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Terms of association
Housebuilder – December 2008

Can housing associations save the industry in this recession, asks Mark Smulian

Will the cavalry ride in to save housebuilders hit by the credit crunch? It happened in the early 1990s recession, when the government enlisted housing associations to help pull the industry out of a slump by buying its surplus homes and employing its members as contractors. Can associations do that again? More importantly, do they want to?

They can offer some help, but there will be more strings attached this time.

The main difference is that 15 years ago housing associations were relatively unaffected by recession. In those days they mostly built using public money and to help revive the market the government encouraged them to spend while others could not. Since then, associations have increasingly based their development either on cross-subsidy from builders - normally where some homes on a site are sold privately to raise the money to finance the adjacent social housing - or on private finance borrowed to top up their public funds.

present climate

In the present climate housing associations are feeling the credit crunch too, even though most are among the safest things to which any bank could lend. They normally borrow not against their property but against the value of their rental income, most of which in turn is guaranteed by housing benefit payments to tenants from the government. Even with this advantage, banks have fled the sector. Thus, even if associations wanted to help out the house building industry, their room for manoeuvre is limited.

They will want to spend what they have to best secure their objectives. If that coincides with what the house building industry needs, then fine, but expect no favours, even though there is an awareness of the need to sustain the industry's capacity. One cherished hope of builders is that associations will take unsold homes off their hands, as happened with the housing market package in 1992.

In fact, it is the memory of that event that makes associations cautious now, says Tom Dacey, chief executive of Southern Housing Group, who recalls his experience of 15 years ago was that he ended up with "concentrations of people with a range of issues, of which housing need may be only one, in accommodation that was not suitable for them."

He adds: "I'm not buying unsold stock from builders as it is almost all built to the wrong standards, or is the wrong kind of property or in the wrong places. "We find housebuilders' flats are not really suitable as affordable housing."

One housing association leader, who did not wish to be named, elaborated: "A lot of the stuff acquired during the housing market package was pretty awful and housing associations do not want to be exposed to that, there is an element of being once bitten, twice shy."

A complicating factor is associations' space and specification standards, which are normally higher than those of private homes. Housing associations set up their repair, maintenance and management programmes for particular home types and "if you get a lot of other property that is different it is no help," he adds.

Gavin Smart, assistant director of the National Housing Federation, explains how associations are in a different position, against 15 years ago, both in their finances and their expectations.

"There won't be the same kind of financial support from housing associations as one might have expected from the last recession," he warns. "Firstly, there was no credit crunch then, and secondly a lot of our projects now rely on cross-subsidy and that model does not work well in this situation so associations are in a less flexible position."

There is though some help that builders can expect. "The sector will do what it can to assist and has various rental schemes for people who buy homes from developers," Smart says.

"We are also talking to the government about changes to the National Affordable Housing Programme to keep up the supply of homes by bringing forward investment from future years."

Smart emphasises that purchase of unsold homes is likely only "where associations' standards are met". Associations' attitudes to the faltering cross-subsidy model will vary according to where they are and how well advanced.

"They will look at projects case by case," he says. "If a scheme is near to completion they will probably let it go ahead but if it is not yet started they might well not."

Richard Ashdown, director of affordable housing at property firm Jones Lang LaSalle, thinks it may be worthwhile for builders to search out associations that secured new funding earlier this year and so have money available. Even there, he notes, "they will feel particularly under pressure to spend that wisely, so if they see a market that is only going one way they may expect that they will get more for their money by waiting a year to spend it".

Builders with a track record of acting as contractors to associations will be best placed to pick up work but will face "pressure from builders who used to do partnerships and cross-subsidy with associations and now want to be contractors too," he says.

intermediate rent

Dacey is looking to convert homes built for sale to ones for intermediate rent, where occupants are charged between a social and a market rent and have an option to buy in the future, an approach that salvages something from the cross-subsidy model.

Julie Cowans, director of housing consultancy Placeteam, urges all players to think afresh about both finance and profit. "Local authorities are going to have to think differently and creatively about how they get homes built," she says. She urges public bodies to do deals where they contribute land in return for a long term stake in a project.

"There are people who will still lend but they demand greater security and having a project secured by the public sector helps," Cowans says.

Builders should, she suggests, look to a new business model where they rent out property long term instead of simply taking a profit once it is sold. "If builders go into market rent they could get a return that includes both revenue and capital, and that might attract new investors such as pension funds," she says. Success, indeed perhaps survival, will go to the builders who think most creatively about how to work with those who still have land and money.