To merge, or not to merge?

  • Registered providers of social housing (RPs) must cut their rents by 1% per year for four years from April 2016
  • Under increasing financial pressure, a third of RPs are considering merging with another organisation
  • We look at the risks and rewards of merging your social housing organisation with another

From April 2016, registered providers of social housing (RPs) are required to reduce their rents by 1% each year for the next four years. The Chancellor intends this to drive efficiency savings within the sector, and it is causing many RPs to consider merging with other organisations.

The move to systematically reduce social housing rents came during the first all-Conservative Budget in 19 years.

In his statement to Parliament in July 2015, the Chancellor made a major U-turn on the formula he had prescribed just two years earlier, which allowed RPs to increase rents by 1% above inflation each year for the next 10 years.

The new directive to start reducing rents was accompanied by a call for RPs to play their part in reducing the country’s benefits bill, and make more efficient use of the subsidies they receive from central government.

Mergers on the mind

Following the announcement, one third of RPs said they were considering merging in response to the 1% annual rent cut, according to a survey conducted by Inside Housing.

Since then, mergers have been announced on an unprecedented scale. These mergers could form social housing organisations to rival the leading private sector house builders in terms of scale and influence.

Thinking big

While numerous mergers have occurred in recent years, these have predominantly been larger organisations absorbing smaller or struggling ones. Now, however, we are seeing several large and successful organisations coming together to form one giant provider.

One of the most recent, and grandest, examples is the 135,000-home mega- merger between three housing associations in southern England – L&Q, Hyde Group and East Thames – which is intended to generate £50m in efficiency savings over the next five years.

Once complete, it should create one of Europe’s largest social landlords, boasting combined assets of £30bn, and a development pipeline that would make it one of the top four house builders in the country.

Uncharted waters

Mergers on this scale are unprecedented within the sector, so it is difficult to anticipate what the result will be. However, based on extensive experience in helping RPs through similar periods of transformation, we look at the likely risks and rewards for organisations considering a merger.

Potential benefits

  • Combining operations should, in theory, reduce duplication, and therefore generate savings on purchases – this could be anything from IT systems administration to office space
  • Procurement efforts will also be consolidated, giving the combined organisation greater buying power and helping it negotiate better deals with service providers
  • Alternatively, the merged provider may reach a critical mass to allow more services to be cost-effectively delivered in-house. Maintenance services are one example – instead of outsourcing repairs, it may become cheaper to employ a permanent maintenance team
  • With continuing calls for RPs to build more affordable housing, a greater capacity to borrow money and service debt is likely to be a strong driver for many mergers. With budgets under increasing pressure, any increased access to finance will be an attractive prospect for RPs

Possible risks

Chris Greaves, Zurich Senior Strategic Risk Consultant, says it is vital to thoroughly assess the risks associated with any potential merger.

“Mergers are fraught with risk, but RPs can increase the success margin by assessing the level of risk, keeping the integration process flexible and focusing on the benefits the merger will bring, “ he says.

Housing associations need to be prepared to address the most common risks, barriers and objections head on. These include:

  • Failures in planning and processes
  • Opposition to the concept
  • Cost and resources
  • Inability to integrate systems
  • Inability to integrate differing organisational cultures
  • Initial service delivery performance drop as systems and staff merge
  • Low staff moral through the fear of efficiency drives which might result in job losses
  • Fear of losing identity and independence

“By undertaking a risk management approach you can ensure the detailed investigation of key strategic risks/impacts and cost-effective active risk management,” says Greaves.

“This reduces the probability of latent risks emerging and the net outcome is an improved probability of merger success.“