Updated: Jul 13
In our webinar on the 24th of June, ‘Keeping up to date with Planning Reform’, Chris Wandel was joined by Jonathan Walters, the Deputy Chief Executive at the Regulator of Social Housing. Jonathan has worked at the Regulator since 2004 and has extensive experience in dealing with funders, government, and Registered Providers.
With Michael Gove’s new levelling-up department now in place, there is considerable interest in revisiting planning. This white paper outlines a plan for new, higher-quality houses which, along with net-zero goals, will affect how the sector operates.
Chris notes that a great number of these proposed changes, such as removing Section 106 deals and giving funds directly to local authorities, have caused some anxiety amongst SDS customers. Jonathan offers his perspective on these issues.
Overview by Jonathan:
To be clear, the Regulator of Social Housing is not Homes England, but they are a very interested observer in what’s happening within the planning and new supply. Since 2010, housing associations have been churning out 40-50,000 homes each year with a strong focus on social rent, as well as recent spikes towards shared ownership. However, about 85% of these developments are being done by the top 20 housing associations, with others in the sector picking up the Section 106 deals in property developments. This has resulted in extreme market concentration within the social housing sector.
Looking back over the pandemic, most housing associations’ planning proposals showed a scaling back, or a risk-averse approach to future developments. This reflects general uncertainty within the housing market, issues with supply and materials, as well as rising interest rates. There was an expectation for this scaling back to be reversed as we came out of the pandemic, and this did happen for a short period. However, it appears that many developers are returning to a cautious approach to planning. There does not appear to be a strong appetite for risk across the sector and, consequently, development ambition has also dropped. What the Regulator is currently seeing is much more interest in building rental properties and to a certain extent shared ownership.
But how do you finance the construction of those homes? Previously, it was the profits from new sales that were cross-subsidising a lot of the new supply, and if housing associations are scaling back on building properties for outright sale, they will see a reduction in this cash flow. This is driving organisations to see where else in their business they can find value to cross-subsidise new developments. Consequently, there is some discussion around disposing of residual Section 106 properties to commercial new entrants; for the housing association this would release cash in the short term, and the new entrant would be able to purchase a new income stream. Increasingly, even within housing associations, businesses are seeing a greater conflict of interests between the development and management teams, as the asset management side of the business requires income to address new building safety regulations and zero-carbon goals. There is a real battle going on between investing future funds in existing stock or new supply. These are the conditions for a perfect storm, as housing associations are not sure where to position their business given the existing pressures on the stock, on the balance sheet, with the new entrants coming into the market, and the uncertainty around planning. Many organisations do not feel able to forecast for large building projects in the next five years and hence are showing hesitancy.
We are curious to know what Homes England, GLA, the central government, and local authorities are going to do to provide certainty in this environment. Certainty would allow developers, housing associations, and others to carry on building as, economically, the worst outcome would be if all of the house builders and associations sat on their hands and waited this period out. The government has a fiscal treasury interest in the continuation of house building. So far, most of the government interventions have been concerned with demand, however, moving forward there needs to be greater intervention on the supply side. There is no silver bullet, but what we’re seeing at the moment is just more and more fog.
From a Regulator point of view, our engagement with the government has changed. Over the last 10 years, the question we have been asked is ‘what can you do to encourage supply?’. Now, we are being asked ‘how can you improve the condition of existing stock?’, and ‘how are you going to get the stock to net-zero?’. This feels to be quite an inflection point, and it is unclear whether this is a temporary focus driven by social media and news stories, or a permanent shift in government policy that will play out over the next few years.
Question 1: In terms of ethical disposal schemes, is this something that housing associations and registered providers are going to benefit from to fund new growth? (Chris Wandel, SDS)
We could see this happening in several ways. Residual Shared Ownership could be sold to release cash. This may be to for-profit registered providers, unlike with social rent properties. Shared Ownership may also be disposed of in the open market - there is no legal obligation to sell to a registered entity. Most local authorities would be very concerned by an influx of social housing being sold on the open market, but legally it is permissible. However, it is much more common to see stock being sold back into the social housing sector. As a regulator, we feel reasonably relaxed about the disposal of shared ownership as the residents have a great deal of protection built into the lease.
We are aware of the issue of disposing of property in low-demand areas. These areas are experiencing high EPCC or zero-carbon bills, and it will cost the management provider a significant amount to bring these properties up to standard. They may consider selling those properties because of the increased cost, or potentially selling a number of the properties to obtain equity to improve the remaining plots. These are difficult conversations to have, as these properties will be released into a fragile housing market and thus may not be beneficial to the local community; a lot of social sector stock in an unregulated PRS sector. As a regulator, we would be extremely concerned if stock was being disposed of with sitting tenants in it outside of the sector.
Merseyside had a homesteading scheme for a long time, in which terrace houses were disposed of to first-time buyers. The hope is that this would bring more economically active people into the area, which would help the locality itself. Moreover, even if the net cash flow to the business is quite small, as the property is disposed of at a low price, you’re taking a significant liability off your balance sheet and improving the area you work in as people have a route into homeownership. When done properly, this can be a win-win solution for the housing association and the local community.
Question 2: What are your predictions for the sector if the country continues to fall into a recession? (Chris Wandel, SDS)
The differential inflation rate is one of the most damaging things for a housing association. Over the last four years the sector experienced rent cuts, yet, the damage was manageable because the differential inflation rate was quite low. Now, however, rents have increased by 4% with an expectation that in September the CPI could rise into double digits. This is going to lead to rent increases of more than 10%.
But can housing associations do this to their customers? Customers are going to experience a winter of significant energy price rises and at the end of that a rent increase. Family finances are under incredible strain. Therefore, is it acceptable for housing providers to drive up rent prices? This is a difficult question because if housing associations do not increase the rents they will experience massive differential inflation in their businesses. At that point, supply takes a considerable hit.
It is unclear whether the government will move to support housing associations in a way that replicates action from the late nineties and early noughties as the economy is facing more considerable restraints presently. However, I think it is likely that the Treasury would want to intervene in some way to keep the housing market afloat and to ensure that new construction projects continue. However, I think we could see some casualties in the housing association sector before the cavalry arrive given the differential cost pressures and rising interest rates. The housing sector will have to build a strong case in its favour.
Question 3: Will regeneration projects be a way to increase stock and upgrade existing properties? (Barbara Curror, Golding Homes)
Regeneration has been a dirty word in government for the past ten years. In the late noughties, New Labour established the Housing Market Pathfinders program in a series of weaker housing market areas in the north of England. The objective was to remove poorer quality stock and rebalance supply. However, it led to the demolition of a considerable number of terrace houses, some of which were boarded off for a number of years before they were demolished. Moreover, following the crash of 2007, some projects were never recovered. This generated a lot of negative publicity and feeling toward regeneration, and consequently turned politicians against the idea.
Looking forward, however, Michael Gove and Boris Johnson have begun to talk about regeneration in more positive terms. There has been a great deal of media coverage revealing poor quality housing stock across the country which is generating an appetite for change amongst the public. Regeneration is a difficult and complex process involving people’s homes. Yet, if the government can signal that regeneration is an important aspect of their housing policy, and make tangible changes to support planning teams and make large regeneration projects viable, housing associations would be in a better position to carry out this process. The tide is beginning to turn, and this is a prime opportunity for the social housing sector to build a case in favour of regeneration.
Question 4: Jonathan alluded to traditional housing associations working with for-profits with different structures. Can you elaborate on these particular structures? (Nick Thompson, Right Size Consultancy)
There is a range of ways that the new entrants and existing organisations are all currently working together. Simple property management contracts are being agreed upon with for-profit organisations. There is a certain amount of shared ownership disposal which is acquired by for-profits to release cash into the housing associations. There are also more integrated joint ventures being explored between organisations. For-profit subsidiaries are established, and the Housing Association and the additional player each have an equity stake in the venture. These are interesting developments in the market as it is giving housing associations some additional options to access capital.
Question 5: Are build contracts linked to BCIS becoming more common? (Chetan Chowhan, Home Group)
The Regulator is seeing a mixture of contracts, however, it is difficult to say if it is becoming more common.
Question 6: What is Jonathan’s take on the new infrastructure levy, is it workable in practice for affordable delivery? Would a reformed and faster Section 106 process be preferable? (Steve Hughs, Yorkshire Housing).
It is not the role of the Regulator to speculate, and thus we do not hold a view on this issue. The Regulator has previously observed that the more radical the change, the more likely it is that there will be a hiatus while developers work out what the new rules of the game are. This was certainly a worry with the reforms discussed in January; there was a real concern that these changes may stop supply for a couple of years. Incremental changes are less likely to have a significant impact on supply but will take longer to implement. However, if you think that incremental changes will never get you where you need to be, then a few years of pain will have to be accepted while the market readjusts to these new rules. These are the current trade-offs being discussed in government.
Question 7: What is Jonathan's opinion on implementing all social regeneration instead of traditional mixed tenure? (Ryan Stevenson, Richmond and Wandsworth Government)
Previously, mixed communities were the mantra and few projects would be authorised if they did not feature mixed tenure. However, more recently there has been a move towards building estates that include no social housing, which has led to the two types of tenures being isolated from each other. There are still estates across the country, though, in which residents are keen to maintain their diversity and are not supportive of mono tenure estates. Although there is some appeal to establishing mono tenure estates for social housing, it is unlikely to be financially viable.
Question 8: Is it the case that housing associations will be prevented from disposing of the worst-performing stock into the private rented sector? (Alistair Jones, Octavia Housing)
The Regulator would always be concerned about rented stock with sitting tenants leaving the sector as the tenant will be losing their rights and access to social housing. This being said, nothing is preventing this process from occurring. Something for housing associations to consider though is their public reputation and the political risk of allowing a flow of social housing into the private rented sector.
Private sector tenants are unlikely to pay for the properties being disposed of to be brought up to standard, and thus there is a bigger policy debate about what we do as a nation to recover our tired stock. There are a number of reforms being suggested for the private rented sector, including the extension of the decent home standard into the private sector. This has caused some consternation amongst landlords as they were previously unregulated, however, it could have quite a transformative effect on the private rented sector.
Question 9: Can Jonathan elaborate on what interventions he thinks would be useful to support the social housing sector, and what may be politically palatable. (Nick Thompson, Right Size Consultancy).
There are a couple of things at play that might lead to the government needing to offer some kind of intervention. One of these issues is the complex developments in high-demand urban areas in which the tenants are experiencing low-quality living conditions. It is very difficult for landlords to address these problems as they may be rooted in the fabric of the building. Moreover, there may be leaseholders in this building who are unwilling to contribute to the building improvements or give contractors access to their properties.
The sector is under a great deal of pressure due to media coverage to bring these properties up to standard. But in many cases, this will require a multi-year, multi-million pound investment to knock down the building and begin regeneration. Therefore, the sector needs to build a case to bring to the government highlighting issues around cash flow, planning, and negotiations with local authorities. If the government is serious about hitting zero carbon and addressing what is being reported on social media, there may be support available to resolve these problems.
Question 10: What advice would you give to housing associations moving forward? (Chris Wandel, SDS)
To be blunt, this sector has a poor reputation for complaining and placing the blame for problems outside of itself. It is perceived by the government as routinely asking for a bag of money to solve its problems. This is why it is really important for the social housing sector to improve its narrative, and to build stronger cases when it is in need of assistance. Housing associations must take a more proactive approach to the challenges facing this sector. By offering solutions that support the government’s net-zero goals, housing associations could enter into more cooperative relationships with the government which mutually support each party.
Based on a webinar given by Jonathan Walters on 24/06/22. Written and edited by Sophie Shelton.