Risk,commercialism and social purpose: Repositioning the English housing association sector

Abstract

Chinese

Originally seen as the ‘third arm’ of UK housing policy, the independent, not-for-profit housing association sector had long been seen as effective in ‘filling the gap’ where the state or market were unable to provide for households in need. Since the 1980s in particular, successive governments had viewed housing associations in favourable terms as efficient, semi-autonomous social businesses, capable of leveraging significant private funding. By 2015, in contrast, central government had come to perceive the sector as inefficient, bureaucratic and wasteful of public subsidy. Making use of institutional theory, this paper considers this paradigm shift and examines the organisational responses to an increasingly challenging operating environment. By focusing, in particular, on large London housing associations, the paper analyses their strategic decision-making to address the opportunities and threats presented. The paper argues that in facing an era of minimal subsidy, low security and high risk, the 2015 reforms represent a critical juncture for the sector. Housing organisations face a stark dilemma about whether to continue a strategy of ‘profit for purpose’ or to embrace an unambiguously commercial ethos. The article contends that the trajectory of decision-making (although not unidirectional) leads ultimately towards an increased exposure to risk and vulnerability to changes in the housing market. More fundamentally, the attempt to reconcile social and commercial logics is likely to have wider consequences for the legitimacy of the sector.

Keywords

exposure to risk G15 housing organisations not-for-profit organisations

Introduction

The need to manage risk has become a widely accepted feature of organisational environments within the public, private and voluntary sectors. Operating within a turbulent context, the not-for-profit housing sector has also struggled to balance the demands of commercialism with a need to retain a core social purpose (see, for example, Morrison, 2016a). Such tensions have been exacerbated by the removal of public subsidy, by changes to regulatory frameworks and an environment characterised by chronic uncertainty. As Czischke et al. (2012) argue, greater knowledge is required about how not-for-profit housing organisations are responding to contemporary challenges, not only to ensure their business survival but also so that they continue to perform a critical role in providing decent homes to those who cannot afford market rents.

The above pressures are not unique to the UK. Increasing state withdrawal of funding in Australia, for example, has forced not-for-profit housing organisations to reconcile their involvement in commercial activities with a desire to retain their social mission (see Gruis and Nieboer, 2007; Milligan et al., 2012). The USA has seen not-for profit housing providers look towards commercial diversification to cross-subsidise social activities (see Bratt et al., 2016) whilst in the Netherlands, housing associations in the 1990s diversified towards market housing sales to generate funding. The level of exposure to risk amongst Dutch housing associations, however, resulted in systemic failure, requiring state intervention and a return to the core social functions of managing and developing housing for low income groups (see Nieboer and Gruis, 2014; Van der Kuij et al., 2016).

Drawing on institutional theory, the purpose of this article is to consider how English housing associations (HAs) have responded to these contemporary pressures and how they have managed competing demands in an increasingly challenging environment. In focusing on large London HAs, the article considers how different obligations have helped re-define organisational purposes and strategic priorities. The article analyses how London HAs reconcile what appear to be incompatible aspirations between maintaining a social purpose alongside the demands of a commercial orientation, as they seek to cross-subsidise their operations and to deliver government housing targets (G15, 2016).

An understanding of how the large London HAs are responding to contemporary government pressures offers salient lessons for other HAs yet to undergo organisational change. By focusing on this critical juncture in the housing sector’s history, the article not only highlights the trajectory of change for the HA sector but also considers the implications for the future of affordable housing provision in the modern welfare state. Lessons can also be applied to urban policy in other parts of the UK as well as to a wider international context. These lessons highlight key pressures and dilemmas confronting urban managers, as they struggle to provide services to local communities within an environment characterised by severe resource constraints.

The theory of institutional logics

Institutional theory offers a critical lens to analyse processes of organisational change, highlighting the rationale for decision-making, the capacity for autonomy, the relationship between voluntary- and statutory-sector agencies and changing power relations between service provider and local communities. The concept of ‘institutional logics’ in particular, a term introduced by Alford and Friedland (1985) has captured the contradictory practices and beliefs inherent in the institutions of modern Western societies, helping to explain organising principles and providing social actors with ‘a set of rules and conventions for deciding which problem gets attended to, which solutions get considered and which solutions get linked to which situation’ (Thornton and Ocasio, 2008: 114). The theory of institutional logics provides an important link between individual agency and cognitions on the one hand and socially constructed institutional practices and rule structures on the other. Logics provide a sense of identity, become embodied in practice, and are sustained and reproduced by cultural assumptions and political struggles with organisations both enabled and constrained by the prevailing institutional logic (Wooten and Hoffman, 2008).

The institutional logics perspective invariably emphasises the existence of competing logics within a particular field and the ways in which different logics assume priority at different points in time. Whilst scholars have long emphasised the role of the state in regulating institutions, increasing attention has focused on the rise of a market logic and its effect on organisational behaviour and action (Scott, 2001: 51). Moreover, interest has grown on how the ascendency of a market logic has accompanied a decline in alternative logics, most notably relating to state-based regulation. Zuker (1987) contends that individuals and organisations rely on their understanding of this interplay between institutional logics in order to gain access to societal resources, aligning themselves with the prevailing logic in order to ensure their long-term survival.

For Powell and DiMaggio (1991) these struggles to ensure legitimacy, control over market competition and contestation of state rules and regulations shape organisations’ logics of behaviour and action. Under conditions of neoliberalism, organisational status and power have become increasingly driven by economics, which has further embedded the market logic within the field (Thornton and Ocasio, 2008: 112). Portfolio and risk management status as well as expertise in finance, for instance, have become progressively valued as the market logic has gained prominence in welfare provision and public policy. Whilst the ascendency of the market logic does not necessarily imply a rejection of other logics it does require decision makers to switch their attention to issues and solutions that are consistent with the orientation of the dominant logic. Organisations thus follow suit, developing structural arrangements and production processes that conform and over time become institutionalised (Zuker, 1987).

At the same time, organisations react to their institutional environment in variegated ways, as they possess distinctive ideological values, identities, and styles of leadership, that influence their goals, purposes and logics of investment (Binder, 2007). Consequently, they adopt different strategies to take advantage of opportunities afforded by the dominant market logic. As Scott (2001) contends, certain organisations are more effective in aligning themselves with dominant rules and conventions. Described as ‘active players not passive pawns’ (Scott, 2001: 179) such organisations have the capacity to respond to external pressures in creative and strategic ways. Highlighting the way in which competing institutional logics are mediated and the organisational capacity for agency provides a critical avenue of research (Thornton and Ocasio, 2008: 243).

A growing body of work has emerged within housing scholarship, seeking to understand how the theory of institutional logics can be applied to interpret the relationship between social and commercial goals in the not-for-profit housing sector (see, for instance, Blessing, 2012; Czischke et al., 2012; Morrison, 2013, 2016a, 2016b; Mullins, 2006; Mullins and Jones, 2016; Sacranie, 2012).

Since the late 1970s and at an international level, the emergence of neoliberal welfare policies characterised by competition, entrepreneurialism, free markets and minimal state intervention has become an increasingly noticeable feature of the public policy agenda (Harvey, 2005: 2). Under conditions of neoliberalism, the housing sector in general, and HAs in particular, have therefore experienced increasing levels of marketisation, exposure to risk; processes underpinned by the predominance of the financial sector (Hodkinson et al., 2013). In broad terms, HAs have been compelled to retreat from the traditional provision of subsidised rental housing, towards market renting and promoting varieties of homeownership.

The HA sector has also experienced growth in hybrid governance structures and development of diverse housing products to address the complex financial and regulatory challenges of the prevailing market logic (Morrison, 2016a). Moreover, sophisticated treasury management and financial portfolio analyses have been developed in response to the replacement of public with private funding and to exploit commercial opportunities (Morrison, 2016b; Tang et al., 2017). Before examining the organisational responses to these competing demands, some context is given to explain the changing perception of the sector and to analyse the key structural constraints that have compelled English HAs towards a more commercial logic.

The changing landscape for English housing associations

Originally seen as the ‘third arm’ of UK housing policy, the purpose of the independent HA sector was to ‘fill the gap’ where the state or market was unable to provide for households in need (Malpass, 2000). Since the 1980s and influenced by neoliberal ideology, governments had viewed these organisations as preferred partners in developing and managing subsidised rental housing, in preference to supposedly bureaucratic and inefficient local authorities (Mullins and Murie, 2006). As a consequence, the sector faced rapid expansion and following the Housing Act 1988 became the main providers of new social housing. Their ability to raise private finance enabled HAs to develop affordable housing and the sector expanded further through transfers of formerly local authority owned stock. Once viewed as an ‘outstanding success’, the sector was praised for its capacity to combine the disparate skills of entrepreneurialism and sound financial management (a market logic) with a commitment to a strong social purpose in providing good quality, affordable accommodation to households in need (Pawson and Mullins, 2010).

However, the privileged position of the housing association sector began to change, initially following the government’s 2010 Comprehensive Spending Review, resulting in spending cuts of around 60% in 2015, accompanied by a statement that government grant funding would end after 2018 (HCA, 2015a).¹ The 2010 Coalition government established an affordable housing programme, allowing HAs to charge up to 80% of local market rents, introduced fixed-term tenancies (under the Localism Act, 2011) and restricted benefit payments (under the Welfare Reform Act, 2012).

The 2015 General Election marked a critical juncture for the sector following an unexpected Conservative majority government. Based on manifesto commitments, the government introduced proposals to extend the Right to Buy (RTB) to housing association tenants and proposed to restrict the ability of landlords to increase rents (by 1% per annum on social housing properties over a four year period) (HM Treasury, 2015). Whilst the RTB proposals proved highly contentious, the proposal to limit rent increases had a more profound impact on the sector, disrupting business plans, jeopardising income projections and threatening financial forecasts (HCA, 2015b).²

In addition to the pressures of grant reduction, rent restrictions and welfare reform, the HA sector, for almost the first time, was subjected to significant censure from central government. Criticisms were directed at their inefficiency and lack of progress in meeting the government’s ambition to build 1 million new homes by 2020 (UK Parliament, 2016). These arguments were accompanied by a scarcely veiled threat that the government would act if housing associations failed to cooperate. As the then Chancellor of the Exchequer warned: ‘They can either work with us … or there can be a more confrontational relationship’ (Osborne, 2015). In what appeared to be a sustained campaign, these criticisms were accompanied by profoundly hostile press attention. An article in the (centre-right) Spectator magazine referred to housing associations as ‘the true villains of the property crisis’ and described the sector as ‘combining public sector lethargy and private sector greed’ (Clark, 2015). An enquiry conducted by a national television channel (Channel 4 News) in 2015 was presented under the headline ‘Why are housing associations failing to build enough homes?’ (Ebrahini, 2015). Media reports also criticised ‘low performing and highly paid’ housing association CEOs – ‘£350,000 salary for Britain’s worst housing Chiefs’ as one headline expressed it ( The Times, 2016).

Housing associations therefore faced a challenging policy environment. Whilst the English HA sector has long diversified into commercial activities to cross-subsidise their core social functions (see Malpass, 2000; Mullins and Pawson, 2010), contemporary organisations face stark decisions about how to reposition themselves in response to the above pressures. Given the scale of grant reductions the sector has chosen to diversify by developing more systematic strategies for market sale. However, such an approach inevitably implies greater exposure to risk, not least through fluctuations in the wider housing market and uncertainty in raising finance from capital markets (Wainwright and Manville, 2017). This new environment therefore presents acute tensions for the sector, both in terms of structural constraints and opportunities to exercise autonomy. As Morrison (2016a) argues, HAs need to develop a portfolio of commercial activity to fund their core businesses. At the same time they remain committed (for the most part) to a sense of social responsibility to existing (and future) tenants and are obliged to protect their assets from unnecessary risk.

As institutional theory maintains, the conflicting regulatory logics commonly observed within public policy (Thornton and Ocasio, 2008) are clearly evident within the English housing association sector. The Homes and Communities Agency (HCA) supports the establishment of unregistered profit-making subsidiaries to deliver HAs’ commercial activities, such as market sales – such bodies are not constrained by charitable rules and can benefit from tax efficiencies. However, as these vehicles lack direct accountability, government regulations specify that HAs must provide assurances that their social housing assets are not put at risk and that the public value within them is protected (HCA, 2014, 2015a).³ The sector therefore faces a challenging environment of relative autonomy, combined with continuing regulatory, financial and political pressures. In order to analyse these processes in greater depth, the next section examines how the major London HAs have responded to these pressures.

Research methods

Given the wide variation between HAs and organisational contexts, in order to analyse strategic decision-making, Gruis (2008) argues, it is important to select similar sized organisations operating in the same market conditions, to allow the external environment to be held relatively constant. For the present study, the sample was restricted to the large HAs (managing over 15,000 units each) operating in London (collectively known as the G15). Given unprecedented pressures to deliver new housing in response to growing demands from existing and future tenants and the context of a market characterised by rising housing prices, the propensity to be market orientated in London is therefore extremely high (Savills, 2016a).

The research entailed in-depth, semi-structured interviews with members of the G15 HAs’ senior executive teams. The purpose of the interviews was to determine how individual organisations had revised their business plans, and in particular their development programmes, in response to prevailing circumstances and to determine the rationale behind their strategic decision-making. The study aimed to identify the key risks of diversification and to consider how far a market logic can be reconciled with maintaining core social functions.

Given that senior managers would be expected to portray their organisations in a positive light, the interview responses were compared with documentary evidence to ascertain how far the claims could be supported or refuted by other forms of data. These data included analysis of HCA Global Accounts, which collect performance information about HAs’ charitable registered status, including the extent to which surpluses made from diversification were used to fund non-social housing activities. Annual reports, financial accounts and company press releases were also analysed to consider the range of commercial (and non-commercial) activities undertaken within the group structures. Through this triangulation of qualitative and quantitative data, involving crosschecking and verification of senior managers’ statements, the analysis examined taken-for-granted assumptions and values. In doing so, the research was able to highlight the relationship between the logics of social and commercial investment, their impact on strategic priorities and their influence on organisational behaviour (see also Morrison, 2016a, 2016b).

Strategic decision making within London housing associations

The G15 HAs represent the largest organisations working in the not-for-profit housing sector. They own and manage over 550,000 homes (accounting for 21% of the housing sector stock), provide accommodation for 1 in 10 Londoners and range in size from just over 15,000 properties (East Thames) to 71,700 properties (London & Quadrant). Historically they have been highly successful in their ability to generate funding; they leveraged £15.5 billion in private investment (representing 33% of sector’s net debt) and generated 47% of the sector’s overall surplus in 2015 (HCA, 2016). They have an active development programme, having provided 16,000 affordable rental homes and 6400 shared ownership properties between 2013 and 2016 (G15, 2016). Nevertheless, the large London HAs acknowledge that they could increase output and have suggested that collectively their development programme could increase from 93,000 to 180,000 over 10 years in order to help deliver the government’s national housing targets (Stothart, 2016).

An increase in development activity is undoubtedly needed in the London housing market where it is estimated that 50,000 homes per year are required to keep pace with housing need – output in 2012–2013 was 21,900 (Wilson, 2015). London has the highest housing prices in the country (the average housing price in 2016 was £482,000 in London, compared with £234,000 in England) (ONS, House Price Index) and increasingly high rent levels (an average of £281 per week, compared with £145 outside London) (London Housing Commission, 2016). The capital is therefore beset with chronic problems of affordability and whilst local authority development remains at historically low levels, the London market requires a dynamic and growing housing association sector that can respond to housing need.

As noted above, the HA sector has faced extensive public criticism in recent years, both for its lack of success in meeting housing need and for the level of remuneration offered to senior staff – although the salaries of the G15 Chief Executives (CEO) vary from £155,000 (East Thames) to £300,706 (Affinity Sutton). These salary figures do not necessarily equate with the size of organisation; CEO pay per home varies from £3.69 to £10.25 and even the trade magazine for housing professionals has questioned whether these salaries represent value for money (McCabe, 2015).

The G15 HAs are financially robust, with surpluses rising to a total of nearly £1.5 billion for 2015. Whilst this could be attributable to a favourable macroeconomic condition and historically low interest rates, such figures have encouraged the government to believe that the sector could become self-financing and should no longer be reliant on government subsidy (Walker, 2014). In order to consider these and other issues further, the following sections examine how these HAs have responded to the specific challenges presented by an operating environment characterised by turbulent change.

Establishing a commercial logic

As noted above, the dominance of a market logic has been a longstanding debate within the sector. However, given the scale of change following the 2010 and 2015 General Elections, the G15 respondents expressed little doubt that government reforms heralded a paradigm shift for the sector, illustrating how far decision-making was driven by exogenous factors. Whilst the Chancellor’s rent reduction announcement came as an unpleasant shock, respondents suggested that they had anticipated the trajectory of change (choosing to highlight their relative autonomy). Hence, by the July 2015 Budget, ‘the writing was on the wall’ as one CEO commented, adding that ‘all that happened is that the (government’s) rent cut has made what we were intending to do all the more urgent’. In the words of another CEO ‘we had to do what we could to make the business more efficient’. Respondents were keen to emphasise how seriously they had taken the efficiency agenda (even before the centrally imposed rent reduction): ‘I have spent the last three years really driving down operating costs’ as one CEO commented. For many, the external environment presented a valuable opportunity for organisational change. For example:

In a way it takes the external pressure of radical cost cutting driven by government to make organisations really think … But you need to be careful what you wish for. I wouldn’t encourage any more radical action, but I think some good will come from it. (Interview)

This commercial logic was manifested in a number of ways, the first of which was an increased reliance on property sales income as a proportion of turnover. Table 1 highlights the extent to which sales from non-social housing development and first tranche sales of shared ownership housing products has grown for each of the G15 HAs.⁴ Whilst the share of this development activity as a proportion of total turnover varied by organisation, from Catalyst (43%) to Circle (10%) in 2015, this upward trend indicates the degree to which the G15 has become increasingly reliant on non-social housing development. All the CEOs interviewed acknowledged that they were looking to increase the proportion of market sales within their development programmes as grant diminished, arguing that the cash receipts generated were needed to cross-subsidise the delivery of affordable homes. ‘I think it will play an increasingly important role in how new homes are funded. If you move away from a grant model you have to look at all sources of capital’ as one CEO suggested.

Table 1.

G15 HAs’ first tranche sales and non-social housing development activities: income 2014/2015.

	Total turnover		First tranche sales		Non-social housing development		Development activities share of total turnover
	£m	Change on year %	£m	Change on year %	£m	Change on year %	2014/2015	2013/2014
L&Q	642	11	33.0	6	204	21	37	34
Circle	412	14	14.5	224	27.2	1600	10	2
Notting Hill	381	28	68.5	111	76.8	55	38	27
Affinity Sutton	430	34	40.1	153	89.8	309	30	12
Hyde	326	16	34.5	60	52.2	41	27	21
A2Dominion	297	9	12.4	−42	75.8	42	30	27
Genesis	282	6	22.2	76	13.8	50	13	8
Family Mosaic	230	−6	10.2	−52	29.2	−27	17	25
Peabody	223	35	14.5	113	10.4	−7	11	11
Catalyst	212	23	40.2	163	50.6	27	43	32
Network	190	21	24.6	6	28.4	506	28	18
Southern Housing	175	10	14.9	113	13.5	5	16	12
East Thames	146	−17	15.5	15	33.9	−41	34	41
Metropolitan	240	−6	6.4	−35	9.8	−65	7	15
Amicus	161	1	4.3	1	–	–	3	3

Source: adapted from Social Housing (2016).

A second illustration of a dominant commercial logic was an increased exposure to risk, as HAs were subject to cyclical changes in the market. Despite London benefiting from above average house price rises, this market exposure increased their vulnerability to housing market fluctuations. Delays in initiation and completion of schemes, slowdowns in sales, reductions in market prices and failures to achieve projected sales incomes represented threats to business plan assumptions and to an ability to comply with loan covenants. ‘Even London is not impervious to shocks’, as one CEO remarked.

A greater reliance on cross-subsidy from commercial activities resulted in increasingly sophisticated approaches to financial risk modelling to accommodate a complex business environment. However, G15 members believed they were well placed to address these challenges. The main strength of these large London HAs was their asset bases that offered a strong competitive advantage and leverage for borrowing: ‘developers do not have the same equity base’ as one respondent expressed it. Although a reliance on market sales generated risk if property prices and values fell, many organisations had established contingency arrangements, for example by changing the tenure profile to shared ownership, private renting, or occasionally affordable housing if necessary. Unlike private developers, HAs were in a position where they could maintain their existing properties and defer making a profit – ‘diversification allows us these options’. As one respondent explained:

the more you move towards this self-funding model and move away from government grant the more you become pro-cyclical. Whereas the grant funding model was effectively a counter-cyclical model … This model is clearly about big market exposure, so [we are] making sure we have plans and the right prudential limits around how much exposure we have at any given time to keep the rating agencies and funders happy and to make sure the business is protected.

Nevertheless, as Scott (2001) contends, alignment with the dominant market logic can be precarious: ‘If the market falls, the cross subsidy element would be reduced at a stroke’, a CEO argued. Guarantees that there would be no impairment risks to social housing assets were therefore necessary as these complex, hybrid organisations moved towards a market logic, albeit one which carried not only financial but also reputational risks. Whilst there was a clear opportunity cost of undertaking commercial activities, a number of organisations also saw this new direction of travel as an opportunity to be seized, as the CEO of Genesis Housing Association argued publicly after the July 2015 Budget announcement:

We could become something different. I don’t know where this will lead … There are great opportunities opening up to reduce some of the regulation we go through … putting your head in the sand means that someone tramples all over you. I don’t want Genesis to do that. I want Genesis to be in the forefront of change (Neil Hadden, interview, quoted in Apps, 2015a).

These new risk factors required changes in organisational structures and governance arrangements and many HAs had undergone fundamental restructuring and developed new business models (see Figure 1 which depicts a typical G15 group structure). Whilst most of the HAs had established complex, hybrid group structures, pursued innovative borrowing techniques and created a range of non-charitable subsidiaries to carry out market activities prior to the July 2015 Budget announcement, much higher expectations were now placed on their commercial operations. At the same time, the governing boards were required to have higher-level skills to understand and recommend business decisions from non-social housing activities as well as the capacity to analyse the significance of new interdependencies within the organisation. These new skills implied that Board members were likely to be recruited on the basis of their private sector, financial management experience, rather than as local community representatives.

Figure 1.

An illustration of a G15 hybrid group structure.

This commercial logic not only affected decision-making, organisational strategies and Board membership, it also influenced the location of development activity. In the words of one respondent, the key to minimise risk was to ‘buy land wisely and diversify geographically’, which meant that because of the difficulties of developing within inner London, activities tended to focus on so-called ‘zone 3’ (outer London) boroughs. At the same time, these constraints also offered considerable opportunity, as HAs were considered to be ‘attractive partners’ by private developers, given their ability to cope with risk. A number of respondents maintained that joint ventures would become more significant within this changed environment, and they in particular made development within inner London areas more feasible (in theory at least) – ‘it allows more and more to happen’ as one commented. Respondents also welcomed an increased autonomy to take decisions, often complaining of continuing government interference. In the words of one CEO ‘I’d love to be in a position in some respects to pay back all the grant, because then I would be truly independent’ (Interview).

The final component of a commercial logic was illustrated by the way that HAs were seeking to change the socio-economic composition of their residents. All respondents agreed that the tenure mix would have to change following reductions in subsidy and cuts in rental incomes on their social housing properties. As the G15 collectively announced to the Department of Communities and Local Government Select Committee (G15, 2015: 1):

The Government has set the HA sector a big challenge by cutting rents. We are being asked to deliver development with less funding … Ultimately the G15 are net borrowers every year … Smaller surpluses will result in reduced supply of new homes … We are determined to keep developing but it is highly likely that the number of affordable homes for rent will be a smaller proportion of overall building.

One respondent, for example, explained that before the rent cut their development programme was predicated on one-third affordable housing, one-third shared ownership and one-third market rentals and market sales – ‘now it is 10% affordable housing, 50% shared ownership and 40% market sales and rented’. Many of the other G15 organisations mirrored this trend, with the CEOs justifying their course of action in order to maintain the economic viability of their development programmes.

Retaining a social purpose

Whilst a commercial logic clearly played an increasingly dominant role in discussions of organisational purpose, senior managers and Chief Executives argued that they remained committed to an organisational purpose driven by a social logic, regardless of economic contingencies. As shown in Table 2, turnover from social housing lettings constitutes a high proportion of total turnover in each of the G15 organisations, varying from Catalyst (68%) to Circle (98%) in 2015. As large London HAs, these organisations benefited greatly from the high gross book value of their portfolio, with figures well above the national average. As a consequence, they were heavily reliant upon borrowing against their social housing assets to fund development programmes. Table 2 indicates how the gross book value of assets ranged from over £5.5 billion for London & Quadrant (with the largest social housing stock) to just under £1.2 billion (in the case of Network, with the lowest number of properties). These figures illustrated how the sector was becoming increasingly reliant on these historic, social housing assets to raise capital funding. However, this capital funding was largely devoted to delivering new market housing, raising questions about how far public assets were used to finance commercial activity.

Table 2.

G15 HAs’ social housing businesses (2015).

	Social housing units managed	Gross book value of housing properties (£bn)	Turnover from social housing lettings (£m)	Turnover from social housing lettings as a % of total turnover	Total ‘other’^a social housing activities (surplus/ deficits) (£000)
Hyde	41,772	2.63	168	93	(13,507)
L&Q	28,460	5.53	389	89	6090
Genesis	26,700	2.89	234	71	3800
Notting Hill	26,700	2.15	171	89	(1100)
Southern Housing	23,969	3.06	136	87	3879
Affinity Sutton	22,617	3.06	283	93	(4660)
Family Mosaic	20,893	2.22	183	86	1020
AmicusHorizon	18,633	1.46	146	68	(803)
East Homes	13,729	1.04	79	67	2505
Metropolitan	12,737	2.38	175	87	11,324
Catalyst	11,892	1.92	112	89	11,728
Peabody	10,623	1.46	113	76	8040
A2Dominion	8022	1.16	184	84	3692
Circle	7417	1.49	93	98	2982
Network	5839	1.19	69	72	9298
England average	1097	0.09	6.7		222
England total	361,973	30.1	2.206	80	73,143

Notes: ^a‘Other’ social housing activities consist of community investment, e.g. employment and training initiatives, apprenticeships, debt advice, etc. to tackle social exclusion.

Source: authors, compiled from HCA (2016).

Whilst the reliance on turnover from social housing lettings continued to be seen as the core business for the London HAs, as seen above the reductions in rental income following the July 2015 Budget announcements removed significant capacity from their business plans. Nevertheless, respondents stressed that they had adopted a pragmatic approach, describing their strategy as an ‘adaptive mechanism’ to enable cross subsidy which would enable them to realise their social purpose. At the same time they argued: ‘We were clear that what we didn’t want to do is stop doing some of our core activities’. This CEO explained the distinctive purpose of the organisation as follows:

the thing that differentiates us is that we are clear that we do not want financial pressures to drive a reduction in service quality. Whether withdrawing from anti-social behaviour (ASB) initiatives, from community development activity, resident involvement or jobs and training … If anything these things become even more important as communities struggle with welfare cuts and poverty.

The difficulty was that the sector was at the same time repositioning itself to focus on a clear set of market driven priorities. Thus, whilst some emphasised that they would continue to provide core services, many had chosen to end their involvement in activity such as providing supported housing for vulnerable groups, given the uncertainty surrounding future sources of income. Hence:

we need clarity from Government and we cannot justify putting internal subsidies into these extra care schemes –£150,000 subsidy is needed per unit and these schemes just do not stack up. We are disappointed as there is still obviously a need for them.

All organisations interviewed emphasised, however, that they would continue to fund additional ‘housing plus’ work, which was seen as a ‘community investment’ despite often being a loss-making activity (in monetary terms). As Table 2 indicates, four of the organisations recorded a deficit from their non-core (‘other’) social housing activities, which continued to be seen as important. In the words of one respondent: ‘if we don’t provide these community investments, who will? It is part of our social mission’. This social logic formed an important source of motivation for many in the sector; ‘we have dedicated staff. We make money on other aspects of our business; why cut back on this aspect?’.

As a finance director commented, providing debt advice, employment and training opportunities made financial sense as ‘to make the community more economically active is better for us and better for the community’. For many respondents, the social value of this activity not only could be translated into financial value, but also had considerable multiplier effects. Whilst the core social purpose remains providing and managing subsidised rental housing, the broader housing plus role is ‘what the sector does’, as this director argued. Although community investment would inevitably remain a very small proportion of total turnover, respondents argued that the expenditure ‘would not be touched’, despite a recalibration of business plans to take into account the rent reductions.⁵

Moreover, all of the G15 respondents interviewed expressed a continued strong commitment to sub-market rented housing, albeit at reduced levels: ‘It is all very well for government policy to be centred on home ownership but they ultimately need subsidised rental housing – whether they like it or not’. Respondents expressed a firm commitment to affordable sub-market rented housing. As one CEO explained:

We have a new development strategy, but what I can say for sure is that there will be a proportion of the programme with rents around current social rent levels (around 45% of market levels) to ensure that we can offer properties to people who are on benefits, nominated from local authorities.

Respondents were keen to argue that there was no inherent contradiction between social and commercial logics. They are ‘not mutually exclusive’ and ‘they are entwined’, were common responses. Yet they were also clear to stress that their mission was now to meet ‘a range of housing need’ rather than simply accommodating low income households. This commitment to social purpose represented sincerely held views. However, there remained the question of how far the sector could continue to sustain loss-making activity within an environment characterised by competition, financial risk and marketisation. What seemed clear was that there was a disjuncture between a rhetoric of social purpose and the reality of commercial business strategy. Whilst the G15 HAs’ revised organisational direction responds to affordability pressures experienced by a wide spectrum of residents, there is an opportunity cost in diverting attention away from housing for those in greatest need. The next section therefore subjects the above claims to critical scrutiny.

Discussion

Although the changes are not unidirectional, the growth and prevalence of neoliberalism in housing policy has not only led to a market logic to assume primary significance, but has been supported by a regulatory agenda, particularly within the UK that has emphasised sound financial management as the key (if not sole) criterion for success (Hodkinson et al., 2013). This market logic has in turn assumed paramount importance in determining organisational behaviour and actions, as witnessed in the HA sector (as well as in wider welfare policy). In considering both structural constraints and the capacity for agency, institutional logics perspective offers a way to examine how organisations can take advantage of the prevailing logic to further elaborate, manipulate and use to their own advantage (Thornton and Ocasio, 2008), within certain parameters at least.

The responses from the G15 London HAs’ senior managers suggested a collective consensus about the importance of retaining a strong social purpose. However, scrutiny of the business models applied represented a fundamental challenge to this ethos. In an attempt to ensure their long run survival, the large London HAs had not only aligned themselves with the dominant market logic, they also had to ‘switch their attention to issues and solutions … that were consistent with (its) orientation’ (Zuker, 1987), namely development for outright market sale that over time would constitute a significant proportion of their development programmes (Apps, 2015b). Making use of the market rhetoric to justify their re-defined business purpose and chosen course of action (Thornton and Ocasio, 2008), the G15 London organisations had attempted to position themselves as ‘active players’ (Scott, 2001: 179) in delivering government housing targets that prioritise homeownership. These developments indicate the London HAs’ direction of travel towards the idea of what they liked to term ‘profit for purpose’ (Mullins and Pawson, 2010).

London HAs have specific advantages to pursue market-orientated strategies, as a result of their extensive unencumbered asset base (containing individual properties worth several £million). This asset base provided considerable borrowing capacity and allowed large surpluses to be produced from social housing lettings and remains the key means of differentiation between London and other UK areas. Moreover, in response to government reforms since at least 2010, the G15 HAs have led the way in commercial diversification strategies, placing considerable emphasis on a strong business culture, justified as helping to optimise social outcomes. All of the organisations had plans to increase the proportion of market sales and were becoming progressively more reliant on the income generated from these activities in future business plans. As they move towards more complex hybrid group structures with a greater level of commercial activity in non-charitable subsidiaries, this business model will inevitably increase their risk exposures.

However, as the tenure mix changes in new schemes and the amount of sub-market rental provision falls to allow development programmes to remain commercially viable, tensions will become more explicit as the HAs seek to reconcile competing social and commercial goals (Watt, 2013). Inevitably, they will face difficult choices in meeting their social duties to house the lowest income households in London. A market logic is likely to compel organisations to abandon their social roots, as they widen their resident profile and divert their attention to building housing for outright sale.

Notwithstanding the above points, some London HAs have chosen to view such tensions as strengths. HAs have been described as using ‘chameleon-like activity’ (Blessing, 2012), to avoid undue dependency on public subsidy, whilst harnessing an ability to access private financial markets (Mullins and Murie, 2006). Their status as hybrid institutions has in effect enabled them to take advantage of both government subsidy and private finance. Many of the assumptions that had underpinned HAs’ operations in the past, however, have now been removed – for example, generous government subsidy, political consensus about their positive contribution to housing delivery and local community support. As Murtha (2015: 1) maintains, ‘the Government has forced their hand’. The sector has a duty to respond not only to the government’s efficiency drive but also to increase their capacity to deliver new housing in order to ensure not only their long run survival but also their legitimacy in the face of wider public criticism. Whilst the London HAs have plans to increase their output and respond in particular to the Capital’s housing crisis, diverting attention from concentrating on providing for the lowest income households within London, is likely to have serious consequences for the most vulnerable groups and those with the least ability to pay (London Housing Commission, 2016).

Conclusions

Internationally, the historical development of the not-for-profit housing sector created an institutional environment where organisations shared a common goal to provide low-income groups with decent housing at a price they could afford. In the UK as elsewhere, the policy framework since the 1980s has progressively weakened this consensus and a sector (which was always heterogeneous) has been transformed under conditions of neoliberalism by changes in exposure to market risk, heralding new governance arrangements and business models (Mullins et al., 2012).

By framing the way in which contemporary policy uncertainty manifests itself in organisational decisions, institutional theory helps to explain how and why the large London HAs have been transformed into complex businesses extensively driven by a market logic motivated by state withdrawal. Organisations’ strategic priorities are in effect manifestations of, and legitimated by, the institutional logics they face (Thornton and Ocasio, 2008). Moreover, the way in which these HAs have responded to external pressures offers salient lessons for organisations yet to restructure and diversify into commercial activities so that they too become more self financing and secure their long term survival.

The paper also brings to the fore wider questions and raises further avenues for research. What future is there for subsidised market rented housing, particularly within a city like London where affordability problems remain unprecedented and likely to worsen? What can these organisational changes tell us about the direction of travel for housing policy in general in England and for the housing association sector in particular? The combination of political pressure to promote owner occupation and economic pressures to reduce funding, mean that a market-oriented trajectory is set to continue. The sector response is likely to become divided between two categories of not-for-profit housing organisation. Those that are ‘active players’ (Scott, 2001: 179), using the market rhetoric to their advantage look to be rewarded by government, whilst those that resist or are passive are likely to be left behind (NHF, 2016a). The trend towards greater merger activity within the UK housing association sector, as the active organisations pursue their growth strategies, is an issue that will provide scope for future research study.

When Dutch housing associations adopted an ambiguously commercial logic, they soon foundered, eventually requiring state intervention (Nieboer and Gruis, 2014, Van der Kuij et al., 2016). Given this context, the extent to which the English HA sector can continue to pursue a distinctive social purpose, delivering affordable housing to those with least ability to pay, may therefore be in some jeopardy, raising questions about the wider legitimacy of the housing association sector. As the organisations move inexorably towards a market logic, an inability to respond to the needs of households, particularly those most vulnerable to London’s housing crisis, is likely to have wider implications for urban policy. At the same time, in light of the 2016 UK Referendum result to leave the EU, exposure to risk and vulnerability to changes in the housing market may well be accentuated (NHF, 2016b; Savills, 2016b).

Footnotes

Acknowledgements

The authors would like to thank the senior managers of the G15 London Housing Associations for agreeing to participate in this research and also the anonymous referees for their invaluable comments on earlier drafts of the paper. The usual disclaimers apply.

Funding

This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.

Notes

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