Map reading

How should housing associations respond to the tantalising prospect of freedom? In uncharted territory you need something to guide you.

A report last week offers them the chance to buy out their historic grant at a discount and in return win substantial new freedoms over nominations, asset management and rents and the capacity to build many more homes.

The fact that it comes from Policy Exchange has been enough for many people to denounce it as privatisation and it may indeed be another big step towards that. However, this is not quite the free market fundamentalism we’ve come to expect from the think tank that brought us recommendations on selling expensive tenancies and the sale of all housing association homes. Many of the ideas in this report come from housing associations themselves and have been tested in polling of the chief executives and finance directors of 15 of the larger ones. As the contrasting reactions of the NHF and Placeshapers show, the report has sharply divided opinion but many of these proposals have support.

There are attractions for government too: this report seems to offer a way of replacing £1.1 billion of capital grant which counts against public borrowing with equity loans that do not; it gives associations freedom on rents within an overall limit rent; it outlines a way to get more homes that it is claimed will not add to the housing benefit bill: and it could even end up making a profit for the taxpayer.

But is all of this just a little too good to be true? The limit rent of CPI plus 1 per cent may apply to each association’s overall affordable housing portfolio but that seems to leave it free to set rents for new homes as high as it wants. Have the implications for housing benefit really been thought through?

‘The old, inefficient, byzantine system’ that the report criticises is on its own figures saving £3 billion a year in housing benefit when rents are compared to market levels. That doesn’t seem too bad a return on £45.4 billion in historic grant. Meanwhile an appendix at the end of the report includes bullet points from a roundtable discussion with associations. One makes a point about the existing system that is not really answered in the report itself: ‘Grant has been important as a control – the presence of strings attached to grant, refusing consent of disposal, prevented Cosmopolitan from being even worse.’

‘Affordable’ rent is seen as unsustainable and as imposing ‘unacceptable financial risks on housing associations in the context of welfare reform’. However, the model of replacing grant with government equity investment seems to rely on rents at up to 80 per cent of market levels. And if free associations look to move upmarket and house tenants in work who can afford the rents, what happens to those most in need?

There is of course no reason why greater commercial freedom for larger housing associations could not be accompanied by action to stimulate the development of more social housing elsewhere. For example, council housing could be freed from the public borrowing rules or a new generation of community associations could be endowed with grant.

But that is not on the agenda here. Instead we have the prospect of associations free from local authority control and influence, able to house who they want and sell what and where they want. This would complete the move away from council housing and the severance of the connection between housing need and local political decision making.

Would councils and tenants have voted for stock transfer if they’d known that 20 or 30 years later they could lose nomination rights and the stock could be sold off without their consent to fund new homes elsewhere? Equally, will housing associations that are not active developers be happy to lose their freedom (they will be required to become active under these proposals) as the price for others gaining theirs?

Whatever you believe on these points, the logic of commercialisation over the last 25 years suggests that something like these proposals will happen sooner or later. The real question is where the commercial logic of ‘free’ housing associations will lead next. Most public grant has already been replaced by private finance. With the rest replaced with public equity, is it such a big step from there to private equity or stock market flotation?

In her blog over the weekend, Carla Keegans offered one warning from recent history. The collapse of Southern Cross after it could no longer pay the rent on the care homes it had sold and leased back is a warning of what can go wrong when a business dealing with vulnerable people turns to private equity and burdens itself with too much debt. Ironically, salaries at Southern Cross used to be quoted as benchmarks by housing associations seeking to justify the high pay of their chief executives.

That got me thinking about the other points on the compass. Another obvious warning from history is the way that building societies rushed to convert to plc status in the 1990s and 2000s. First came a wave of takeovers, then expansion into new sources of finance, then the global financial crisis symbolised in the UK by the spectacular collapse of Northern Rock. All of the societies that converted were swallowed up by the banks and another sector that once proudly described itself as a movement is now a shadow of its former self.

Then look East for some other examples of what can happen when social housing is privatised. It’s strange that the Policy Exchange report does not mention the example of Dutch housing associations, which were given their financial independence and largely privatised in 1995. Serious shortcomings in the sector, including €2 billion losses on derivatives deals made by the largest association, led to a parliamentary inquiry.

Finally (this is cheating a bit because it’s in East London, but bear with me) look at what’s happening at the New Era estate in Hoxton. This was built in the 1930s by a charitable trust and has offered homes at affordable rents to local families. A consortium of investors bought it earlier this year and told tenants rents would increase. The family firm of Tory MP Richard Benyon decided to sell its stake and withdraw from the management of the estate after a vociferous campaign by residents and a wave of bad publicity. That leaves the estate under the control of Westbrook Partners, a US-based investment company that now seems set to evict the tenants before Christmas, refurbish the flats and re-let them on full market rents. This seems to be in line with the business strategy outlined in this company overview by Business Week: pursuing ‘opportunistic real estate investments resulting from undervalued assets and portfolios’.

Social housing estates in expensive areas represent precisely these kind of ‘undervalued assets’. At two conferences recently I’ve heard talk of private equity companies that are keen to invest in social housing. They might of course be looking for the sort of steady but unspectacular returns that lenders to housing associations already enjoy but private equity specialises in exploiting under-valued assets. And that is exactly how they could see homes let on social rents.

Add these concerns to the ones raised by the Joseph Rowntree Foundation about where we could be heading on housing and poverty by 2040 if we continue to move from social to market rents. All the signs may be pointing to the sunlit uplands of financial freedom, but housing associations and politicians alike need to check the map carefully and get their bearings before they start on what could be a hazardous journey.

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