their chances of gaining grants. 'We recognise there will be costs associated with any changes but there should be a reasonable expectation of efficiency gains as well,' adds Miller.

For Anglia and Circle 33, the main reason for merger was to achieve economies of scale as part of a larger organisation. 'We wanted to remain in the forefront of the housing association sector,' says Cresswell, who was previously deputy chief executive at Circle 33.

The merger process was assisted by the fact that the two groups, made up of a total of 12 subsidiary housing associations, appeared to complement one another. Anglia had emerged from a series of stock transfers from local authorities in the east of England, where it owned about 14,000 homes. Most of Circle 33's 19,000 properties were in London but it was looking to expand out of the capital into the Home Counties and towards East Anglia.

The merged RSL has set up four development teams – two in London and two in the east of England – and is making the most of its expertise in the two areas. 'London and the eastern region are completely different markets,' explains Andy Doylend, group director of development. 'London is all about regeneration whereas the east of England is far more about growth areas.'

For 2004/06, Anglia and Circle 33 received a total of £45m in housing grant. Together they are building about 1,600 homes per year and hope to raise this to 2,000. With about 20% of properties likely to be aimed at future homeowners rather than tenants, it should be easier for the RSL to fund new build through borrowing, making it less dependent on public money. 'Growth is at the heart of the merger,' Doylend says.

Personnel issues also played a part in the merger decision, adds Cresswell, pointing out that it is becoming increasingly difficult for associations to attract and retain key staff. 'People want to work for an organisation that offers opportunities for progression. To remain relevant in the new world, we had to become bigger.'

A study carried out for the National Housing Federation shows that merger activity has remained steady at about 1% a year apart from surges of interest in 1974 (when housing associations first received public funding) and 1989 (when they were allowed to borrow privately).

Many believe the diversion of grants towards large RSLs over the past two years has had a similar effect. Danny Friedman, director of policy at the NHF, says associations are asking whether it makes sense to compete for grants at a regional level when they could combine forces and still provide local services to tenants. He is encouraged by the fact that RSLs want to merge for positive reasons, including economies of scale, rather than to 'bail out' a struggling association. 'Mergers allow housing associations to carry out activities that they couldn't if they were smaller,' he says.

For example, the planned merger of William Sutton and Affinity will create an RSL that is better placed to save money, improve services and develop the skills of staff, according to Rod Ainsworth, group company secretary at William Sutton.

'We would be in a better position to influence the national housing agenda,' he adds.

Jeff Zitron, a director at housing consultancy Tribal HCH, believes that, following the creation of large group landlords in the 1990s, a second stage of consolidation is starting, where groups are merging with groups and some small associations are disappearing.

'Group structures tried to achieve economies of scale while respecting the independence of small associations,' he says. 'With the efficiency agenda, that nicety goes out of style. We want more money to go into services for tenants, not into managers' pay packets.'

Circle Anglia has reduced its number of constituent landlords from 12 to four, plus one specialist care and support trust. On the other hand, a prospective merger between Amicus and Horizon housing groups, which would create an RSL with more than 28,000 homes in London and southeast England, is not expected to lead to an immediate reduction in the number of subsidiary landlords. Each group currently consists of three associations.

Ben Wilson, Horizon's chief executive, says a merged RSL would save an annual £3.4m by 2009/10 through reducing the overlap between the parent housing groups before going on to review the position of its subsidiaries. 'It's a classic Gershon approach,' he says. 'We are driving money out of the back office to spend it on frontline services for residents.'

PFnov2005

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