Research article

Understanding market risk

A housing market downturn remains low on the risk radar of many housing associations, despite their increasing focus on developing homes for market sale

Only 24% of housing association chief executives saw a housing market downturn as something that might prevent their organisation from delivering more homes according to the Housing Sector Survey we published earlier this year. And only a third saw a downturn as a risk to their organisation’s expansion. But with the sector increasingly exposed to the market the associated risks need more attention.

The Government has made available £7.1bn to deliver new affordable homes. Over time more flexibility has been introduced from an initial focus on shared ownership. This has created more opportunities to deliver affordable homes for rent. This shift has been complemented with the announcement of a further £2bn pot of grant allowing for social rent delivery.

In order to deliver the social rent that is central to their charitable purpose housing associations are venturing into market sale delivery to cross-subsidise their sub-market programmes. Just over a quarter of our sample of 189 housing associations made some income from non-social housing sales activity in 2015/16. Increasingly the structure of grant has pushed housing associations towards more pro-cyclical tenures.

For most of them the profit made from these sales was equivalent to less than 20% of the organisation’s total surplus. Some associations actually made a loss from this sales activity. But for others it was equivalent to more than 60% of their total surplus.

So currently most developing associations have only modest exposure to market risk. But the sector's intention is to grow their development portfolios towards pro-cyclical tenures, with 66% in our survey saying they will build market sale in the next five years. This is positive and reflects the maturing role of housing associations in housing supply across all tenures.

Figure 4

FIGURE 4Whilst most housing associations only have modest exposure to the market in their surplus, some are making a loss from their non-social housing sales activity

Source: kamaco analysis of the 2016 published financial reports for over 189 of the largest housing associations owning 93% of general needs housing stock

Risk awareness

However, with more of their turnover and development aspirations exposed to the market, an awareness of the risks of downturn is key. Following the financial crisis in 2008 operating margins for the eight largest listed housebuilders fell sharply into negative territory. They were also hard hit by the rapid fall in land values. Greenfield land values fell 45% in 2009, and urban land values fell over 50%. It was only in 2016 that the average operating margin recovered to 20%, consistent with target returns required 'across the cycle'.

Whilst working to deliver new homes using grant, housing associations are increasingly delivering market sale homes alongside shared ownership, to cross-subsidise sub-market tenures. But despite their experience of developing and managing rented stock only 37% are planning to deliver market rent, reflecting viability challenges and also the capital lock-up compared to open market sale and grant funded tenures.

For sale schemes provide an ability to recycle cash more quickly but this must be offset against the increased risks. Market development programmes with a balance of sale and rental homes offer a lower risk option, providing a long term income stream along with an asset to borrow against. But as we’ve shown in this paper in some parts of the country market rent may also fulfil the charitable purpose of housing associations improving access to housing for households on the lowest income whilst improving the quality of local housing stock.

Flexible use of government funding would allow housing associations to respond to local housing issues, whether it's affordability, quality, or simply undersupply.

Figure 5

FIGURE 5Average developer operating margins fell to -16% in 2009 following the downturn, as land prices fell dramatically. The risks of downturns to market developers are potentially severe

Source: kamaco Research, Nationwide, Housebuilder Annual Reports

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Simon Smith

Simon Smith

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