Smaller housing associations’ capacity to develop new homes

Mark Lupton

The key question

• Do the 962 associations owning and managing less than 1400 units, with a total of 132,097 units – 6 per cent of associations’ stock – really have a great deal of spare capacity?

Who to look at?

• Of those with less than 400 homes many where already in group structures and had high numbers of supported housing

• We looked at the 72 independent associations with between 400–1,399 units

Financial ratios

• Gearing (debt to gross cost of housing properties basis) - 25%: sector average of 35%

• Interest cover (EBITDA basis) - 250%: sector average of 197%

• An average operating margin of 30%: sector average of 23%

What capacity?

• The associations in this study could sustain future organic growth at a rate of about 5 per cent a year.

• Using this projected capacity would potentially increase the number of association homes built by around 2.5 per cent -1200 homes.

Not that simple

• To make use of that capacity requires sufficient organisational capability or / and suitable partnership arrangements combined with access to land, debt finance and grant funding.

Diversity

• Care has to be taken in terms of generalised statements about smaller associations;

• Reasons why associations may be unable or choose not to maximise development will vary;

• In looking for ways forward to encourage development, ‘one size fits all’ approaches are unlikely to be appropriate.

Fanciful solutions

• Major merger activity among smaller associations given the time and effort that would be required

• A major centrally determined drive for smaller associations’ capacity to be transferred to larger associations

Advantages and challenges

• Smaller associations do have some potential advantages, their focus in the main on a particular specialism or locality

• They also can experience challenges in terms of:

• The right skills

• Properly quantifying risk

The way forward

• To encourage organic growth among smaller associations and innovative approaches by larger associations and potential partner bodies to help them do this.

• This will not be easy at a time when the development environment for associations is particularly challenging.

Mutual respect

• Smaller associations need to be clear about their role as an effective client - selecting the right partner and developing skills around the client role and relationship management.

• Larger associations have to be clear about the professionalism of their relationship with the client body. If they are committed to supporting local associations to develop then they need to consider what level of “mentoring” this involves.

Skilling up

• Proactively organising and procuring joint training programmes for staff and board members around development, finance and risk

• Creating mechanisms for supportive approaches by developing smaller associations to help those who want to develop

• Setting up a fund to commission research and good practice advice specifically aimed at smaller associations

Not just development

• There are some advantages to smaller associations purchasing from – or managing stock for – larger associations (and others), rather than directly developing

There are alternatives

• Develop by a mixture of grant, cross subsidy from asset management and converting social rents

• Be a local housing provider by building shared ownership or market rent homes

• A manager of choice for other associations or bodies who might be rationalising stock or developing locally

• Develop the business locally in other ways than building new homes

• Focus on specialised housing and services

A challenge for the sector

• If the sector as a whole does not demonstrate its effectiveness in releasing capacity it will face continuing scrutiny from government

• In seeking to use the spare capacity available to smaller associations perhaps the sector as a whole – not just the smaller associations themselves – needs to consider how to utilise that capacity

Two questions

1. If the association’s mission is to provide homes for those in need then should the development of new homes be a key part of this?

2. Does the association’s current size, structure and costs enable it to effectively achieve its organisational purpose?