Will Rutter from Winckworth Sherwood and Stuart May from Faithorn Farrell Timms LLP discuss the drivers behind the growing trend of stock rationalisation amongst housing associations.
Since as far back as the mid-2000s, the regulator (at that point the Housing Corporation) has positively encouraged housing associations to strategically rationalise their stock holdings, principally by selling to other housing associations. Some associations have taken up the mantle and the market has at times witnessed disposals and swaps involving hundreds or even thousands of homes in one transaction.
The overriding rationale is to ensure that associations can concentrate their resources on the geographical locations and tenure types they can manage most effectively. In principle, it is a win-win situation for associations who become more efficient and for tenants who can be better served. Associations are also becoming more sophisticated about measuring the financial and social performance of their assets, and well thought through asset appraisal modelling may yield stock for disposal regardless of geography or tenure.
During the unprecedented period of large-scale mergers in 2016/17 the market markedly slowed up with buyers and sellers putting projects on hold or biding their time until the dust settled in the marketplace. 2017/18 saw an about turn and was an incredibly active year for stock rationalisation across the UK, with a record number of units being traded between associations.
There is every reason to expect this trend to continue into the 2018/19 year and the drivers are in place to make the need for rationalisation greater than ever before.
The drivers are:
- Ambitious development projects: The cash raised from stock disposals is not just applied to stock purchases, but for many associations it has cross-funded their development plans. Many of the recent merger announcements have included ambitious development programmes, with significant housing for sale components. With the continued dwindling of grant funding, stock disposals will be a significant funding resource, and ratings agencies may look favourably on cash reserves to offset development risk.
- Efficiencies: The business case for most mergers will be predicated on realising increased operating surpluses from the same revenues. In addition, the regulator has an increased and more challenging view of efficiencies and has challenged the sector to demonstrate that the new wave of mergers is delivering on this agenda. Whilst most mergers will deliver geographical consolidation, asset managers look at the geographical spread and concentrations in their new merged organisations and areas and concentrations that could previously be justified are likely to be revisited. Larger but leaner organisations will also want to look at divesting themselves of their worst performing stock.
- Re-appraising tenures: The merged organisations may have very different ambitions to their predecessor associations about customers they feel best able to serve, and we may see some associations look to vacate certain parts of the sector entirely.
Associations will need to be clear about what their key drivers are. The disposal of some unwanted stock can create a book-loss, particularly in lower value areas of the country, so rationalisation will not necessarily result in the expected windfall. Equally, divesting of core products in core areas can deliver benefits to the organisation as a whole if carefully selected.
