Despite housing associations’ historical mission to build and manage properties to meet housing need, rather than operate as commercial landlords, they are now increasingly relying on issuing corporate bonds to finance their activities. Stewart Smyth writes that this is partly in response to reductions in government funding, and to the way credit rating agencies work.

Over the past two decades, housing associations in England have doubled their share of the total housing stock – from 5% to 10%. This has been driven by successive governments’ policy which preferred housing associations to local authorities for delivering social housing. The main increase came during the New Labour years, where the Decent Homes policy had largescale voluntary stock transfers from local councils to housing associations as its preferred option.

The justification for this policy was that housing associations are private bodies, according to the Office for National Statistics (ONS), and so the borrowing they needed to address the maintenance and repair backlog would not count towards the government’s preferred debt measure, Public Sector Net Debt (PSND).

To the bond market

In the decade since New Labour left office, the percentage of homes provided by housing associations has only increased marginally (from 9.5% to 10.2% of total housing), but the changes in, and restructuring of, the sector are arguably more dramatic. The policy approach has been to squeeze the sector for perceived under-utilisation of assets. Wrapped up in the narratives about austerity, social housing grant was slashed in the Affordable Homes Programme.

In research with colleagues Ian Cole (Sheffield Hallam University) and Desiree Fields (University of California, Berkley), we explored what impact the Affordable Homes Programme and other government policies were having on the large London-based housing association, known as the G15. We were aware that G15 members were addressing the funding gap by issuing corporate bonds, which need a credit rating before going to financial markets. So our focus was on the role of credit rating agencies in facilitating the financialisation of social housing. For the paper we conducted a 10-year financial analysis and interviews with senior finance officers of G15 members.

More and more ‘commercially minded’

Housing associations are hybrid organisations, often with philanthropic or charitable roots, that operate on a not-for-profit basis; yet they increasingly compete in the private housing market and source their funding from the corporate bond market. As the 2014 front cover of one housing association’s annual report proclaimed ‘Socially hearted, commercially minded’.

We started the project with an expectation that the government policy environment was accentuating the commercially-minded operations of the housing associations. Our findings confirmed this expectation but were no less stark and worrying, in the extreme, for the future developments in the sector.

First, the financial analysis highlighted an expected increase in the level of debt across the sector: whereas 11 bonds were issued by seven housing associations between 1995 and 2009, by 2017 a cumulative total of 84 bonds were issued by 58 housing associations, worth £17.1 billion.

Second, this debt is being raised through special purpose companies issuing corporate bonds and securing listings on the London Stock Exchange. Most G15 members are setting up corporate groups structures including public limited companies. The impact of this is to organically change the legal basis of the housing association, making it easier in the future to demutualise, as happened with the building societies in the early 1990s.

Third, we found ample evidence that G15 members have internalised the rating agencies’ criteria and adjusted their activities to achieve the highest possible rating. For example, between 2006 to 2015, the average operating margin increased from 20.1% to 30.5% (above 30% is the criteria for the highest rating from Moody’s).

Fourth, senior finance officers told us about how they had changed their key performance indicators to reflect the rating agencies’ criteria, and how this was then communicated across the senior management team and impacted on decisions about whether particular proposed developments would go ahead.

More commercial – more risk

Finally, the financial ratio that is – arguably – most worrying covers the sources of income for housing associations. Traditionally seen as low risk, with almost all income coming from social rents, this has been increasingly diluted since 2006 as the G15 become more commercially-minded. In 2006 nearly 90% of their income indeed came from social rents, by 2015 this had fallen to just 69.6%.

The major change here is that housing associations are now operating in the open market, building homes for sale at full market value to cross-subsidise lost government funding. This is a higher risk activity and in recent months there has been evidence that some G15 members are suffering from the downturn in the London housing market, with homes going unsold, leading to lower income and higher costs.

The increased risk was recognised in the interviews we conducted and by some commentators over the past few years. Most stark are the widely reported comments in 2015 of one G15 Chief Executive that due to the changes in the funding and policy environment housing people on low-incomes was no longer going to be his association’s ‘problem’.

No social future(?)

Numbers of new build social rent housing released in February 2020 by Homes England highlight that these trends have continued in the years after 2015. Funding allocations for the successor policy to the Affordable Homes Programme, the Shared Ownership and Affordable Homes Programme 2016-21, show that just 4% of over 90,000 planned homes are for social rent – the remainder split between affordable rents and affordable home ownership.

The government may have created a hostile environment for new social housing development but the big housing associations have, generally and willingly, adapted to their new commercial role. The future of social housing looks bleak in England, unless tenants and campaigners can force the government to change policy direction.

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Note: this draws on the authors’ published work in Housing Studies and his co-authored work in Critical Perspectives on Accounting.

About the Author

Stewart Smyth is Senior Lecturer in the Birmingham Business School and a core member of the Centre for Household Assets and Savings Management at the University of Birmingham,

All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science. Featured image credit: Nathan Duck on Unsplash.