Exploring the commercialisation of social housing

  • With mounting financial pressure, increasing numbers of housing associations are diversifying into alternative lines of profit-making activity
  • While these activities open up money-making opportunities for housing associations, they also come with risks attached
  • We discuss how to help housing associations ensure a smooth and safe business transition

Amid mounting economic pressure and falling subsidies, many housing associations feel they have no option but to diversify into a new realm of profit-making activity.

While this diversification can undoubtedly open up fresh revenue streams for beleaguered organisations, it can also introduce a new level of risk for the unprepared.

Why the need for diversification?

The blurring of lines between not-for-profit housing associations and their private sector counterparts has been informed by a wide range of factors. However, austerity-related policies, combined with general housing shortages, have been a major contributor.

A raft of welfare reforms have come into effect over the last few years, directly influencing housing association income. The benefits cap and the introduction of the ‘bedroom tax’, which saw a reduction in housing benefit allowances, has been particularly challenging for many to negotiate.

This situation was further complicated by the then-Chancellor George Osborne’s decision in 2015 to cut social housing rents by 1% a year from 2016 to 2020. According to figures from the rating agency Moody’s, this rent cut means that housing associations need to maintain higher operating margins in order to protect their credit worthiness.

The picture is likely to be a familiar one for housing associations across the country. However, as Zurich Market Underwriter Las Langley observes, the pressures and the subsequent diversification are accelerating.

“Seven years ago, we were seeing care-giving as a common area housing associations were branching into. However, the last three years have seen a real push for further diversification and requests for wider cover, particularly around professional negligence.”

These moves are taking many associations into ever more varied and unusual revenue streams.

What new ventures are being undertaken?

Diversification has reached a point where some organisations now identify themselves as property management and development companies, rather than simply housing associations.

And there are common business development themes emerging. “Construction is the big one that most associations seem to be considering, whether developing their own buildings and using them as social homes, or even constructing homes to sell on,” says Las.

Continuing growth in construction has seen associations branch into modern construction methods, including modular building. Some housing associations have even established their own standalone construction firms, a realm far removed from their traditional responsibilities.

Advisory services, particularly financial advice, are also becoming more common as additional business arms for housing associations in the UK. This includes financial advice to tenants, and even provision of support to the wider public.

While housing associations have long been branching into care homes, this trend is also accelerating, with some associations developing their own retirement villages. It is also becoming possible that the leisure and social centres we visit are owned and run by housing associations.

Some housing associations are taking diversification to even greater extremes, with at least one selling gas and electricity.

This new spirit of entrepreneurism, if well handled, should put associations on a strong financial footing. However, the risks should not be treated lightly.

What are the risks?

“One of the biggest dangers is that housing associations go in blind”, explains Las. “We are seeing some associations thinking about possible areas of diversification, but not necessarily what this means from a risk management point of view.

“Associations also need to consider whether they have the necessary internal expertise when branching into a new area.”

Without considering these factors, a fresh revenue stream can quickly become a headache.

In the case of debt advice, do housing associations have the necessary expertise and knowledge of Financial Conduct Authority rules and regulations? If not, professional negligence claims could be a risk.

While care work may be an area where some associations have more experience, even here there are risks. For instance, how much do staff know about safeguarding policies?

While the risks certainly exist, they do not necessarily represent a barrier to diversification.

How Zurich can help

Zurich has a wealth of experience placing cover for commercial entities, which, combined with our new Contractors All Risks and Professional Liability policies, means we are ideally placed to support housing associations as they diversify into fresh areas.

By talking to Zurich at an early stage in the process, we can help provide tailored solutions to cover any of the new ventures being embarked upon.

Ultimately, housing associations may need to diversify in order to thrive in this new economic environment. Zurich’s expertise can help make this transition a success.