Diversifying into private rental
investments: Organisational strategies of
English Housing Associations
Dr Nicky Morrison
Department of Land Economy
University of Cambridge
Housing Studies Association conference
April 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
2079515
2007
1620476
38573
1.77
2178223
2008
1713124
40767
1.77
2296368
2009
1776095
45208
1.89
2379728
2010
1825510
50318
2.06
2437005
2011
1896853
56683
2.24
2526639
2012
1949565
47881
1.85
2586115
2013
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 strategies
Societal innovator:
Notting Hill
Societal RE investor:
Thames Valley
Company model
Established 1963
Owns 27,170 units (57% SH)
Registered profit-making PRS subsidiary.
Borrow against SH assets.
All profits gift aided to charitable parent
group.
Established 1966
Owns 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 parent
2013 - £40m debt funding from
Macquarie Capital investment bank
2013 - £200m Silver Arrow subsidiary of
Abu Dhabi Investment Authority (ADIA)
State-owned investment Fund
Target market
Social mission: To help same group
Commercial mission: client 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
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 income
3% capital appreciation minus costs
and borrowing at 4.5%
N.B will sell off if little return
5% rental income
Capital appreciation not factored
ADIA terms are ‘gold dust’
N.B would not sell - hold over long term
-considers PRS a ‘tradable asset’ in future
PRS Portfolio
(i)
(ii)
Buy tenanted existing properties
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
-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)
Key risks
N.B To focus in and around London and
extend beyond once built Brand
Notting Hill: Societal innovator
Canning 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…