Dial M for Merger
By Paul Smith
As housing associations seek to balance the cost of living crisis for their residents they are also considering the cost of survival for their businesses (these issues are set out here: https://cratus.co.uk/the-cost-of-renting).
As expected the Government (the last one) has consulted on capping rent rises at a preferred 5%, with options also for 3% and 7%.
Housing associations are regulated, by a government-appointed regulator, on their financial viability. Sensibly this means stress testing risks to the business which are now dominated by rising costs, recruitment and retention and higher interest rates. It’s a shame that the government is not subject to the same level of scrutiny or the rules which it applies to associations. We certainly wouldn’t get away with it by renaming our budgets as fiscal events.
I have not yet come across a housing association that has been able to say that the rent cap doesn’t drastically affect its medium-term financial forecasts with many saying that without significant action they would breach their lending covenants. Naturally, action is being taken, it is different for different organisations but typically includes, reducing development ambitions, spending less on non-health and safety property investment, selling rather than improving poor quality homes, cutting back on carbon reduction work and moving out of non-core services. Alongside these measures, it is becoming respectable to discuss the M-word again.
Housing consultancy HQN has quoted some stark figures from the last period when housing association rents were pegged below inflation. In 2016 social landlords were told to reduce their rents by 1% per year, as inflation was 2-3% at that time this meant they lagged rising costs by 3-4%, the government’s preferred option of a 5% cap could see this reduction falling 5-6% behind price rises. “Before Osborne cut rents, there were 332 associations listed in the RSH [Regulator of Social Housing] global accounts. Today there are around 200. That’s quite a cull”. Indeed it is, however a housing association with a worrying financial forecast is unlikely to want to pick up one in the same or a worse position.
Do mergers even improve the finances and or improve services? The easy answer is not always. A merger can remove some central costs, dare I say it reducing the number of Chief Executives and other senior roles, office costs, and produce some other of the famous ‘economies of scale’ and creating organisations with greater borrowing capacity. These efficiencies can be offset by the stagnation and distraction caused by the merger itself and the restructuring which follows, there is also a growing problem of bringing together organisations with different IT systems and data protocols with key information being lost in the process of integration or organisations running multiple systems which never quite communicate with each other comprehensively. Some people have concerns about the impact on customer service and accountability as the sector becomes dominated by a smaller number of larger organisations. Are they less responsive to customers and stakeholders than smaller associations? A topic for a future post.
Until recently the main drive for a merger was the desire to build more homes and the aggressive competition for skilled people to work in development departments. Hence most mergers were of medium-sized associations (5,000-15,000 homes) seeking to compete with their 40,000 plus neighbours. With development being scaled back this may become less of an issue, however, it’s clear that mergers are back on the sector’s agenda.
