1 February 2011
By Mike Thatcher
Could housing associations do more to boost efficiency in the age of austerity? Waqar Ahmed thinks so. But the group finance director at L&Q tells PF that the government must do its bit too
As the war wounds are compared across the public sector, few can compete with the scars suffered in social housing. Budgets have been pummelled, Housing Benefit capped and the idea of a ‘home for life’ jettisoned.
Chancellor George Osborne astonished the housing fraternity in his Comprehensive Spending Review by offering £4.4bn in funding from 2011 to 2015, down from £8.4bn over the previous three-year period. Despite this 63% budget cut, the sector will be expected to produce 155,000 affordable homes by the end of the fourth year.
Osborne offered some relief – by allowing registered social landlords to charge up to 80% of the market rental value for new tenancies. But this will be difficult to carry out, especially in expensive areas such as London.
So the pressure is on RSLs to become more efficient in their use of resources and more creative in finding housing solutions. One association, L&Q, has called for a new ‘contract’ between the housing sector and the government in a report, Hard times, new choices, co-authored with PricewaterhouseCoopers.
Waqar Ahmed, L&Q’s group finance director, says that associations will be able to do more for less if the government can provide greater operational freedom, income certainty and credible regulation. He also wants reform of the planning system and for ministers to offer available public sector land cheaply to developers for housing use.
Ahmed has worked at L&Q since 1998 and took on the group finance role in 2008. He oversees a finance team of 70 and determines the organisation’s financial and investment strategies.
L&Q certainly has an impressive financial record. It manages more than 66,000 homes in London and the Southeast and last year recorded a surplus of £61m on a turnover of £330m. Its social housing operating margin – often used as a measure of efficiency – stands at 37%, well above the average across the sector.
Originally established as Quadrant Housing Association in 1963, L&Q has grown steadily and claims to be the country’s largest RSL in terms of its market value (£11bn). It recently took over Ujima, a housing association that became technically insolvent, and has won a number of ballots on large-scale voluntary transfers of council housing.
Ahmed explained to Public Finance how the new housing settlement could work and the changes that will be required.
Will the ability to charge 80% of market rents compensate for the reduced grant?
In London boroughs such as Westminster, we are currently charging rents equal to 17% of the market rate. If somebody wasn’t getting housing benefit and they were living in an L&Q property in Westminster they would perhaps be paying 50% of their salary into housing costs. If we were to charge 80% of the market rate, they would have to borrow to pay their rent. That’s not sustainable.
Something has to give, so I think the answer in London is somewhere around 60%–65% of market rents.
How can housing associations become more efficient?
First, they should concentrate on geographical focus. What is the point of managing five units 40 miles away from your main operation? That doesn’t make sense. Secondly, is it right for the sector to have 2,000 housing associations managing 2.4 million homes. Is that efficient? It might contribute to the localism agenda, but it doesn’t contribute to the efficiency and growth agenda.
Is it inevitable that associations will merge?
Government and association boards should be encouraging mergers. Boards should be looking at their balance sheets, their business plans and assessing what contributions they are making to achieve their growth targets and their responsibilities to existing residents. If they feel they are not able to contribute to both then they have got to question what exactly is their purpose.
The pricing of bank debt is now very expensive, whereas the bond markets are very attractive. But you don’t go to the bond market for a £5m–£10m loan. You don’t talk less than £200m. For small housing associations, development isn’t really that much of an opportunity because the funding isn’t there.
What has L&Q been doing to improve its efficiency levels further?
We currently outsource most of our maintenance services, and are looking at any efficiencies that can be gained here. With the recent VAT increases, we are considering the possibility of bringing certain elements of our maintenance work inhouse, or partnering more effectively with our maintenance contractors, to produce a more tax-efficient cost base
What commitments can the housing sector offer government?
The sector should commit every penny from its efficiency drive to achieving the housing growth targets. This is what L&Q has done. We are responsible for our own profits but we don’t distribute these to shareholders. They all get reinvested back into the homes and services we provide to residents. Last year, we made a surplus of £61m, but all of that has been spent on a development programme that included a significant proportion of social housing.
What would you expect from government in return?
As the sector is taking more risk on to its balance sheet, it needs more operational freedom – particularly around rents and assets. We need the ability to sell assets that don’t fit into our overall objectives or are not viable and the opportunity to flex the rent regime. This would then enable housing associations to generate an additional income stream and will create more sustainable communities.
We also need a sensible conversation about the discounted land that is currently sitting in the public sector. If we want more social housing and there is a funding gap then that land could contribute and help fill the hole.
Finally, we also need more certainty on planning and the regulatory structure. Developers are looking for a better explanation of how the planning system will work, while lenders want to see independent and credible regulation following the abolition of the Tenant Services Authority.
Will the changes to housing benefit affect associations?
Lenders like the current system, where housing benefit is transferred directly from local authorities to landlords. But the government is moving towards a Universal Credit with one stream of income coming into a household.
At L&Q, around 64% of our social housing residents are from local authorities in receipt of housing benefit. Local authorities are almost defined as default-free creditors. So, as far as the banks are concerned, more than £200m comes from risk-free sources. If you pass that on to residents, irrespective of how responsible those residents are, the banks will perceive that as a higher-risk group and would therefore want a higher margin.
We need a commitment that housing benefit will continue to be paid directly to landlords.
The report, Hard times, new choices, is available on the L&Q website here
