We live in a complicated world so I will try to keep this simple at risk of upsetting the technicians!
Derwent Living is 50 years old this year. We were formed in Derby in 1964. It is therefore a good time to consider what we might look like in another 20 years time.
There are around 1,900 housing associations providing over two million homes. Collectively we are worth circa £80 billion with annual turnover of £14bn. We are a success story and will continue to grow providing homes for 12 million (a fifth of the population) by 2033.
Housing associations come in all shapes and sizes and do many things but housing binds us all together. Secondly we are private organisations. We are not in the public sector as many people and politicians seem to think. We borrow money from banks, building societies and pension funds to provide ‘affordable’ housing solutions. The rents we charge, which are by and large below market levels, are used to fund management and maintenance services and pay back borrowing taken to fund the construction or purchase of new homes. Many housing associations also spend money on supporting local communities by helping with job creation, education, health and community facilities.
Most are industrial and provident societies where profit or surplus is ploughed back in to meet the objectives of the business. Most are charities - Derwent Living is one of the 20% that are non-charitable.
Historically housing associations have also been supported by grants from central and local government or by other support in terms of land for new construction or planning gain. For all housing associations this grant makes up less than 50% of the total value of their housing stock. Grant was paid to enable government to provide social and affordable housing to those on low incomes. Usually housing associations turn to local authorities who nominate households from their waiting lists for new homes and then for a proportion of lettings when the property becomes vacant.
At Derwent Living we have never taken that much public funding. Our current value is over £500m and we have had just £130m grant – 26%.
So housing associations are in no way ‘owned’ by Government. Grant funding buys an obligation to house those in need and no more than that in my view. We are owned by our shareholders who are typically tenants and board members – individuals committed to social good.
The big debate as we work towards 2033 is what are we here for?
We are a very diverse sector. Each of us has a unique geographical area, some do many things and others specialise. Others work in one local authority area and some specialise in care for the elderly or special housing needs. Derwent Living is a regional provider mainly across the East Midlands and focussing on general family housing. Each housing association board choses its strategy and that is a key thing. We are independent of government. We have a social business to run. We respond to local needs and the needs of our existing customers and tenants. Housing association boards choose how best to provide maximum social benefit.
At Derwent Living the board has set out a clear path to 2033.
The needs of existing customers are sacrosanct. Existing management and maintenance services are a given. We achieve 90% customer satisfaction and top quartile performance in the delivery of these services to 8,000 households. This ranges from repair response times and cleaning and grounds maintenance to dealing with anti-social behaviour and answering phones and emails.
But we want to be more efficient in how we do this and this has meant that we make a surplus on our core activities. In 2013 this was £1.1m and we plan to improve this year on year. By concentrating on what we do best we have reached a level of efficiency now but are on the path to greater effectiveness still. Our operating costs are less than 50% of turnover and in the core business we have just 130 staff compared to 250 in 2008. By 2033 we will be supremely efficient through the use of new technology and a ruthless focus on costs.
We also realised that the scope for efficiencies in our core social business wasn’t enough to yield the profits/surpluses we needed to invest in social gain.
Almost 20 years ago (in 1995), the Derwent Living board began to invest in commercial activity to raise more money through profit making ventures. This is now 40% of all that we do and provides annual profits of at least £2.5m.
We think all housing associations have a duty to maximise their surpluses/profits once their core services are delivered and at a time when there is less public funding support we have to seek other sources of funding.
At Derwent Living we have a 75% owned subsidiary (Derwent FM) employing 500 people on facilities management. It turns over £10m and makes £1m a year profit. In addition market rent, keyworker and student accommodation makes a further £1.5m. This spans some 13,000 properties plus offices, colleges and hospitals. We invest commercially to get a return. For instance an £8m investment in universities brings a steady £800,000 per year in dividends. As with successful capitalists we seek a return but we of course spend it on social good!
But what should you do with that profit? Deciding how best to use your profits for maximum social good is one the board’s key decisions.
At Derwent Living we maximise profit for social ends. It’s a great model and radically different to the classic private company that passes its profit to shareholders for their own benefit.
The options for using profit/surpluses are manifold –
Some housing associations look to enhance their base services for existing tenants. This might be additional support to help residents find work, access education or live healthier lives. It could be a better repair service, more green initiatives or more intensive estate management. This is a choice many community based housing associations make particularly those working in a single local authority with greater inequality and deprivation. In areas left behind by market forces and a withdrawal of public funding, support can even stretch to putting money into the local school or running job and health courses or buying the local radio station or running the local post office. In many cases housing associations are the biggest employers in the area having a huge impact on the community.
Others use the surplus to help tenants deal with the impact of government cuts in housing benefit. Some associations decided to pay the bedroom tax on behalf of affected tenants. If housing benefit is taken away from the under 25s (many of whom are working but on low pay) and the benefit cap is reduced from £26,000 (which will really hit larger families hard) might those housing associations also look to foot the bill?
Others focus on building new homes. This could be renewal to replace poor existing accommodation or completely new supply.
Many try and do a bit of everything.
There is no right or wrong in any of these choices. Boards assess what they are best at, what their local/regional/national pressures are and what their financial capacity is to make an impact.
At Derwent Living the board works on the basis that simplicity and focus make successful organisations. The mix and match approach doesn’t work for us. We are not community based so the most efficient way for us is to use the profit to maximise new house-building and the many new jobs that come with it.
We think every pound gives a greater return this way. Our biggest estate is 190 flats and in many of our local authorities we have just tens or at most hundreds of homes scattered across the district. Putting money into local communities does not make sense for us. We can invest more effectively in the regional/national economy by building.
We try to keep our costs down by concentrating only on being a good landlord. We certainly don’t abandon people and try to help by pointing them in the right direction but it would be foolish and blatantly inefficient for us to try and run ‘add ons’ like social enterprises or ask our housing teams to expand into education or health.
We think all housing associations need to do that cost benefit analysis. Sometimes we try to do too much beyond housing and dissipate our effort and appear scattergun in our approach. Are we always investing in the most effective way?
The other major question is who do we house?
We cannot house households on benefit to the degree we have in the past unless grant levels are high enough to reflect the arrears risk. Bedroom tax will be swiftly followed by cuts for the under 25s and then the overall benefit cap that affects large families. That will surely be reduced whichever government emerges in 2015. Then there is universal credit and the inevitable short term hike in arrears that that will bring.
At Derwent Living our strategic response is to reduce the proportion of residents on benefit from 57% to 50%. (The national average is 63%). In terms of new development with our own money we will focus on households with low incomes who are not on benefit but who can’t afford to buy. We will provide medium term high quality rented homes called Choice Living. The focus may be more on job movers and key workers housed from our own waiting list. Indeed it is a return to our roots in 1964 where we housed people who didn’t qualify for council accommodation and who were failed by the private housing market. In addition we are working with local authorities to take nominations from families who are not benefit dependent. Where we are in receipt of government grant for new homes we have to take local authority nominations so we’ll only take grant if we have more flexibility in lettings. We think there are too many strings attached to government funding. A higher grant rate can compensate for some of that but ultimately we’ll choose whether to participate on the basis of what’s best for Derwent Living and its existing residents/customers.
We will still meet our legacy commitments. These are the 50% of relets for the grant we got or the section 106s we signed. We will honour those obligations but we have to keep our business viable for our existing customers.
At a conference recently I attracted a hostile response when I said that we would be housing less people on housing benefit and that we had chosen to prioritise the construction of new homes over supporting people on benefit. We were accused of turning our back on the poor.
Indeed the debate was less about viability but more about the choice of how to use the profit. Derwent Living’s board could have decided to use its surplus to ease the burden on the hundreds of households currently affected by the bedroom tax and the thousands soon to be hit by further restrictions but we wouldn’t have created/sustained 465 jobs a year because we built 250 new homes a year. In addition our commercial subsidiary now employs more than 500 people. Which is better? Almost 2000 jobs or covering the benefit cuts of hundreds of households? I would never criticise another housing association for choosing the latter particularly if it operates in a deprived area where it is a key player but this strategy does let government off the hook. The government has abrogated its responsibility for the poorest in our communities. Should housing associations fill that gap? The answer is that we certainly should but we chose to do it by providing new homes and creating as many jobs as we can rather than covering for Government cuts.
The other key debate is about what we should build?
We build with our money rather than grant and therefore we seek to maximise the number of homes we can produce. We would love to build at code 5 (exceptional energy efficiency) but this costs £20,000 more per home so we take the standard private house-builder product at code 3 to get more homes for our money. Higher grant rates would enable us to achieve volume and higher standards.
We build houses for general needs. It’s what we do best and it is cheaper to manage and maintain. Others will focus on care and special needs/supported housing.
We will complete 750 new homes in the 3 years to 2014 and less than 200 of those are with government grant. We like the freedom that running our own programme brings and question the bureaucracy and excessive strings attached ..the Affordable Homes Programme contract, intensive scrutiny of void disposals, central government prescription regarding property sizes and over fussy programme management. For the record Derwent Living’s board has yet to consider its approach to the 2015/18 bid round.
Our libertarian approach also extends to Local authorities. We will only work with those who want to work with us and can use what we have to offer.
This is all adds up to a simple and focussed model.
Others will choose differently and that’s as it should be but as we go towards 2033 there are some key themes for all of us:
- We must assert our independence. We are private organisations accountable to customers and shareholders. We are only accountable to government, locally and nationally, where we have grant.
- We must strive for greater efficiency. We have a duty to maximise our surpluses or profits. Profit isn’t a dirty word. It’s how you use the profit that really matters. We should use capitalism for social ends. It has been difficult to defend the welfare state and a social model fails to make headway. But on a personal level I remain deeply committed to collective principles. So let’s re-assert those principles by using the system to show that there is another way rather than private greed. You never know that might enable us to have a proper debate about a civilised socialistic society by 2033!
- Developing alternative commercial sources of funding is not easy but worth it for the freedoms it brings to meet our objectives in our own way. The corollary of that is that we should take public funds only on terms that work for us. That doesn’t mean that we give up the fight for more public investment. We must continue to argue for grant on the basis that we can then do so much more if Government takes proper responsibility for the housing crisis. But just to argue for it and not to act in the meantime is a dereliction of our duty to meet housing needs now especially as we may have to wait some time for a change of political heart!
- We are all different and that will still be the case in 2033 but we all contribute to a total housing solution for the whole country. We all have a part to play. Defending the right to choose our own directions is vital.
We housing associations must shape our own futures more than we do currently.