Housing Associations need to think differently to get on a better financial footing

Both a top-down and bottom-up approach is required to drive long term business and stakeholder value.

Housing Providers are often vast and as a result have an extremely diverse real estate portfolio. Some are operating with a healthy surplus and either reinvesting that surplus or sitting on healthy cash reserves, and others are operating at low margins, impacting on what they can deliver. Firstly, a top-down Private Equity lens is required to target the big cost items and strengthen the core value drivers.

Next, a ground up, detailed analytics approach is needed to remove and reduce complexity. Together, this will identify and remove non-value-adding costs, focusing the organisation on spend to make a difference, and ultimately reducing the cost to serve tenants and customers.

Our Cost and Value team have experience of leading transformation programmes where the benefit realisation can be up to £1bn of spend reduction (for an organisation with revenue of £4.8bn). With this approach in mind we propose three areas for housing associations to consider:

Incorporating energy-efficient technologies can significantly reduce operational costs over the long term. Although the initial investment might be substantial, the savings on maintenance expenses can contribute to financial sustainability in the years ahead.

It was reported last year that the headline costs on existing social housing stock increased by 11% to £4,150 per unit. This had an impact on the median operating margin (social housing lettings) which fell from 26.3% in 2021 to 23.3% in 2022. The increase in headline costs was mainly attributable to a record level of expenditure on maintenance and major repairs, including costs related to energy efficiency.[ii]Contrary to the prevailing view in the sector that only the tenant benefits from energy efficiency investment not the HA, green buildings report an average of 12% lower maintenance costs than their conventional counterparts.[iii]This is primarily due to the use of durable materials and efficient systems. There are 2.9million units of social housing stock owned by housing associations in England[iv], so investing in sustainable infrastructure could save the sector over £1.4 billion per year in maintenance costs.

Social Housing Providers are big beasts (for instance one of the largest housing associations by stock size, Places for People owns or manages over 240,000 residential units, with a turnover of £850m), and yet, with some having expanded rapidly from inorganic growth, operating as a unified business is often a challenge. As a result, they often have traditional procurement practices and a large exposure to their supply chains.

Through Strategic Procurement, Cognitive Contract Management and optimised Working Capital Management, providers can ensure that they get best value for money for all the categories of the goods and services they procure, and on an ongoing basis, ensure that they pay for only what they receive. By implementing these practices in other sectors, we have observed businesses reduce cost by 10 to 13%.

Private capital already plays a part in the sector but there is potential for more. Collaboration with the private sector can be a powerful intervention for optimising costs and increasing value in social housing. With the rising social housing sector debt, and the substantial investment required to improve the quality of homes, whilst increasing energy efficiency, institutional investors are required to turbocharge the sector.

This has recently been backed by Baroness Scott, Parliamentary Under-Secretary of State for Social Housing, and the chief executive of Homes England Peter Denton. The fact that social rent is linked to inflation, provides a positive outlook, says Denton, for those wishing to invest in income streams that will “deliver and match annuities over the long term.”[v]These partnerships can lead to cost-effective construction, improved property management practices, and the implementation of innovative solutions that enhance the overall value of social housing assets. At KPMG, we have the specialist capability to support housing associations to get more private capital into their organisations through innovative structures and vehicles.

By thinking differently and embracing these initiatives, CEOs can put their organisations on a firm financial and operational footing (and be able to deliver even during macroeconomic flux). But this isn’t just a CEO’s playbook, it’s a gamechanger for the whole social housing sector.

KPMG’s strategic advisory team supports UK and international private and public sector infrastructure and government clients to address their most complex operating challenges and deliver more for less. If you want to know more, contact:

• Stephen Gallagher, Associate Director