Get ready for more rationalisation
Tue 26 Jul 2016
This article first appeared in Inside Housing on 21st July 2016.
Since as far back as the mid-Noughties, the regulator (at that point the Housing Corporation) has positively encouraged housing associations to strategically rationalise their holdings of stock, principally by selling to other housing associations. Some associations have taken up the mantle in the intervening years and the market has as times witnessed stock disposals and stock swaps involving hundreds and sometimes thousands of homes in one transaction.
The overriding rationale is to ensure that associations can concentrate their resources on the geographical locations and tenure types which they can manage most effectively, leaving other better-placed associations to own and/or manage the stock they cannot manage so well. In principle, it is a win-win situation for both associations who become more efficient and for tenants who can be better served. Associations are also becoming more sophisticated about measuring the financial and social performance of their assets, and well thought through asset appraisal modelling may yield stock for disposal regardless of geography or tenure.
However, as the industry enters an unprecedented period of large scale mergers, the market has markedly slowed up. Some projects continue, but to a larger degree, buyers and sellers are putting projects on hold or biding their time until the dust has settled in the marketplace. Other factors must also be considered to have been at play, not least the statutory rent reduction which immediately undermined values and therefore the viability of certain transactions, and the market uncertainty following the EU referendum.
Despite the current hiatus, there is every reason to expect the market to come back round with a big bang once the major merger activity has completed. If anything, the ingredients will be in place to make the need for rationalisation greater than before.
The drivers for recently merged associations will be:
Hugely ambitious development projects. The cash raised from stock disposals is not just applied to stock purchases, but for many associations it has cross-funded their development plans. Many of the recent merger announcements have included ambitious development programmes, with significant housing for sale components. With the continued dwindling of grant funding, stock disposals will be a significant funding resource, and ratings agencies may look favourably on cash reserves to offset development risk.
Efficiencies. The business case for most mergers will be predicated on realising increased operating surpluses from the same revenues. In addition, the regulator has an increased and more challenging view of efficiencies and has challenged the sector to demonstrate that the new wave of mergers is delivering on this agenda. Whilst most mergers will deliver geographical consolidation, as asset managers look at the geographical spread and concentrations in their new merged organisations, areas and concentrations that could be justified previously may need to be revisited. It isn’t just a case of dumping small isolated numbers of stock. The driving force for mergers is the strength gained from scale, so we expect major players to be hungry to make acquisitions of further stock in their core areas. However, as highlighted above, geographical rationalisation is not the only way of improving global performance. Larger but leaner organisations will also want to look at divesting themselves of their worst performing stock.
Re-appraising tenures. The merged organisations may have very different ambitions to their predecessor associations about customers they feel best able to serve, and may see some associations look to vacate certain parts of the sector entirely.
Associations will need to be clear with themselves as to what their key drivers are. The disposal of some unwanted stock can create a book-loss for associations, particularly in lower value areas of the country, so rationalisation will not necessarily result in the expected windfall. Equally, divesting of ‘core products’ in core areas can deliver benefits to the organisation as a whole if carefully selected.
Will Rutter is a Partner in the social housing team at law firm Winckworth Sherwood and Stuart May is head of housing at surveyors Faithorn Farrell Timms.
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