As seen in Housing Today:
As annual financial reporting season arrives, we can expect headlines about housing associations raking in 'huge surpluses’ to emerge. These stories paint a picture of a sector prioritising profits over people and the communities we serve. Not only does this argument miss the mark, but it also fails to explain what these reserves are for and why they are essential for residents.
Surpluses aren’t rainy-day funds or indicators of hidden wealth. They are essential for the social housing sector’s financial model and our core purpose of serving people in housing need.
At first glance, housing associations may appear to be cash-rich organisations. However, a ‘surplus’ is not the same as ‘cash’, and the word ‘reserves doesn’t mean a stockpile of unspent money sitting in the bank.
Housing associations are driven by a social mission: providing good quality, affordable housing and essential services to those in need. The discounted rents residents pay are our primary income source. Distinct from publicly listed companies, we are not-for-profit entities that don’t pay dividends to shareholders. And unlike private sector landlords, every penny we make is reinvested into managing, maintaining and building homes.
It seems to me that this misconception has come about because housing associations have had to make big changes to how we do things. For a long time, our business model was straightforward: the government provided some subsidy, we borrowed some money, and we built homes for social rent. Over time, as government grants and private borrowing fluctuated, the basic model remained largely unchanged.
The major shift came in 2010 when the coalition government decided to stop providing public subsidies for social rented homes. To continue building new homes for people on lower incomes, we had to change the mechanism by which we did it. Commercial activities, such as building and selling market-rate homes, began to generate additional surpluses for us that we could use to build new homes. This hybrid structure, incorporating government grants, private finance, and rental income, ensured sustainability and growth. It also enabled us to continue investing in our existing homes and services.
Think of a surplus as a safety net that ensures ongoing and future needs are met. Collectively, the sector spends billions annually on repairs and maintenance, so that we can ensure safe and comfortable living conditions for residents. By reinvesting surpluses, we extend the life of existing homes, improve residents’ quality of life, boost educational and employment outcomes, and reduce health and wellbeing issues.
Like many, the sector has been tested over the last few years, from Brexit and Covid to the cost-of-living crisis. As we navigate a landscape of economic volatility, policy shifts and funding uncertainties, surpluses are a financial buffer that makes us more resilient to these risks. From contractor insolvencies to a cooling housing market, they allow us to cover unforeseen eventualities, and respond proactively to challenges. The instability of our rental income due to the government’s imposed four-year cut in social rents from 2016 to 2020 and the 2023/24 7% rent cap, for example, were partially mitigated by our retained surpluses.
Unlike rainy-day funds, these reserves are crucial for maintaining our ability to borrow cost-effectively. Banking rules require housing associations to demonstrate ongoing financial resilience to secure beneficial borrowing rates. In an era of diminished government grants, healthy surpluses signal to lenders that we are financially stable and enable us to maintain their trust and confidence. This credibility allows us to borrow larger amounts at cheaper rates and plan projects that will benefit residents in the long-term.
Our ability to make a positive impact depends on sound finances. Like others, L&Q is more than just a social landlord. We are a housebuilder, placemaker, and investor in communities, based on our proven ability to alleviate poverty through delivering low-cost housing and life-changing services. From running domestic violence refuges and homeless hostels to offering job training and educational programmes, these initiatives help residents build better lives and contribute to the economic and social fabric of an area.
We know we must improve our services, so that residents can rely on us, no matter where they live. Many of the sectors’ homes need investment and improvement. Fundamentally, the core relationship between landlord and resident should be at the heart of everything we do. We’ve not got this right often enough, and we must become more responsive, more transparent and more open to input from our residents. Responsibility for this lies with us.
However, government policies play a decisive role in shaping the operations and viability of housing associations. An unstable funding environment has taken its toll, and the signs of a sector under strain are plain for the new Labour team to see. Fourteen years of frozen grants and increasing costs have stretched our surpluses, making it harder for us to address the growing housing crisis.
As the dust settles on the General Election, we urge the new government to provide a long-term strategy for social housing rents. Doing so will make social housing more accessible for everyone while ensuring fairness, transparency, and affordability for residents. It will also give housing associations a stable financial environment to plan, invest in and deliver new homes. With soaring homelessness and a record number of people in temporary accommodation, this is essential for building the social and affordable housing our country urgently needs.