Diversifying into private rental investments: Organisational strategies of

English Housing Associations

Dr Nicky MorrisonDepartment of Land Economy

University of Cambridge

Housing Studies Association conferenceApril 2014

Why are housing associations diversifying into PRS?

The push factors• Welfare reform & housing benefit

cuts• Affordable rent model = less certain rental

income/cash flows

• Reduced grant funding

• Reliance on bank finance less certain – look to capital markets

> organisations’ risk profile

changing

The pull factors• Generate extra surpluses & cross

subsidisation “robin-hood” principle• Fill a gap in the housing market –

pent-up demand from ‘Generation rent’• Montague Report (2012)

‘natural complement to existing activities/HAs are potentially key players’

• Government support ‘Get Britain building’- £1b ‘Build-to-rent’ / PRS taskforce

• YET HCA(2014) Regulations- Need assurances social housing assets not put at risk

Housing Associations’ diversification into PRS

General needs

Private rented

PRS as % of total

total

2006 154390 36573 1.75 20795152007 1620476 38573 1.77 21782232008 1713124 40767 1.77 22963682009 1776095 45208 1.89 23797282010 1825510 50318 2.06 24370052011 1896853 56683 2.24 25266392012 1949565 47881 1.85 25861152013 1979874 48701 1.84 2634917

Source: HCA Statistical data returns

Research Questions

• What were HA’s reasons for diversifying into PRS investment?

• What is the business model adopted?• What are the key risk exposures and how are

they mitigated?• How does HA manage the tension between

social and commercial goals?

Conceptual framework:Institutional logics

• How organisations reconcile competing logics – commercial and social goals

(Mullins 2006, Mullins et al 2012, Morrison 2014)

• Organisations face similar institutional pressures but negotiate logics in different ways

• How organisations make strategic decisions in relation to business ethos

• Organisational archetypes (Gruis 2008, Czischke et al 2002, Nieboer & Gruis 2014)

Research methods

• Case study research - to examine organisations’ decisions: why taken/how implemented/what results (Yin 2012)

• Purposive sampling • Criteria:

- Operating in same market = London chosen- Focus on `prospectors’ – the front-runners

• Distinguish between: (Neiboer & Gruis 2014)

(i) Societal innovator: enlarge activity and use financial surplus in interest of society - social returns

(ii) Societal real-estate investor: focus on achieving real estate portfolio to provide good financial return – take into account social objectives

Organisational strategiesSocietal innovator:Notting Hill

Societal RE investor:Thames Valley

Company model Established 1963Owns 27,170 units (57% SH)Registered profit-making PRS subsidiary. Borrow against SH assets. All profits gift aided to charitable parent group.

Established 1966Owns 14,900 units (34% SH) 2009 Company restructure:- Parent non-charitable- Non-registered profit-making PRS subsidiary. Ring fence investment. All profits gift aid to charitable subsidiary (TVC)

When entered PRS & portfolio size

2004 – loss making ‘novice’. Today : 700 PRS units

2012 - set up ‘Fizzy Living’ brand. Today: 313 PRS units

Funding - Used £100m own reserves & traditional bank borrowing at historically low rates

- 2013 - £45m loan from HCA ‘Get Britain Building’

- 2013 - £18.3m HCA Round 1 ‘Build to rent’

2012 - £34m seed capital from parent2013 - £40m debt funding from Macquarie Capital investment bank2013 - £200m Silver Arrow subsidiary of Abu Dhabi Investment Authority (ADIA) State-owned investment Fund

Target market Social mission: To help same group who access shared ownership i.e. lower end of market/working poor-Ideally would provide; - discounted rents at £1000pcm but little return- 5-10 years time limited tenancies

Commercial mission: client group young professionals – lifestyle choice-Market rents- 1 year AST- Provide add-on services e.g concierge/gyms/underground car parking

Societal innovator:Notting Hill

Societal RE investor:Thames Valley

Rates of return 3% rental income3% capital appreciation minus costs and borrowing at 4.5%N.B will sell off if little return

5% rental incomeCapital appreciation not factoredADIA terms are ‘gold dust’N.B would not sell - hold over long term-considers PRS a ‘tradable asset’ in future

PRS Portfolio (i) Buy tenanted existing properties(ii) Acquire off-plan from developer

at discounted price(iii) Government ‘Get Britain

Building’ – HCA bought homes from developer/HA manage

(iv) HCA Round 1 ‘Build to rent’N.B To focus on cheaper outer

London locations

(i)Acquire off-plan from developers at discounted price(ii) Plan to build PRS Did not enter Government’s ‘Build to rent’ Rounds as have investor injection of cash

N.B To focus in and around London and extend beyond once built Brand

Key risks -Need a clear brand/marketing -Difficulties in letting – need right product to reduce void period/churn-Maintenance & repair less than anticipated -Need strong track record for investors-PRS returns less than property sales as way to generate surpluses (2013 market sale profits £21.1m versus market rent profits £3.7m)

-Build on Brand reputation – customer loyalty - ‘rentysomethings’-Income threshold – what are tenants willing to pay?- Operating costs relatively high-- Need strong track record for investors-Make sure AH business continues at same trajectory -(TV parent group plans 500 AH p.a next 10 years)

Notting Hill: Societal innovatorCanning Town

HCA ’Get Britain Building’

Fizzy Living: Real Estate investor

Canning Town

Epsom

Popular

Stepney Green

Lessons learnt from ‘front-runners’• Uncertain cash flows and reduced grants so need to generate own profits• Diversification allows cross subsidisation to core business – yet need

assurances social housing assets not at risk• PRS risks versus AH risks are different• Nature extension of business – yet adoption of different business models

in relation to organisation’s ethos • Fills a gap in housing market – especially in London where ‘market risk’ is

relatively minimal • Need to focus on a defined market segment and strong branding

– “cannot be all things to all people” (TVH)– “Fizzy living winning the brand war” (NH)

• Manage the tensions – commercial v social goals..

Key risks in HAs sustaining PRS business

• Investors’ appetite growing but complex deals YET like HAs’ asset management skills & professional management services - ‘safe pair of hands’ (TVH)

• Funds secured against portfolio of completed and income producing PRS (ring fenced) or SH assets – risks & assurances

• PRS returns realised versus selling in open market“sales greater returns and quicker in short run so would consider flogging off PRS” (NH)

• Acquiring properties off-plan from developers at discounted prices – unlikely now in TODAY’s market

• Build to rent: difficult to obtain land in London – escalating land prices/building costs & fierce competition from other organisations

• Public sector land owners reluctant to negotiate reduced price for HAs’ PRS – “best consideration rules”

Purposive exploratory sampling framework: a final point..

To see if fits theoretical model Choose variations to capture insights of

‘phenomenon’ from different angles To illustrate how decisions taken & results If have same problems then likely all will experience these issues – logical generalisations

to help identify cases subsequently select and guide future research…