The CFG team have recently been thinking about risk - risks in supply chains, cyber security risks and so on – and it is risk that forms the focus of this month’s Economic Outlook Briefing which will be published on 28th July.
In the publication, my colleague Andrew O’Brien highlights that charities are particularly affected by government policy. Reading his article got me thinking about two particular policies introduced in the Summer Budget delivered by the Chancellor earlier this month: the extension of Right to Buy (RtB)
to housing association properties and the reduction in social housing rents. Housing associations are an interesting case. Whilst they are run not-for-profit and the majority have charitable status, they do operate like private organisations. But, they also receive not an insignificant amount of their income from public funds – for example through housing benefits. Together these policies will represent not only a significant change for housing associations - the financial implication of which is the focus of this post - but will also indirectly pose challenges for other charities.
What are the changes?
The next generation of the RtB policy will compel housing associations to offer tenants who have been living in the property for three or more years the opportunity to buy their homes. Legislation already allows housing association tenants to “acquire” their homes at a small discount of between £9,000 and £16,000, depending on the house prices in the area. Through RtB, housing association tenants will benefit from higher discounts of up to £102,700 in London and £77,000 in the rest of England. The government expects that the loss incurred by housing associations as a result of these discounts to be covered by Local Authorities selling their existing housing stock and central government will then make up the shortfall. It is worth noting at this stage that it is not clear that the government can guarantee that housing associations will get the full market value price of the properties they sell under RtB. By selling their most expensive properties, Local Authorities will raise an estimated £4.5bn. This will first be invested in replacing the housing stock before funding Right to Buy. Right to Buy will cost around £11.2 billion pounds, this will mean that central government will be required to find billions of pounds to cover the shortfall. It will be interesting to see if this fully accounted for in the Autumn Statement. A reduction in social housing rents by 1% over the next four years was also announced by the Chancellor. This policy will represent a reduction of 12% in rental income by 2020/21 - a significant change for housing associations who, up until the July Budget, would have been working on the assumption that rents would increase at a rate of CPI + 1%.
So, what's the risk?
This week the House of Lords voted in favour for an amendment that would restrict the government from compelling charities to sell off their assets which is inconsistent with their charitable purpose. Whilst Housing Associations are not directly mentioned in the amendment, this represents a move to block the policy. We will have to wait and see what the implications of this vote will be, but considering RtB was included in the Conservative party manifesto, it is unlikely it will do much to alter the government’s course. Assuming that the government will stay its course, below are some of the financial implications for housing associations, and indeed other charities, that we might expect.
- In the short term housing associations will have an influx of capital. However, it will difficult to replace a property that has been collecting a yield over 20-60 years like for like. Housing Associations will therefore have to reassess future plans regarding the quantity and quality of future housing and delivering the additional services (eg support for personal care and employability).
- Relatedly, housing associations can also provide grants in their local area, an important source of income for local charities. With reduced income, will these grants be cut? If so, this will add further pressure to small local charities that are faced with greater competition for diminishing grants from their local authorities.
- Housing associations have traditionally been seen as sound investments as they have a stable income stream from rents, implicit government support and the strength of their collateral comprising of fixed charges on their housing association policies. The reduction in government funding to housing associations during the last parliament, and the reduction of affordable, long-term bank loans since the recession, housing association bonds (now worth around £12 billion) have become an important source of capital. It is not clear what impact RtB in particular will have on the credit worthiness of housing associations. As such, this looks set to make the currently low cost of capital enjoyed by housing associations more expensive.
- Charitable foundations turn to housing association bonds as safe investments. If together RtB and the rent reduction lead to financial difficulties for housing associations this could have a knock on effect for those foundations that have invested in them and in turn have a negative impact on the available funds for their beneficiaries.
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- Finally, what about social investment? Charity bonds and social lending have been reliant on the current model of housing associations buying and updating properties and then paying back the investment through renting them to beneficiaries. However, if housing associations are to be compelled to reduce rents, will there be a question mark over whether investments will be paid back? What impact will this then have on the social investment market?