Regulation, finance and the barriers to the UK housing co-op sector

‘The current government has guaranteed many schemes in the housing sector … We could do with them offering a guarantee to us’

The UK’s deepening housing crisis comes as its housing co-op sector faces challenges of its own, from the specific troubles at Rochdale Boroughwide Housing, to tighter regulation and continued barriers to finance – with co-ops reporting that even mutuals in the building society sector are slow to lend. Co-op News caught up with Blase Lambert, chief officer at the Confederation of Co-operative Housing, to discuss the state of play.

Governance changes at Rochdale Boroughwide Housing, agreed with the regulator, have seen criticism over tenant representation. Do regulators work well enough with co-ops?

The role of the regulator of social housing primarily is to protect the interests of people living within social housing, and to protect the taxpayers’ funds that have been put into registered providers. Rochdale is a very specific example that caused an awful lot of public scandal. Alongside the Grenfell tragedy it has led to significant changes in the way the regulator oversees the performance of landlords. And while I understand there are some people who are concerned that the model in Rochdale is being amended, there’s some pretty solid reasons for making changes. Rochdale wasn’t just one property with a damp and mould problem; it was a significant systemic failing across that landlord. That doesn’t present any change in the way the regulator is operating or increase the risk to other housing co-ops in England, as long as they continue to provide great services and ensure appropriate living conditions. 

Related: A co-operative answer to the UK’s housing crisis?

With regard to the crisis at Rochdale, is there an underlying issue over how co-ops in social housing are funded?

Rochdale is not your typical housing co-op – it was the stock transfer from local authority to a new housing association. This housing association had some form of tenant membership, but the co-operative rules document didn’t mean it was in any way similar to the housing co-ops established in this country in the 1970s and 1980s. It was a completely different model and its financing is an issue of how local authority stock transfers were financed from the Major government, through the Blair years, until the stock transfer programme finished in the early 2010s. I think it’s more a situation that if you take an existing structure and transfer it all over to a new structure, and give it a slightly different governing document and say it’s a co-operative … the problems it had, which led to transfer in first place, won’t suddenly disappear. The property problems in Rochdale were probably reflective of the poor state of certain parts of the social housing sector.

Is there a risk of seeing co-operation as a magic bullet for these problems?

Watching from a distance, I was concerned that people did think they could just parachute the governing document into Rochdale and suddenly that would transform it. There was a clear desire to make a statement, with 2012 being the UN’s first global Year of Co-operatives, and where better to make that statement than in Rochdale, the birthplace of co-operation? That was just so simplistic, to think its problems would suddenly go away. In addition to that, what they were trying to do in Rochdale was different from any other co-operative housing structure in this country, they were trying to blend the John Lewis style employee ownership model with an open membership housing model. 

The Seven Sisters buildings operated by Rochdale Boroughwide Housing

Virtually all of my members are fully mutual housing co-ops: that means all their tenants are members and all their members are tenants. That wasn’t adopted in Rochdale. What was adopted in Rochdale was people could choose to be a member if they wanted to; it meant from the outset a large part of the resident population were not members of that organisation and not engaged in it. Then they sought to graft on the a notion of employee ownership as well. With hindsight people with more awareness of housing issues, regulation and governance should have been involved in setting that up, rather than it being quite so theoretically driven by the desire for a co-operative structure per se.

the UK lags behind countries like Austria or Denmark on housing co-ops. What sort of policy landscape would you like to see in the UK?

We’ve set out what we would like to see within the manifesto at the start of this year. What’s challenging is that when you visit countries that specifically legislated for co-operative housing after the Second World War, and then look at the outcomes that they have years later, and try and read that across to the UK where we legislated for authorities to provide housing … it’s really difficult to make a single policy change that changes 80 years of direction of travel. 

One of the things that we are advocating for comes to finance. It’s not that co-ops can’t access finance – it’s the cost of that finance which is the problem. If I want to set up a new housing organisation and build 100 homes, I’m able to access the same government grant programme for affordable housing as the largest housing associations. To do that, I have to now become a registered provider of social housing. That’s going to take me a period of time. If I get through that registration process, I then have to bid against those housing associations, and they’ve got a massive competitive advantage.

Related: Lessons from Europe’s housing co-ops

And if I have to go to the capital markets to borrow money, my cost of finance would be massively higher. An existing housing association with 100,000 homes and a track record, currently would borrow at around about 5.5%. But if I’m doing this as a start-up co-op, I’m borrowing at 12%. Your ability to develop affordable housing in that environment is very challenging. So what we need a route to the financial markets that de-risks the investor and lender community and drives down that cost of finance for smaller-scale and new start-up community organisations. We’re advocating for a new financial intermediary that will do the job that the bond-issuing co-op does in Switzerland, that will do the job that the Housing Finance Corporation does in the UK for small housing associations.

In addition, what would be useful is the sort of policy they have in Switzerland around the disposal of public assets. In this country, if I want to purchase a piece of public land or a public building, I have to bid alongside everybody else. Switzerland has a presumption in favour of co-op and community development; I would get first choice. In the UK, we tried to replicate this through the Localism Act, and the current government has introduced community rights. They’re insufficient – the idea that you give somebody a six-month window to start an organisation up, secure the finance, create a business plan, build their community membership and purchase that in six months time … it isn’t realistic. The opposition party are talking about extending that window to 12 months. I’m afraid that’s just tweaking a policy that isn’t fit for purpose. If we really want to enable community development in housing and other areas, we have to have the presumption in favour of disposal on public assets.

Larger housing co-ops have a lot of assets – is there any scope to leverage those to develop newer co-ops?

In hindsight, what we should have done in 1970s and 80s is create structures that allowed our assets to be recycled. We didn’t do that – we placed assets on balance sheets of individual organisations, and created governing structures that basically said those assets and any income derived from them can only be used to further the objects of the individual co-operative. And if you do that 200 times, you create 10,000 homes and billions of pounds of property assets – put into structures that make them utterly unusable to grow the sector. I understand why people did that in the 70s and 80s, because they didn’t think that in 1988 the government would abolish the 100% grant framework for social housing. They probably never envisaged a future when you’d have to borrow from the capital markets, and leverage assets to do it. By the time that change happened, these structures were already in place. And that’s why there’s been virtually no new development of registered providers of rental housing co-ops in this country since 1988. Our assets were locked up in such a way that when I get a new co-op ask, “can we borrow from your members, we know they’ve got loads of money,” I have to explain to them this reality.

On the one hand, we need a co-operative housing act in this country that creates a legitimate statutory form of tenure co-operatives, because that doesn’t exist at the moment and that is a real problem. Alongside that, we need changes that address the structural problems we’ve put in place 40 years ago, because sector has significant asset bases and cash reserves but it just can’t bring them forward in a way that helps to grow the sector.

How could this be done?

I posed a solution to this nearly 20 years ago when Gordon Brown commissioned Kate Barker to undertake a review of social housing and she was talking about creating real estate investment trusts as they have in the USA. At the time, I was talking to people in Co-operatives UK, and the broader co-operative economy, about some sort of intermediary trust model that allows us to transfer the assets of individual co-ops, and create a usable asset base in a way that protects the interests of the individual co-ops.

I’m hopeful that in the not too distant future, we might be able to have some sensible discussions about a co-operative housing act and the changes that would release some of the potential this sector has in its existing asset base. We can’t replicate the growth after the Second World War in Scandinavia or Austria, but we can still learn a lot from countries like Switzerland, for example, where in the last couple of decades, they’ve really grown their co-op housing sector.

Should building societies offer more lending to the sector?

A building society’s credit committee is going to take the same attitude towards lending risk that a bank will – whether that bank is Triodos or Barclays, whether that building society is Nationwide or Coventry, they will all price risk in exactly the same way. That is the banking model that we have and that’s why we need different structures to de-risk those lenders.

Alongside that, building societies have told me they need to see sufficient demand for those types of products if they are to invest the time and resources to create them.

Finally, for so many building societies, lending mortgage money to individual homeowners is their core business. If we expect them to change their business even a little bit, we’re going to have to get them to the point where they see the commercial drivers. Hoping they will simply make these decisions on the basis of ethical arguments, it doesn’t work – we’ve got to meet them in the middle.

Also, look at housing association bond issues. The Co-operative Insurance Society is in the market to buy that debt, as are mutuals like LV=. Coming to organisations like that saying, I want to build five homes, we need a couple of thousand pounds – that’s not how they operate. They want to be in the market of five, 10, 15 million pound blocks. We’ve got to able to recreate that, to allow our natural partners to partner with us, rather than hoping at some stage they’ll change the entire way they operate so that they can start giving £100,000 out to five people that want to build a home. It’s never going to happen.

That’s a Catch 22 – you have to build scale before you can get scale…

That’s why we need what the Swiss government did, it got behind a bond-issuing co-operative and said, we are guaranteeing this as a government. That instantly sent the right signal to the market and de-risked situations. The current government has guaranteed many schemes in the housing sector, including their rent-to-buy programme. We could do with them offering a guarantee to us.  

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