Keep Calm and Carry On?Robert Wassall

Head of Social Housing

Keep Calm and Carry On?

‘Viability and Vitality’: Mervyn Jones‘At the Heart of Housing’: Shelagh Grant‘Build Now or Pay Later’: Orbit/Rowntree‘Where next: Housing after 2015’: PWC/L&Q“Private landlord planning to shift into SH sector”“CEO says sector near cliff edge”“Regulator chair voices concerns for landlords”“International landlords could become reality”“Landlord heads for China for funds”

Keep Calm and Carry On?

18th July 20118th November 2011

Viability, Recovery and Asset Management

Mervyn Jones

Viability and Vitality • Level of financial risk inherent in the activities

that associations undertake • The risks are real and are likely to become

more challenging• Where risks cause difficulty, there needs to

be clarity about how these might best be managed

• Active Asset Management can help mitigate risk and improve performance

Part One Tomorrow is not yesterday

Yesterday and today

•Many risks that associations will face in the future are those they have faced in the past:• pursuit of aggressive development strategies• ineffective risk management• ineffective governance• fraud• challenging business models• treasury risk• complex regeneration models• complex structures or geography• product lines affected by market risk

Tomorrow •The world associations are operating in is changing significantly and this means:

• There are new risks• some of the “normal” risks are intensified• the interactions between the various risks

are becoming more complicated

Risks from Affordable rent

• Discord in Boards about future strategy– Or even the 2012 rent increase

• Misalignment of interests in Groups • Unknown reaction in Groups led by non-RPs• So, increased governance risk

Risks from Affordable rent • Producing new homes with lower percentages

of grant will result in increased gearing ratios• Changes may put pressure on key financial

covenants - might stretch available security. • When looking to raise rents, associations will

be subject to lenders’ assessments of exposure to new risks. These will include:– Affordability to households for whom the homes are

intended– Volatility and depth of the market– Risks involved in changes to welfare benefits– Political risk of future rent control

Alternative business development

• Associations will have to decide how far they wish to keep developing new homes with lower levels of government grant.

• If they choose not to, they may look for alternative business opportunities that have new and different risks

• Haemorrhaging of talent from non- developing RPs

Increased “normal risks”

• Fraud• High levels of cost inflation• Margin Calls• Refinancing risk• Repricing risk• Inability to meet higher levels of due

diligence required– Asset registers

• Failure to comply with property covenants and S106

• Pension deficits impacting Balance Sheets

Self-help

• Associations have been too reliant on external agencies riding to their rescue

• Associations need to be in the driving seat in sorting out own difficulties

• Where problems materialise, boards must be smarter in devising solutions

• Regulator’s role would be to intervene when self-help solutions fail

Effective Governance? • Danger of putting too much focus on

financial viability alone – effective governance crucial.

• Current focus on signing up to “an appropriate code of governance” does not provide solid basis.

• Are boards, and indeed executives, fully equipped with the skills to take the added commercial risks?

Smarter boards, smarter risk management

• Regular external challenge to governance to highlight symptoms of poor governance

• TSA should more fully spell out expectations of boards where they encounter viability problems

• Boards should target a level of surplus to create the right size of cushion for their risk exposure

• Need to develop understanding for boards, landlords, tenants, regulator and other stakeholders, to allow a wider, better informed dialogue about viability and risk.

Single Association Takeovers • To date the main solution for associations

with viability problems has been transfer to another association, by merger or joining a group.

• A single association takeover is still the most likely solution when speed is of the essence.

• If time can be bought a more measured route to rescue becomes feasible.

•Merger mania back?

New solutions • High RPI means unexpected increases in income – potential to create cushion

• Strong growth in market rents• Continuing positive results from stock

rationalisation- market for tenanted stock• Increased experience of managed work-outs• Increased interest in investment in

residential portfolios amongst institutions and others

A radical option?• Associations may feel it is a good time to

develop an independent approach to the rescue of troubled associations that does not rely primarily on the regulator or the government.– A radical option for the sector might be the

development of a Central Housing Fund – Could this be a means of developing the co-

regulatory aspects of regulation?

• Alternatively, rescue funds are popular with Governments at the moment!

• The FSA is consulting on requiring registered firms to file Recovery and Resolution Plans.

Managing assets

• Associations will have to understand: – Local markets – The long term performance of their property

portfolio– The investment performance of each individual

property.

What is Active Asset Management?

• Measure the long term performance of your properties

• Use modelling techniques to analyse worth• Helps plan for conversion to affordable rent,

investment, modernisation or replacement

• Provides an objective baseline on which to make investment decisions

• Generates candidate list for option appraisal

• It’s a component of business planning

Candidate List of poor performing asset groups

Cashflow Code NPV pu 30yrGasworks House Trad Gen ExNT (158) -£3,435W oodnorth House Trad Gen ExTDC (148) -£3,346Malinslee1 Flat Trad Gen ExTDC (18) -£3,303Shawbirch Flat Trad Gen ExTDC (9) -£3,272HighSt Flat (+1xBung) Trad Gen ExNT (176) -£2,800Madleytrad Bung Trad Gen ExNT (68) -£2,679HollinNdev Flat Trad Gen ExTDC (4) -£2,472HollinsDev Flat Trad Gen ExTDC (106) -£2,276Buxton House Trad Gen ExNT (84) -£2,063Ironbge Bung Trad Gen ExNT (28) -£1,770Randlay Bung Trad Gen ExTDC (19) -£1,503Hillslane House (+4xBung) Trad Gen ExNT (149) -£1,479Brookdev Bung Trad Gen ExTDC (11) -£1,238W ell3 House (+3xBung) Trad Gen ExNT (24) -£1,204Lancaster House NTrad Gen ExNT (121) -£1,203W oodSouth House Trad Gen ExTDC (66) -£1,055Lancaster House Trad Gen ExNT (37) -£932W ell2 Flat Trad Gen ExNT (22) -£715Hadley5 House Trad Gen ExNT (38) -£555Hadley3 Flat Trad Gen ExNT (23) -£507Ardern Flat NTrad Gen ExNT (14) -£473Ket1 Bung Trad Gen ExNT (47) -£293MadeleyTDC Bung Trad Gen ExTDC (45) -£291DON8 Bung Trad Gen ExNT (15) -£49

Typical summary output

•

A Universe of Curves - which is you?

-£50,000 -£40,000 -£30,000 -£20,000 -£10,000 £0 £10,000 £20,000

Ranked Average 30 yrs NPV Per Unit

-£50,000 £0 £50,000 £100,000 £150,000 £200,000

1

8

15

22

29

36

43

50

57

64

71

78

85

92

99

106

113

120

127

134

141

148

155

162

169

176

183

190

197

204

211

218

Cas

h Fl

ow C

odes

Cash flow per unit - how different units performs

• Three tower blocks

• Surplus/deficits

• Different outcomes

-£3,000

-£2,500

-£2,000

-£1,500

-£1,000

-£500

£0

£500

£1,000

£1,500

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Output Area Profiles: Future Values

-50000

-40000

-30000

-20000

-10000

0

10000

20000

30000

40000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

KingsHay Bedsit Trad GenExNT (13)

KingsHay Flat Trad Gen ExNT(49)

HighSt Flat (+1xBung) TradGen ExNT (176)

Woollam House Trad GenExNT (25)

Arleston House Trad GenExNT (130)

BarnFarm House (+4xBung)Trad Gen ExNT (131)

Arleston House NTrad GenExNT (36)

Arleston Flat NTrad Gen ExNT(27)

Arleston Flat Trad Gen ExNT(27)

All Stock NPVs and Market Values

£0

£50,000

£100,000

£150,000

£200,000

£250,000

MV

VP

-£80,000

-£60,000

-£40,000

-£20,000

£0

£20,000

£40,000

£60,000

NPV

Geographical Strategy

Price by Type of Portfolio: Totals & £ p.u.

Total Bids; Price p uType Total Bids £m Price p u UnitsGeneral Needs £143.1 £64,827 2207General Needs/SO £73.6 £49,234 1494GN/Sheltered £33.2 £34,234 969GN/Shlt/SO £8.8 £34,307 257GN/Shlt/Sup £8.3 £16,532 504GN/Shlt/Sup/SO £8.1 £43,335 188GN/SO/Development Site £15.1 £50,980 297GN/SO/Leasehold £6.0 £18,212 330GN/Sup/SO £17.1 £56,457 302GN/Supported £21.8 £54,721 398Sheltered £26.9 £34,048 789Supported £6.7 £54,836 122Sum of Bid Total £368.6 £46,918 7857Source:Savills

Price by Type of Portfolio: Totals & £ p.u.

Total Bids; Price p uBy Region Total Bids £m Price p u UnitsEast England £17.7 £49,385 358East Midlands £71.2 £50,329 1415London £84.0 £58,996 1424North West £79.4 £34,707 2289South East £43.4 £37,867 1146South West £50.0 £64,723 772West Mids £10.8 £48,132 225York/Hmber £12.1 £53,028 228Sum of Bid Total £368.6 £46,918 7857Source:Savills

Uplift above EUVSH By Type

Uplift above EUVSHType % UpliftGeneral Needs 31%General Needs/SO 31%GN/Sheltered 49%GN/Shlt/SO 16%GN/Shlt/Sup 5%GN/Shlt/Sup/SO 24%GN/SO/Development Site 39%GN/SO/Leasehold -29%GN/Sup/SO 25%GN/Supported 40%Sheltered 23%Supported 64%Overall 30%Source:Savills

Uplift above EUVSH by Region

Uplift above EUVSHBy Region % UpliftEast England 38%East Midlands 36%London 9%North West 40%South East 15%South West 58%West Mids 61%York/Hmber 28%Total Count of Bid Ref 30%Source:Savills

What if there is no market?

• Homes under the hammer• Market still strong

Part four: Restructuring an Association

Restructuring an association might be appropriate where • the ‘worth’ of assets to the current landlord

may be less than the ‘worth’ to another landlord or on the open market

• transfer or disposal may generate value.•How to

Part four: Restructuring an Association

This would need TSA involvement in:• Agreement of restructuring plan • Negotiation with funders • Liaison with HCA re grant intervention

This may need ‘steady state’ associations to support meanwhile management through:

• Funding arrangements• Temporary Group membership• Through an SPV

Unravelling Groups

•Potential obstacles• Third party approvals at an acceptable price• Unacceptable damage to other group

members• Approval from a group member which it

cannot give (for charitable, contractual or solvency reasons)

• Tax liability• Pension liabilities• Staff transfers under TUPE.

•But greater experience of collapsing Groups

Part four: Restructuring an Association

Depending on the nature of the problem a restructure might involve:

• Cost reduction • Income improvement • Redesignation of stock to different uses • Transfer of tenanted property to better

placed landlords in return for value• As a last resort, decommissioning schemes

and disposal as vacant, to realise the latent vacant possession value.

Part four: Restructuring an Association

Part four explores “How To”• Recovery of failed projects• Disposals and Transfers

– Transfer of subsidiaries– Transfer or disposal of sufficient assets to leave a

viable core business– Transfer or disposal of non-core product lines– Reduction of footprint by transfer of geographical

asset groups– Complete transfer or disposal of all assets

• Involving tenants• Meanwhile management• Winding up

New Rescuers? •Potential for investors to “buy” distressed RPs

“Making Affordable Rent Happen” At the Heart is Housing

Shelagh GrantChief Executive, The Housing Forum

8th November, 2011

About The Housing Forum“Campaigning for more and better homes”

• Membership network spanning public and private sector – unique selling point is cross industry learning and influencing

• A “mutual” organisation with industry based practical and business experience directed at industry and Government

List of MembersHousing Providers

A2 Dominion Affinity Sutton Group bhpaBroadland Housing Group Bromford Housing Group Connected Partnership East Midlands Housing GroupEast Thames Group Eastbourne HomesFusion21 Gallions Housing AssociationGrand Union Housing Group Hackney HomesHarvest Housing GroupHexagon Housing Association Homes for HaringeyJephson Housing Group

LHA-ASRA Group Longhurst GroupNewham Homes Newlon Housing Trust North Hertfordshire Homes Plus Dane GroupSaxon Weald Southern Housing Group Sovereign Housing Group Thames Valley Housing Association The Guinness Partnership The Places For People Group Thrive HomesTown and Country Housing Group Walsall Housing Group WM Housing Group Yarlington Housing Group

List of Members

Developers, Housebuilders, Contractors

Argent Plc Breyer Group Galliford Try Higgins Construction PlcHill Partnerships Ian Williams Igloo Regeneration Jones HomesKeepmoat Kier Lakehouse Land Securities Leadbitter Group

Lovell Partnerships Mansell Mulalley and Co Osborne Robert Woodhead LtdRydon ConstructionSeddon Group Southdale Homes Thomas Vale Construction United House Wates Living Space Willmott Dixon Housing

Suppliers, ManufacturersAggregate Industries Akzo Nobel/ICI PaintsBritish Precast / Modern

Masonry AllianceExcel Industries ForticreteIG DoorsK Panels LtdKingspan PottonMarley Plumbing & Drainage Polypipe Group Swish Building ProductsUK Timber Frame Association Wolseley

Who are the members?Specialist and Consultants

4i SolutionsAirey Miller Partnershiparchitecture plbBaily Garner BM3 Architecture LtdCalfordseaden Conisbee Davis Langdon Design For Homes Dickinson Dees EC Harris Faithorn Farrell TimmsHTA Ibis Project Services

InbuiltI.S.4 Jon Watson Consulting MacConvilles Martin AssociatesMJS Consultancy NHBC PML Group PRP Rider Levett BucknallSalford Centre for Research & InnovationThe Concrete Centre Trowers and Hamlins Waterstons

We are known for:• Networking and influencing – strong cross business

linkage• Best practice and learning; demonstration projects;

Skills Summits on Asset Management e.g. Procurement and Green Deal

• Market awareness – monthly Round Table discussions on local housing business issues e.g. Hampshire in June with architecture plb

• Date for your diary: 16th November 2011South West Networking Conference

at Exeter Race Course

Keep Calm ...• What can we expect?• Government’s housing strategy likely to say –

increased housing supply is much needed – we are all getting older!

• This to be market-driven• To be market led has to have conditions for private

sector to succeed• NHBC’s statistics tell us that UK 10 year average is

minus28% and much worse in some areas than others• Forecast of 115,000 completions in 2011/12 to be

revised down

Regular Housing Forum Round Tables tell us:

• Drive from “top” still needed

• Concreting over green belt sensation has not helped

• Geoff Rooker – ex-housing minister – 2% of land developed

• Economic constraints on more s.106

• Certainly for “community infrastructure” – impact could be equal to 40% cut in community infrastructure

Local Councils

• Closer collaboration essential

• Councils may be looking for longer term returns and will want standards and quality

• Commuted sums or more homes?

On Affordable Homes...• Bidding oversubscribed and new entrants but 90% of

the programme will still be delivered by housing associations

• Market rent issues

• “Bunching” of programme delivery and supply chain

• BUT... Subsidised housing still needs a subsidy

• WHY CARRY ON...?

• Income needed for existing stock to fund improvements

Skills Summit Series• Highly popular – looking at all aspects of asset

management including procurement, energy, environmental, etc.

• Need to maintain value over time and offer a service• Housing associations can be more flexible in their

financial plans• Lease-back arrangements, modernising the offer,

private rental services• Take a longer term view• Greater commerciality

At the Heart is Housing “Making affordable rent happen”

Housing Forum Working Group chaired by board member John Cross, bpha

Conclusions:-

• Funding – appetite and risk – the future is institutional

• A radical reshaping of housing associations to respond to the tectonic plate shifts

• Planning and Land Policy

• New Homes Bonus – is a stimulus in some areas

• In-Betweeners – the revival of our estates with career couples – is this going to happen?

• How do you make your offer attractive?

• What are the specifications and standards in building going to be?

• Energy and Code standards

• Let’s not undo 15 years of good work!

• The future is now – University of Oxford report

• A real opportunity for the industry to work together like never before

• A new era of PPP

• Make the economic links now

• The Housing Forum’s next steps

www.housingforum.org.uk

NO FACTS, FIGURES, GRAPHS AND TABLES RATHER STATEMENTS HOPEFULLY TO PROMOTE DISCUSSION

Brian Everett, Operations DirectorBellway Housing Trust

Statement No. 1

• Whatever happens with the Localism Bill, New Homes Bonus and the National Planning Policy Framework – the number of homes built will not increase until mortgages at higher loans to value become readily available.

Statement No. 2

• House builders are, and will continue to, concentrate on margins, not numbers of homes built.

Statement No. 3

• Government subsidy for affordable housing will not increase any time soon.

Statement No. 4

• The Market has changed – owner occupation will not increase – Renting is here to stay and grow.

Statement No. 5

• Shared ownership and equity loan products are not now tools to help people into full home ownership, they have become a tenure in their own right.

Statement No. 6

• The distinctions between housing associations and house builders are, and will become, increasingly blurred.

There will be new players.

and finally …

• Which will happen first?

A housing association buying a house builder

or

A house builder buying a housing association.

Paul TennantGroup Chief Executive

I will cover:Brief background of OrbitContext for our FutureFuture of our OrganisationsTransforming into our Future

Orbit GroupA Federal Partnership

37,000 homes£165m turnover1100 staffAssets of £1.5bn

Context: 3 Factors

Global• Economy & Austerity• Unemployment & Society• Politics & Power

National• Austerity• Redefining Relationships• Policy Reform

Social Policy• Recognition of Issues• Vigorous Reform• Changing Roles

TraditionalProgressiveRadical

Role?

Direction

Return Risk

The choice we make will be a spectrum to reflect circumstances and aspirations

Direction in the New World

Future of Organisations: DirectionBecome more commercial and/or to diversify operations further

• Become more commercial in operations though not culture• Be less reliant on state support and seek new income sources • Develop new business models to transform offer•

Extracting greater financial and social return from operations

• A greater economic impact• Greater social impact/consumer impact• A repositioning of the sector and to make a case for their role• A future as self-sustaining organisations

Be more aware of risk and the need to mitigate increasing risks

• Inertia and inefficiency• Ensuring sustainability• Stigmatisation of the sector

Drivers of Change

Current & future customersAffordable rents/capital reductionWelfare reformAusterity & value for moneyRegulation/self-determinationEvolving role of LA’s/communitiesSustainability/green economy

Change Agents

Customer: services & standardsCommunities: role & investmentHomes: range & funding modelStructures: partnership & innovateFinance: income, funding, VFMOrganisation: culture, technology

Each organisation must assess what to transform to be successful

Strategies

Improve what we have/do nowExit or expand services/geographyIncrease income – revenue/capitalNew partnerships & venturesInfluence, promote our roleCulture and people development

How we respond will define our success in the future

Transforming our Future: Making it Happen

Leadership Skills• An imperative to transform• An entrepreneurial culture

Shaping a New Role• Greater role in society• More proficient businesses

A change in operations• Align to new world• A new set of outcomes

A new message• Demonstrable change• A stronger narrative

Orbit: An organisation in transformation

Progress since 2003Plans to 2013Orbit 2020 Project• Environment & Vision• Drivers & Change Agents• Strategies & Outcomes

Leadership!

Transformation Process

Environment

Business Drivers

Direction

Change Agents

Outcomes

Developed among organisations across four counties

In Summary

The world is radically changingOrganisations must transformRequire a different approach & roleAlign outcomes, operations & cultureLeadership is critical