5 March 2019

Back in 2016, Inside Housing ran an article called ‘Whatever happened to the for-profit providers?’ The article looked at how ‘although the number of both providers and homes has risen each year since 2013 many of the insiders that we spoke to believe it may have peaked.’

In the wake of rent cuts, one of these insiders suggested, ‘generating a profit is much harder now. It’s difficult to make a profit to distribute if you are coming at it from a standing start.’ Waving a tweed-jacketed arm sagely around his book-lined study, he added, ‘Some of those that registered did so with basically just an idea, but could not, or did not, raise capital. People were very aspirational round about then; there was a lot of optimism…’

Three years on, would I agree in these claims that there was more hope than substance in for-profit registered providers? On the one hand there are now 44 for-profits registered with the Regulator, nearly 30 more than in 2013, so calling a peak was perhaps premature. On the other hand, only one of them has currently reached a thousand homes with total combined stock amounting to 2,171 properties (mainly shared ownership). Collectively, for-profits grew 1200% between 2013 and 2018 but that still represents less numerical growth than Paradigm Housing managed by itself in the same period.

But there is some substance behind the growth, which suggests it could gather pace – and this relies on rethinking what the for-profit provider is for.

The original idea behind for-profits was simple – use the for-profit model, with shareholders exerting pressure on the management to increase profits, to drive efficiency. This efficiency should then free up resource to build more homes. It’s fair to say that this model has failed to take hold. Creating a new, full-service landlord takes time and money and needs investors who are prepared to wait to receive relatively low levels of profit.

An alternative use for the for-profit RP has begun to emerge, which may enable them to grow in the future. An RP is, after all, just a company with a special badge that enables it to do things like hold s106 properties, receive local authority nominations and apply for grant. The RP doesn’t have to be a landlord in the conventional service-providing sense, it can act as a repository for the special type of property which is social housing. Because it is in RP, it can acquire new s106 homes and contract the management out to a third party. This requires few people, is quickly scalable and can deliver higher profits than building and maintaining a portfolio of existing homes. Because it is a for-profit it can sell shares to raise capital and pay its shareholders dividends from its profits. What this structure creates is a way for real estate investors to buy into social housing in the way they buy into other real estate asset classes like hotels, warehouses or shopping centres. Being a landlord is secondary to enabling the investment and generating the returns.

So what is the future for for-profits? Whether this trend of establishing for-profit providers as vehicles to enable investment in the social housing asset class continues is dependent on several variables:

  • What happens to the supply of s106 in a construction downturn?
  • Can the kind of returns investors expect be generated over the long term, particularly as the homes age?
  • Is there a market for older homes which no longer generate the same returns?
  • How does the capital exit?

But more fundamentally, even if they have been re-presented as investment vehicles, for-profit providers are still regulated landlords of social tenants’ homes. Are they any good at it?

Will is writing in a personal capacity.

Will Perry

Will is Assistant Director – Commercial and New Entrants at the Regulator of Social Housing

Will is responsible for the Social Housing Regulator’s relationships with sector funders, advisors and ratings agencies, and leads the development of regulatory policy on private finance. He also advises on for-profit and complex not-for-profit registered providers, including REITs and structured financing. A qualified chartered accountant with a background in corporate finance, he was previously Director of Strategy at HouseMark, and held a variety of financial regulation positions at the TSA and the Housing Corporation. He is a non-executive director of The Housing Finance Corporation and Affordable Housing Finance.

For-profits: new (funding) model army?