David Montague

Accepting commercial risk allows us to do much more

As housing associations prepares for the ‘B’ word and following L&Q’s forecast surplus cut, David Montague explains why the sector should take on sales risk
Published on 26/02/2019

Last night I attended one of those round table events where the politicians join practitioners for a ‘Chatham House’ discussion.

This one was about what we now refer to as the ‘B’ word in polite company. Like Voldemort or the Scottish play, too risky for its name to be said, we can only infer with a nod and a wink.

As each day passes, ‘B’ stands for something more, even greater change and uncertainty than ‘B’ itself.

My daughter is an art student and chose the ‘B’ word for her final piece. In her mind, ‘B’ stands for, well, ‘B’, but also for disillusionment, disenfranchisement, the rise of hatred, Trump, the Wall, war, immigration, poverty and more.

Tomorrow is her 18th birthday – old enough to vote, but too late to influence the greatest change she may ever see.

I see the same thing happening in housing. As ‘B’ compounds with other financial and social challenges, we question our future, our purpose, our methods.

It’s inevitable that some will question whether housing associations should take commercial risks to fund social housing rather than simply return to good old-fashioned government grant.

For me, the answer depends on whether the risks can be managed. In L&Q’s case, our track record shows that they can.

I must take some responsibility for reigniting this debate; L&Q’s recent financial results have shone a light on the challenges housing associations face: softening of demand, new build quality, tackling stigma and increased investment in health and safety.

Since the 2008 crash, like other housing associations, L&Q has found other ways to finance its ambitions by accepting sales risk.

We recognised we would be more exposed to the cyclical nature of the housing market.

So, we set ourselves prudent thresholds and undertake regular stress-testing and scenario planning to ensure that our underlying financial position is strong enough to meet our obligations.

Risk likes company; it rarely travels alone. And this year is a pretty good example.

We are rising to the post-Grenfell challenge to keep our residents safe.

By the end of this year, L&Q will have replaced all aluminium composite material cladding and we will not pass the cost on to residents, including leaseholders. We stand ready to do whatever else is needed.

We must tackle social housing stigma and one way is to improve the quality of our existing homes.

This year, L&Q will invest a quarter of a billion pounds in homes in management. Satisfaction with re-lets has increased 15% in the past few months. We are restoring pride but this is not a one-year journey.

The housing industry needs to confront new build quality.

L&Q has been doing this in a very public way. We have now drawn a line in the sand – we will not hand over a home into management unless we would be prepared to live in it ourselves. In the short term, we will complete fewer homes than planned; this will affect sales and rental income but it is the right thing to do.

Despite a more challenging environment, we expect to hand over more than 2,900 homes this year and commence more than 5,500 new ones – a record for us and for the sector. We have a development pipeline of 46,000 homes, almost one-third of which are on site. L&Q Estates holds another 46,500 strategic land plots.

We will deliver a surplus this year of around £190m and our ambition to work with like-minded partners to fix the housing crisis remains as strong as ever.

Our acceptance of commercial risks enables us to assume the role of ‘master developer’, giving us more influence over the developments we’re involved in, more say in infrastructure, in placemaking, in building sustainable communities.

Consequently, we can have a greater impact on the lives and communities we touch – addressing homelessness, inequality, mental health, disability, and improving skills and employability.

In current market conditions – with the ‘B’ word and everything – government and government grant have a crucial role to play. Uncertainty creates a risk that momentum will falter; government can help us maintain that momentum.

But housing is a long-term business and housing associations are prudent long-term investors.

In my view we should share the upside when it is available, plan for the downside and lean heavily on government when times are tough.

That’s what strategic partnership should be about – long term and open book, managing the economic peaks and troughs to maintain momentum, a shared commitment to meeting the needs of today’s residents and a shared aim of providing a quality, affordable home for everyone.

L&Q went into the 2008 recession with a development pipeline of 5,000 homes. Today we are heading for 100,000 homes over 10 years. We will not lose sight of our social purpose or our ambition.

We could leave sales risk to the house builders. Or we could work together as trusted, strategic partners and fix the housing crisis.