Where should we draw the line between the social and the private?

Originally published as a column for Inside Housing on June 15.

The borderline between the social and the private has been blurring for decades for housing associations.

Ever since private finance was introduced in 1988, they have been free (or forced) to match grant with borrowing in the knowledge that higher rents would mostly be covered by housing benefit.

If it’s always been something of a Faustian pact with governments intent on reducing public spending and lenders focussed on the bottom line, there have been undoubted benefits not just in terms of homes delivered in the short term but also surpluses reinvested and major social businesses developed for the long term.

But the question has always been whether and when the housing Dr Faustus would have to deliver on the price of the pact.

There are many who would argue that associations sold their soul long ago, with commercial heads taking over from social hearts in organisations that behave no differently from private landlords and developers.

News that Sanctuary Students has called in debt collectors to write to students over rent unpaid for the summer term on accommodation they no longer occupy because of Coronavirus seems a classic case in point.

There may be particular circumstances here (students had called a rent strike and Sanctuary says it has suspended recovery activity) but the comparison between private equity-owned providers waiving rent for their student tenants and a social landlord-owned one using a debt recovery company speaks volumes.

Sanctuary is far from alone in business-like behaviour that seems incompatible with ‘social’ status and for many large associations it seems that negative coverage in the press and on social media goes with their blurred territory.

Every once in a while, though, an idea comes along that stretches the boundaries between social and private so far that it raises more fundamental questions.

That much was true when some associations flirted with conversion to PLC status in the 2000s and again when one sponsored a right-wing think report advocating ‘free’ housing associations in the 2010s. Neither of these came to fruition.

Though smaller in scale, Hyde’s move to set up a for-profit provider looks like such a moment for the 2020s. The momentum behind for-profits has been growing for several years, led by private landlords, developers and private equity, but now a mainstream housing association is set to join them.

Chief executive Peter Denton explained the thinking behind the move and how it ties into Hyde’s 2050 strategic plan in an article for Social Housing last week.

He argues that associations desperately need capital to build affordable homes and, even before Coronavirus, were facing reduced grant levels and big bills for fire safety and decarbonisation.

At the same time global investors are looking for ways to invest $2 trillion worth of environmental, social and governance (ESG) capital, and affordable housing looks like a perfect match.

As he puts it:

‘We believe that if there is ownership blindness – that customers get the same experience irrespective of ownership – then we should cautiously welcome private capital, providing the right checks and balances can be put in place.’

He addresses likely concerns in the sector one by one. Investors will make profits? So do associations, he says, the difference is they are not-for-dividend and reinvest their profits.

If that switch in language away from the sector’s cuddlier terminology of ‘surpluses’ is a jolt, perhaps it’s more honest.

And language matters a lot. As he also points out, ‘private equity’ suggests short-term profit seeking, whereas the same thing branded as ‘institutional investors’ signals something more benevolent and long term.

Regulatory oversight is key, he argues, both by the Financial Conduct Authority and the Regulator of Social Housing, which he says has rightly come down harshly on sale-and-leaseback transactions by other for-profit providers.

At the end of the day, he says, affordable housing needs capital and that means associations must look for new sources of it – ‘not to the detriment of grant, but alongside it’.

That begs some obvious questions, not least the fact that previous expansions of private finance have gone hand in hand with reductions in grant, leaving associations more leveraged, more dependent on lenders and investors and more exposed to criticism.

Waqar Ahmed, finance director of L&Q, rehearses some of the other objections to private equity in another article for Social Housing.

Fundamentally, he argues, ‘social housing is a low-risk, sub-market social business that has benefited from long-term patient capital’ in the form of government grant and associations’ internally generated reserves.

If equity investors are looking for initial returns of 3-4 per cent and then rising with inflation after that, ‘they should therefore be prepared to accept more risk and not look to acquire social assets at roughly half their market value’.

And what happens if equity investors want to cash in their assets at the top of the market or look to sell when there is a downturn?

Associations should look inwards to their own resources, he says, and say no to private equity ‘unless every penny is reinvested in building more social homes’.

Now many of the detailed financial details involved in this go over my head. So it’s possible that Mr Denton, who came to Hyde from the private real estate sector, has grasped something important that is beyond me and more conservative voices in the sector.

As he puts it:

‘We believe it’s a fundamental mistake to always look inwards, assuming the only real solution is more grant; we doubt we will achieve 50 per cent grant anytime soon.’

A case could be made that we should accept that big associations have evolved into major social businesses and welcome them as more ethical alternatives to private landlords and housebuilders rather than hold them to a purely social standard.

But you do not have to look very far to find warning signs about what can happen when socially focussed businesses  tip too far into private territory.

In the UK, all of the former mutual building societies that converted to plc status have been taken over and private equity has turned care homes into cash cows with disastrous results.

In the Netherlands, the biggest ‘free’ association came completely unstuck in derivatives trading, had to be bailed out by the rest of the sector and was forced to sell stock to private corporate landlords over the heads of tenants.

In Germany, huge privatised social landlords like Vonovia – which Mr Denton praises for its customer service and efficiency – were the subject of large demonstrations last year calling for their property to be expropriated and a rent freeze.

Quite apart from the ethical issues involved in social businesses that millions of people rely on for their home, that raises what could be a flaw in a business model that relies on guaranteed inflation-plus rent increases covered by housing benefit.

This is controversial enough even when all of the proceeds are reinvested into more homes by not-for profit (or dividend) housing associations and is even more so in the era of high executive salaries and ‘affordable’ rent but it could quickly become untenable if it is seen to line the pockets of  private equity investors.

And if political support ebbs away and rents stop automatically rising, what then? The Faustian Pact works both ways.