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Mergers: Too big to fail

Merger mania is on the cards, following proposals by some major league housing associations to consolidate their operations into even bigger, supposedly better super-associations, but is this trend a sign of confidence in the future – or the defensive reaction of an industry under siege? By Mark Cantrell

 

THERE'S safety in numbers, we are told. Then again, we hear it said that the bigger they are, the harder they fall. So much for folk wisdom, but lately the housing association world has seen a flurry of merger proposals, raising the prospect of a new ‘super-sized’ breed of corporate landlords.

Eyebrows shot up when L&Q, Hyde Group, and East Thames Housing announced their merger plans back in April – a move that would create one of the largest housing associations in Europe, with around 135,000 properties on its books. But they are not the only one’s vying to be the ‘daddy’ of king-sized mergers.

Admittedly, the proposed merger of Affinity Sutton and Circle Housing announced back in December 2015 doesn’t quite make the numbers at 127,000 properties – but it gives the L&Q trio a run for its money, and it makes sure they aren’t the only ones to join the league of Europe’s largest.

Coming in behind, in February this year Sovereign Housing Association and Spectrum Housing Group, announced they were considering merging to create a 56,000 home organisation.

Mergers are nothing new in the sector, of course, and these are unlikely to be the last. In the commercial world, mergers and acquisitions are a fact of life; over decades, it has fostered the emergence of big business and trans-national corporations dominating just about every industry you care to mention. With size comes clout; a greater ability for the company to shape its operating environment and seize control of its destiny.

Well, within limits; economic history is littered with many a corporate Ozymandias. Therein resides the cautionary tale. Big isn’t always better.

In the wake of the 2008 crisis, for instance, it emerged that banks, which had grown too big to fail had also become too big to manage. And we all paid a price for that one. From one perspective, mergers might be seen as a mark of strength, but then again, you could argue they’re born of weakness too.

“We are seeing more and more of these mergers as social landlords try and shore themselves up against an uncertain future,” said John Gray, branch secretary of UNISON’s housing association branch. “Conservative policies like right-to-buy, pay-to-stay, and the cut to social rent are forcing the social housing sector into turmoil.”

Gray’s comment was made as part of UNISON’s response to the news of L&Q et al’s merger plans, but he’s not the only one to suggest the general point: that sometimes mergers aren’t quite the go-getting road to success they are inferred to be; rather a defensive response to adverse circumstances.

“Over the last 10 years or so the constant reduction in social housing grant has led to a much greater reliance on borrowing somebody else’s money, with all the risks that entails,” said Steven McIntosh, a senior consultant at Altair, writing on the consultancy’s blog late last year.

“Now welfare reforms, rent cuts, pay-to-stay, and the extension of right-to-buy to housing association tenants, is about to make working in a challenging environment much more difficult for all, and maybe impossible for some.”

Mergers may not be a sign of confidence, then, but of trepidation. Be that as it may, the players in the L&Q-Hyde-East Thames merger, however, were pretty bullish when they announced their plans to take the future by the horns together.

“Our plans will allow us to tackle the housing crisis head on, driving greater efficiency, building more homes, creating beautiful new places and sustainable, independent communities. At the heart of our united mission will be the continued provision of affordable homes for those in need,” said L&Q chief David Montague.

By merging together, it is claimed the new supersized organisation would have the capacity to build 100,000 new homes across London and the South East over the next 10 years, whereas if they remained separate they would only be able to deliver 65,000 between them. It’s a volume said to represent an investment of £25bn over the decade.

“The combined strength of all three associations means that we will be able to deliver a house building programme that would have been impossible to achieve for each organisation alone... Put simply, we are stronger together – more financially capable of delivering and managing our stock than we are apart. Every penny that we make will be invested back into the services we deliver and into building much-needed homes,” said Elaine Bailey, Hyde Group’s chief executive.

The merger would deliver efficiency savings in the region of £50 million a year within five years, it is claimed. This would primarily be achieved by combining back office functions, investment in IT, “flexible” working, growth through development, and its enhanced purchasing power in procurement.

Inevitably, merger proposals bring worries over jobs. Efficiency savings, no matter the industry, can be a euphemism for shedding staff, so in that respect UNISON’s Gray warned that in its talks with the three organisations, the union’s priority will be to “ensure that jobs and working conditions are protected”.

“The housing crisis in London affects all our members and we welcome increased investment in social housing,” Gray said. “But the three associations must recognise that big does not always mean better, and that residents and staff will have real concerns about this proposal. Employers must recognise that the success of their plans relies on the efforts of their dedicated workforce.”

The story of the proposed Affinity Sutton-Circle Housing is much the same as that of L&Q et al, only the numbers are more modest. The proposed new group would aim to deliver 5,000 new homes annually, with 50,000 delivered in 10 years. These would be built across tenures and a range of prices, with a focus – it is said – on delivering homes for “subsidised rent” and low-cost home ownership.

“The merger of Circle Housing and Affinity Sutton creates a unique opportunity to build the new homes our country desperately needs; safeguard the future of our existing neighbourhoods through increased investment; and transform the lives of our residents through access to work and training programmes,” said Keith Exford, Affinity Sutton’s chief executive.

Mark Rogers, Circle Housing’s chief executive, added: “Both of our organisations have long held ambitions to grow and maximise the benefits that scale can deliver... By embracing this challenge we will combine our strengths and transform the way we operate to create a new type of housing association. Together with our strong social purpose, this will enable us to deliver sustained efficiencies, build more homes, invest in more communities, and provide better services to our residents all underpinned by local decision-making and accountability.”

Sovereign and Spectrum are likewise selling their merger on the basis of delivering more homes and achieving greater efficiencies.

As Ann Santry, Sovereign’s chief executive and designated chief of the new merged organisation, said: “The new organisation will be a stronger social business creating economies of scale, which will allow us to deliver on our commitment to provide local services to our residents and build more homes to help tackle the housing crisis.”

Most recently, Sanctuary Group and Housing & Care 21 have announced they are getting together. The merger will see the creation of a new operation within Sanctuary Group which will specialise in housing for older people. Sanctuary 21, as this new group entity will be known, will be responsible for over 32,000 retirement and extra care homes, together with care and telecare services. The aim is to become a market leader in the provision of care and housing for older people.

“This merger is a natural fit for Sanctuary, complementing our existing older people’s services and accommodation with Housing & Care 21’s significant expertise,” said Jonathan Lander, Sanctuary Group’s chair.

Lord Ben Stoneham, Housing & Care 21’s chair added: “The merger with Sanctuary will help further the core purpose of Housing & Care 21 to provide high-quality housing and care services for older people of modest means. As a result of the merger we will be able to provide many more homes, better services and make improvements far sooner than would have been possible as two separate organisations.”

[Editor’s note: Since this article was first published, the merger between Sanctuary and Housing & Care 21 has been called off. Story HERE.]

With all these mergers, one might joke the National Housing Federation is fast losing members, but let’s just hope it’s not the banks that end up having the last laugh. Housing, after all, is far too important to fall foul of hubris.

 

This article first appeared as the cover story in the June/July 2016 print edition of Housing magazine

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