Why do Housing Associations merge?
Me, several other geeks, and a large number of finance people are excited that the Regulator of Social Housing has published its global accounts. The big headlines are the further reduction of interest cover (EBITDA MRI down to 87%) and a further significant increases in spending on repairs and maintenance to £10bn.
These snapshots are important and interesting; however, my attention was on the trends. One which drew me in was the change in the number of organisations analysed. The first set of global accounts (which are still available online), was 2011. In 2011 there were 366 registered housing associations with more than 1,000 homes, last year that number was 230. This reduction is not primarily due to mergers. A further statistic which has only been published for the last ten years, is the number of groups registered. Over the ten year period this have fallen 20% from 240 to 200. The main cause for the reduction in registered associations is the consolidation of group structures, merging associations which are already within the same organisation.
Another telling figure from looking at changes over the last decade is the proportion of the housing stock managed by the 19 largest associations (the strange use of 19, rather say 10 or 20 is that at the end of the year there were 19 groups owning and managing over 40,000 affordable and social rented homes and this cut off was selected by the Regulator in its analysis). Ten years ago, the largest associations managed 32% of social housing in England, last year that proportion had risen to 42%.
Mergers are happening, I am involved in one myself, but maybe not at the rate some may think. As the operating environment for the sector becomes more challenging it is likely that more will take place. Some will be by mutual decision, others forced by the Regulator at least indirectly.
It used to be said that the prime trigger for mergers was the pension package of Chief Executives. Many years ago (In a Galaxy far away) I worked for an association where the CEO was actively seeking a merger and a pension deal. Today the main trigger is often related to capacity.
As interest cover and operating margins have fallen many associations have found generating viable medium and long term business plans increasingly challenging. Meeting borrowing covenants has triggered discussions not just with the regulator but more critically with lenders. This can be even more stark for those providing supported housing, which generates much smaller margins than rented housing or shared ownership. The overall operating margin for the sector in 2024/25 was 17.3% in 2019/20 (immediately pre covid) it was 22% and in 2015/16 before the Government forced a reduction in rents it was 28%.
For smaller organisations capacity can also relate to recruiting high calibre people to senior posts (especially in finance, IT and technical professions) and the strength in depth leading to staff teams having several single points of failure. In larger associations, those that might be considered medium size, capacity might relate to borrowing capacity, which affects their ability to build new homes. Capacity can also relate to technology as many of the current housing systems are creaking, they don’t meet the need to improve data management and analysis, but the cost and disruption of adopting new systems is prohibitive unless your organisation has scale (even then there are horror stories of large organisations sinking eye watering sums into failed system transformation).
The global accounts show these pressures are leading to an increase in property disposals aa well as mergers.
There are reasons for optimism for the sector’s future finances, in particular falling interest rates and the possibility of rent convergence. However, we are likely to see more consolidation among housing associations. It may not be many years before the percentage of homes managed by the larger associations passes 50% and, even with the creation of new organisations, the number of groups will continue to fall.
