Big beast housing associations show the way


Father and son Stephen and Toby Lloyd talk big beasts and takeovers in their latest column for Pioneers Post.



I was at the first birthday party for Big Society Capital the other day. No balloons, complete shortage of lurid coloured cake and a dearth of crying children. Instead we learnt that they have lent or invested £56m and look set to receive £500m from the Reclaim Fund that recovers the unclaimed assets from banks and building societies. So good news for the social investment space...up to a point. 

The nice people from Big Society Capital actually consulted me about what their new fund could do in the housing space. They were keen to support new social housing, or tackle ingrained problems like worklessness among social tenants – and seemed a bit crestfallen when I suggested they should avoid massive issues like these. There are lots of housing issues that could benefit from some more innovative approaches to small scale finance – social equity release, community land trusts and self builders being three that are close to my heart. But a few million in softish loans wouldn't begin to touch issues as deeply ingrained or capital intensive as the failure to build enough social housing. 
In all the talk of social finance and investment - about which I admit I talk quite a lot - this is the proverbial Trappist elephant in the room...The housing associations. They are the big beasts of the social finance world. Their borrowings dwarf Big Society Capital's hoped-for investment portfolio. Last year, the sector borrowed £4bn from bonds, more than all previous years combined – as their response to the continuing drought in bank lending. One association alone raised £250m on a bond issue.
The housing associations show social enterprises can raise significant capital from existing markets. How can they do this? Leaving aside the fact they can offer lenders tasty security on property, which is the most desired asset class: associations have their rental income underwritten by housing benefit, have no shortage of demand for their product, and are subject to strong regulation. The current government may not buy this, but that is the truth. When the Housing Corporation was established to promote social housing and phase out council housing it knew it had to build market credibility. It has done this in part by creating strong institutions. Not for the Corporation a Maoist 1000 flowers blooming. It wanted a limited number of viable players that could win market confidence and has done just that.
Big, safe, predictable institutions are what finance like. So it’s unfortunate that by weakening the regulatory regime, cutting housing benefit and pushing social housing closer to the unstable private rented sector the government is undermining what has been the biggest success story in social finance – even if it was never the trendiest. 
Housing associations are the opposite of the hip image of the social enterprise sector as a hotbed of innovation and creativity. Which is true, and great – but is also another way of saying it’s full of tiny start ups, most of which will fail. Even those deemed successes hardly ever make any actual money or grow into serious businesses. Which is probably why there seem to be more people engaged in supporting, promoting, networking, micro-financing, theorising and blogging about social enterprise than there are people actually doing it. And there’s been a corresponding stream of government and investor supported initiatives to get the sector going with grants and loans – many of which seem to struggle to actually invest the cash they have because they want to invest in things that big but innovative, cool, creative and safe all at once.
So if social finance is to really take off it needs some bigger, more stable social enterprises to back. The charity sector, being older, is a bit more mature. While most of the 180,000 charities in England and Wales are tiny, some are huge: the biggest, The British Council, has an annual turnover of £738.5m. The 100th biggest is The Royal Horticultural Society, which only turns over £65.9m. To put that in a commercial perspective, if Manchester United was a charity, its turnover of £320m would place it ninth on the list. Of course, there are far bigger players in the private sector: MUFC turns over less than one large Tesco branch (total Tesco turnover is £64.5bn).
Social enterprises need to follow these older sectors’ example to grow. The Housing Corporation and its successors forced small housing associations to merge, to ensure the sector flourished. The Charity Commission cannot easily force a merger, although once it has commenced an enquiry, it does have huge powers which could include transferring assets to another charity.  I have worked out a way for a charity to effect a hostile takeover, although no one has yet dared to try it – and it would require the Charity Commission to use its powers in a way that they may not be willing to…Any volunteers out there want to try? 
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