While most housing co-ops tend to keep their surplus cash in banks as deposits, investing in other co-ops can be more rewarding, sector leaders heard at their annual conference.
Mick O’Sullivan and Richard Pearl, from the board of the Confederation of Co-operative Housing (CCH) led a session when the organisation gathered in Kenilworth on 10-11 May, where they advised members on how they could better manage surplus cash.
Cash-rich housing co-ops can use their money to build new homes, improve or green their properties or invest in charitable funds. They could also return it to members via rent reductions and cash back, or can simply leave their surplus in the bank. The final two options are the most common among housing co-ops. At Liverpool Gingerbread Housing Co-operative in Merseyside, part of the surplus is invested in a credit union 2% interest rate.
Yet most banks provide interests below 1%. Mr O’Sullivan explained how, if a co-op had £500,000 in a bank account in 2009, the amount would be worth £523,000 today. But if the co-op had invested the same amount into an ethical fund, it would have made £696,000.
Investment funds have their disadvantages, such as requiring notice before withdrawing money, a potential for fluctuations, and not guaranteeing a return. Therefore, co-ops considering this option should make sure they have insurance to cover potential losses and work with professionals, rather than designating the task to the co-op’s finance person.
The second option available is acquiring property for social rent – where co-ops could predict their income based on the benefits received by tenants. In this case, the income would be higher than the interest from a bank deposit, and would rise in line with inflation.
Co-ops could also borrow on the value of the property – and if something goes wrong, sell the property and get their money back, added Mr O’Sullivan.
He highlighted some of the disadvantages of the approach, such as having cash tied up. The property value can also drop and the co-op could be faced with unforeseen bills for repairs or rent arrears.
A third option would involve lending money to another co-op to build housing, complying with principle six – co-operation amongst co-operatives. In this instance, the co-op would get an income from the builder co-op, which would be higher than leaving the surplus cash in the bank. The loan can be guaranteed against the property.
Disadvantages include the risk of the builder co-op going bust before buying the property and having the money tied up for the duration of the loan.
These options are not mutually exclusive, the two presenters told delegates. Co-ops could use different amounts of money for different investments.
“Most co-ops need to change their mindset when it comes to treasury management,” said Mr Pearl.
“Always get advice from an independent financial adviser before making a financial decision,” added Mr O’Sullivan.