Paul Phillips has housing in his blood. The group finance director of Notting Hill Housing Association (NHH) has worked for housing associations (HAs) for the best part of three decades. His first contact with the sector was as a member of an organisation called the Paddington Christian Council, which had set up Paddington Churches Housing Association, now called Genesis. And that interest moved him to apply for jobs in the sector.
NHH can also trace its foundations back to the church – in its case, Methodist reverend Bruce Kenrick. Kenrick set up NHH in 1963 in response to the dreadful housing that he saw around his church, and the problems that people had with overcrowding and disreputable landlords.
‘I am still interested in making sure that that kind of philosophy to some extent still informs what we do now,’ says Phillips, ‘although we operate in a very different world today compared with the 1960s. The idea is that people who could not otherwise afford to live in London can have somewhere decent at a price that they can afford.’
NHH now operates across all of London’s boroughs, having spread its wings from west London. In retrospect, 1979 was an auspicious year for Phillips to join the housing sector. The election of a Tory government under the premiership of Margaret Thatcher sparked a revolution in social housing, as one of the early acts of her government was to bring in the right-to-buy legislation for council tenants – an idea that David Cameron echoed when he promised HA tenants a similar right as part of his election campaign this year.
‘I worked briefly for a housing co-op and remember a lot of debate and meetings about the legislation at the time,’ says Phillips. ‘But they never made charitable housing associations sell off.’
AB met Phillips before the government’s legislative programme was finalised. However, he was clear about what he had heard about the pre-election promise: ‘It seems like madness.’ He wonders how those tenants in the private sector– probably already paying more in rent than HA tenants – will feel about the government giving only HA tenants help to buy their home. ‘Among our stock, the only group of people who will be able to buy are the relatively wealthy, and that would be at the expense of everybody else. And I would have thought everybody else would be unhappy.’
From a financial perspective the plan seems to be that while the tenant receives a discount, the HA will receive full market value, with the funds to pay for this generated by the sale of expensive houses owned by councils. ‘I don’t feel our finances would be undermined if that were the case, although I don’t think it is the right thing to do. It is also a tricky message to get across. I don’t want those who lend us money to be scared that they don’t get their money back. I can’t see the point. If they can afford to buy a house maybe they should be encouraged to go for a first-time buyer scheme.’
The lenders that concern Phillips include banks and bond holders. When NHH builds new social housing, the financing comes from three sources: government grant, the planning system (builders construct social housing, which is sold to HAs at a discount) and loans.
‘The big one for us these days is the debt.’ NHH’s banking group includes Lloyds, Barclays, Nationwide and Santander. Increasingly, HAs are securing finance from bonds. ‘We are the biggest user of the bond market of any registered provider, with £800m of bonds,’ he says. NHH is not the biggest HA but it does have a large development programme, and bonds are helping NHH refinance some of its bank loans; it is also using bonds to build up a war chest, which it will spend on building.
Phillips seems to have the financing well under control. By way of example, here’s a phrase you don’t hear often: ‘The financial crisis was good for us.’ He goes on: ‘We were extraordinarily lucky. The cost of bank debt fell and fell and fell. We first borrowed from banks in the late 1980s/early 1990s and margins were 1.25% above LIBOR. By 2008 margins were down to 25 or 30 basis points. There had been a continual reduction.’
Credit where it's due
When Phillips joined NHH in 2004, he started a debt restructuring programme – completed two years later – which took advantage of those slipping/decreasing margins. In 2008 he signed another major loan still at those margins (Lehman Brothers crashed in September 2008 but the credit freeze began the summer before, and Phillips remembers hearing the news on holiday in 2007 as the first reports of the credit crisis came through). Indeed, the banks were committed to those margins for up to 30 years at those sorts of prices. ‘The last of those deals was signed in March 2008. ‘To be fair, no one knew how long this would go on for, but nevertheless it was a great deal.’
The banks did shut up shop eventually, and when NHH took on another housing association, called Presentation, it turned to the bond markets for financing. Presentation became an NHH subsidiary in 2009 after hitting financial difficulties. In 2010 NHH wanted to completely restructure Presentation’s finances. It did so by paying off the bank loans of its new subsidiary and replacing them with £180m of bonds.
Bond funding was still relatively new when Phillips entered the market. He says it wasn’t terribly difficult. ‘It’s nerve-wracking the first time, but it’s a sausage machine.’ The process – which included Phillips presenting at roadshows – was helped by having two good book-running banks, and they were able to show NHH the ropes.
Subsequently NHH tapped the bond market for another £120m and has been back twice more since, both times for £250m. Significant sums against an average for the sector of £100m. However, with the government starting to guarantee loans for HAs (technically called ‘registered providers’) from the European Investment Bank (EIB) at a cheaper rate than the bond market, the latter may not be used so frequently in the future.
To tap the bond market, organisations need a credit rating. Phillips says he was disappointed not to get the highest ratings from Moody’s. But on reflection he says NHH is an aggressive developer and so takes a certain amount of risk, and the rating is solid with little chance of a downgrade. He identifies » NHH’s main reward (and risk) as a large build-for-sale programme – the association is the largest provider of shared ownership homes in London. Building homes with the aim of a partial sale involves no guarantee of a sale, or not one at the expected price. The London market may have been kind to that sort of deal, but Phillips says: ‘It is a risk in the sense that the money we have out there is substantial; typically £250m is tied up in work in progress.’
NHH also acts as a private house builder. ‘The idea is to make money, which we then plough back into the core rented business and, to a lesser extent, shared ownership.’
The government’s welfare reform agenda may not seem an obvious area of concern for an HA, but the overall cap on benefits means that individuals may struggle to meet all the bills, and that includes rent. The other welfare change is that instead of rent being paid directly by the local authority to the provider, it is now paid to the tenant. As a result NHH is seeing a rise in rent arrears, which could ultimately lead to evictions. As the universal credit system is rolled out, this could become a bigger problem.
He managed the more obvious challenge of interest rate rises by getting fixed-rate funding for a period of 20 to 40 years. He is more concerned about inflation. With rents broadly linked to inflation, in a low-inflation environment income could be static while costs continue to rise, hitting margins. These are all areas that the regulator expects the HA to have thought about.
NHH has a board of three executives – Phillips, the chief executive and the chief operating officer – and nine non-execs. The advantage of this structure, he says, is that the executives are steeped in the organisation while the non-execs from a range of backgrounds bring a wider perspective, so helping to set the strategy and keep the organisation moving in the right direction.
All about the numbers
What, then, for NHH is that right direction and what are the key performance indicators? As FD, Phillips says the bottom line always matters to him. ‘Clearly I would be worried if we didn’t do really well financially. More generally our job is to build houses, so we need to focus on the number of sites we have bought, the number of homes we have started building and – most importantly – the number of homes we have finished and pushed into the market to let to people who need them.’
NHH has a significant land bank – not for hoarding, he insists, but waiting for planning permission so that building can start. It’s a long cycle, perhaps four years from acquiring a plot until the home is ready for occupation. It is a fact perhaps worth bearing in mind when politicians talk about home-building programmes. ‘Half of that is the planning stage, but it does vary depending on whether there is outline permission and the local authority wants to see building. But you can get pushed back at planning especially if the council changes its mind or its political hue.’
When AB talked to Phillips he was right in the middle of the myriad tasks around year-end. Nothing divulged, naturally, but he did say that NHH is planning a five-year strategy and he was working on the financial aspects. If the government goes ahead with its policy of a right-to-buy for HA tenants, then that strategy and the NHH – indeed, the whole sector – look set to be subject to far-reaching change.
Peter Williams, journalist
This article originally appeared in Accounting and Business magazine. Read the original article