What is driving the current wave of mergers between housing associations in Wales and what are the potential benefits and pitfalls? Darren Hartley explains
The last year has witnessed several merger announcements from some of the major registered social landlords (RSLs) in Wales. This has included public announcements by Linc Cymru and Pobl (which should be completed by the time we go to print), Melin and Newport City Homes, Newydd and Cadwyn, and RHA and Coastal.
A recent article in Social Housing magazine[1] highlighted that there have been 71 mergers in England since 2012 – and that largely includes registered providers (RPs) with more than 1,000 homes. Welsh RSLs have been less inclined to merge than their English counterparts, but has Wales caught the merger bug?
Altair has provided support with several mergers in both Wales and England. There are structural differences which account for the differences in approach to date. Whilst there might be organisational drivers for mergers at any time, the incidence of mergers tends to increase in periods of economic stress. Whilst lending conditions have been favourable over the last decade, English RPs faced sector stresses through the rent cap of 2016-20 at the same time as major reductions in capital grants. Merger was often cited as a reason to generate increased supply, often from larger providers that have systems and infrastructure to ‘bolt-on’ additional organisations.
The growth of Peabody is a classic example of an RP that went from 17,000 homes in 2012 to 92,000 in 2022 through a series of mergers. For comparison, the total social housing stock in Wales owned by RSLs is currently around 150,000.[2]
Welsh RSLs tend to be much smaller and embedded within their communities. Many have wider shareholding which constitutionally and procedurally can make mergers more challenging. There has also been a greater availability of capital grants to support growth. Mergers in Wales have tended to fall into two camps:
- Regulation – The requirement a few years ago for smaller RSLs (under 1,000 homes) to also operate long-term financial plans exposed fragilities, largely around stock investment obligations, which required a ‘safe haven’ within a larger RSL. Regulatory compliance issues more generally can also cause RSLs to find a stable merger partner.
- The offer – The merger offers something distinctive or there is a clear and specific benefit particular to the parties involved.
Current merger drivers in Wales
Welsh RSLs now face many similar macro-economic challenges as their English counterparts, as well as policy challenges specific to Wales. Higher interest rates are the ‘new normal’, inflation continues to remain stubbornly high, and costs of energy, materials and human resources are rising at rates that generally outpace rent increases. There are also challenges of building safety compliance, delivery of net zero homes, carbon reduction targets, and the costs of the new Welsh Housing Quality Standard. The housing market more generally is flat as buyers face higher mortgage costs, so new supply and market-based products are also under pressure. It is no surprise that RSL boards are looking to merger as a potential solution.
The forms of merger
Merger can take various forms. There can often be benefits derived from arrangements that fall short of full constitutional change, such as shared personnel, procurement consortia and joint ventures.
The favoured device for registered societies is the transfer of engagements route, usually involving the smaller RSL merging into an existing larger RSL. However, there are various options available. There are models where two RSLs combine to create a new entity; where one RSL joins a group structure but retains its own identity as a subsidiary; or regional structures can be established. There are also other mechanisms depending on organisational form, such as share purchases. What is clear is that any organisation considering a merger will need to look at their own particular circumstances to agree the optimum route and have a very clear rationale on the benefits they want to realise.
For RSLs in Wales, there also remains the need to be mindful of the restrictions of Welsh Government Circular RSL 05/08 which imposes additional restrictions on merging organisations.
Benefits of merger
Increased financial capacity to build more homes and invest in existing homes is usually at the forefront of decisions. A larger organisation can be better placed to buffer against uncertainties, manage risk, and leverage improved borrowing rates and access to capital markets. Most mergers will expect to yield 2 per cent-4 per cent efficiencies in Year 2 and 3 per cent-5 per cent in the following two years. There can also be operational efficiencies, improved purchasing powers, and investment in technology and infrastructure. Increased size can also result in increased influence with strategic partners. It can also present new markets and opportunities, both in terms of geography and service types. Ultimately, the focus should be on what this could mean for the quality and range of services to current and future tenants.
Downsides of merger
However, there is no certainty that benefits will be realised. Research by the London School of Economics concluded that ‘for very big associations, there is little evidence of a relationship between size and cost, so mergers do not necessarily enhance efficiency unless one of the partners is underperforming.’[3]
Mergers can be costly and time-consuming. Combining two already well-established organisations with distinctive identities and cultures can be a challenge and a distraction to maintaining service quality.
There is no ‘ideal’ size of RSL. It depends on the operational and financial circumstances of each organisation. In the longer term, RSLs will need to ensure that they do not erode the local service, and lose their connection with local communities, which is a strong feature of services in Wales. Finally, the costs alone of a merger can mean that a positive return may not be realised for some time, and with the generally smaller size of RSLs in Wales, this itself is an area that will require laser focus.
Features of successful mergers
Our experience suggests that successful mergers have the following in common:
- An aligned culture
- Clear rationale for merger
- A strong business case for the merger that all boards and staff can sign up to and tenants have been consulted on and views heard
- Clearly defined roles, terms of reference and project sponsors from the board and executive
- Robust project management
- A clear communication plan as part of staff and tenant consultation
- Detailed lender packs as part of the lender negotiations.
Common pitfalls
There are various reasons why the courtship of merger might break down. Overwhelmingly, the major reason mergers do not proceed is due to a perceived lack of cultural fit between the two organisations. You therefore need to choose your merger partner carefully.
The board also needs to establish a set of clear red lines early in the process and ensure that it is the board that remains in control. Other pitfalls RSLs considering merger need to be aware of include:
- Clarity on who will be appointed to the key senior roles
- Whether it is truly a merger of equals or is it effectively a take-over
- There is a need to be open, honest and candid, otherwise trust can quickly break down
- Establish clarity on strategy, vision and operations from the outset
- Undertake early due diligence to either avoid or identify early the financial deal breakers.
So, do mergers live up to expectations?
This really depends on your expectations and your reasons for merger. If integration and the efficiencies can be achieved, there are benefits that can be realised in the long term. However, you need to ensure that you keep in sight the goals outlined in the merger business case, and that Day One post-merger is then only the start of the next phase when the opportunities for staff and the improvements in service for tenants need to be realised. Controls should be put in place to ensure you regularly test and monitor delivery against the merger objectives and remember to communicate those benefits to tenants.
With the continuing challenges ahead facing RSLs, further mergers of Welsh RSLs may well be in the pipeline.
Darren Hartley is a director at Altair. If you are interested in finding out how Altair can support your organisation please contact him at darren.hartley@altairltd.co.uk or Jo-Anne Morgan, director of governance at Jo-anne.morgan@altairltd.co.uk
[1] Social Housing – Insight – Trend report: mergers
[2] Social landlord housing stock and rents: as at 31 March 2023 | GOV.WALES
[3] The-future-social-housing-provider-full-report.pdf (lse.ac.uk)