Regulating affordable housing

The new regulator of social housing, the Tenant Services Authority (TSA), was launched in an unprecedented global recession. The economy had taken a battering, private sector activity had fallen sharply and public finances are still coming under increasing strain to help support the banks and the fall out from the credit crunch.
    
With lending severely constrained, one of the TSA’s top priorities has been viability. Without a healthy balance sheet and a strong cash flow, homes don’t get built, decent homes programme stop and services to tenants suffer.

Building homes
With four and a half million people on housing lists and access to mortgage finance still tight, the need for housing associations, councils and arms length management organisations (ALMOs) to build more homes has never been more important. Based on housing association business plans, we expect that the number of homes built by housing associations to fall from 50,000 last year to 40,000 a year after 2011.
    
There are other issues also facing providers. Section 106 sites (where there is a legal agreement between the planning authority and the developer) have dried up and there are less opportunities coming from planning gain and profits from low cost home ownership subsidising rented development.
    
In addition, the deflation experienced in the wider economy will feed through into associations’ rent levels in 2010/11 – rent increases are linked to the September retail price index (RPI) figure, which was negative in 2009. Although, associations appear to be coping with forecast reductions in income and none have approached the TSA saying the fall in rents will cause them viability issues. However, they will have to look closely at their cost base to cope on more uncertain economic times.
    
One question I am often asked is how the sector is coping in this economic downturn. This article should hopefully illustrate that there is good news. One of the TSA’s priorities is to provide the regulatory clarity and certainty needed to maintain the confidence of private sector lenders and investors, so that they can finance improvement improvements to neighbourhoods and the building of more homes.

Reducing cost of borrowing
By effective regulation, the TSA safeguards and maximises the value of public investment in affordable homes. The protection we offer to private lenders reduces the cost of borrowing. Every £1 we spend on regulating helps housing associations to save £15 in reduced interest costs. This amounts to a saving of £250 a year – or 70p a day – for every housing association home in England. Our regulation of rents helps to ensure that the £127 billion of public money invested in social housing delivers value to the taxpayer – by making those homes available to those who need them most and keeping down the £7 billion Housing Benefit bill for social housing.
    
The TSA also has a priority to protect the taxpayer. We were established by Parliament to safeguard the public investment of £37 billion in housing associations and over £90 billion in local authority homes, and provide assurance for private investors who have £40 billion funds invested in housing associations. We will make sure that our work continues to enable the landlords we regulate to secure loans at significantly lower rates than they would otherwise.
    
Lenders are clear that an efficient and stable national regulatory system is crucial to the flow of the further £20-25 billion of funding that will be needed over the next five years to continue to build new homes for those most in need. Independent research shows that regulation currently reduces interest costs by some £500 million per year. This saving will grow as the debt in the social housing sector increases. At a time when public resources are constrained and markets prone to uncertainty, the benefits of regulatory stability and continuity are clear.
    
Over the next five years, we want to ensure that lenders, pension fund managers and the wider bond market keep their confidence in the sector and our regulatory role, so that landlords can borrow the £20 to £25 billion over the period.

Finding the funds
In November last year we published our private finance strategy, which set out how we work with lenders and the capital markets to increase the sources of private finance to invest in social housing. During 2008-09, over £7 billion of private finance was raised by housing associations and the overall value of their assets rose from £85 billion to £95 billion. Since the TSA launched, housing associations have raised just under £2 billion from the bond market.
    
Large institutional investors such as pension funds and insurance companies are looking for new asset classes in which to invest that will offer a stable return and security for their investment. There has been some debate recently about whether the combination of demand for a new asset class and the potential need to afford affordable and sub-market cost housing could offer part of the solution to the UK’s affordable housing problem.
    
Our job is to make sure that housing providers are well-governed, well-run and deliver value for money, so that they can invest effectively and efficiently in new homes and in the homes they already own. We work with landlords to drive up value for money – by sharing information on costs and performance, by effective allocation and by encouraging new entrants into the market and promoting new partnerships between existing providers. Our work with lenders and investors helps to ensure that new funds continue to be made available to build new homes and improve existing ones.
    
Housing associations have weathered the economic storm better than many parts of the UK economy, with minimal write down of assets and no instances of insolvency. The sector has to date avoided the business failures seen in other parts of the economy – no funder has suffered a loan default from lending to an association during the credit crunch. Although there have been writedowns of some assets – some associations bought land or property at the top of the market and now it is not worth what they spent on it – the size of those writedowns is relatively small at around 0.1 per cent of the sector’s £95 billion asset value. Importantly, it has not affected their ability to comply with funders covenants and the sector has been far less exposed than commercial developers.
    
I believe that the housing association sector is well placed to emerge in a position of strength from the downturn and will be ready to help address the long-term shortage in affordable housing faced by the country, whilst continuing to deliver high quality services to tenants.

For more information
Web: www.tenantservicesauthority.org