Housing Q&A: Waqar Ahmed of L&Q on local authority collaboration
0Room151 talks to Waqar Ahmed, group director of finance at housing association L&Q, about his criteria for collaboration with local authorities and why he is unlikely to borrow from councils.
Waqar Ahmed
Room151: What work are you currently involved with that involves partnerships with local authorities?
Waqar Ahmed: We have been working with a number of councils in London for a number of years – particularly around land, planning, nominations and housing management. Of course, on big regeneration schemes there is a competitive bidding process but when we are selected we have processes for decanting properties and developing sites.
We do joint regenerations and have a number of models where they put land in and we put equity in. We then build the scheme out and share the profits.
The council can take as much or little risk as they like. They might choose to take a receipt for the land with an overage agreement, or they could convert the land into equity and become an equity partner, taking a profit share. Our aims – to provide affordable housing – are usually aligned so there is no reason we wouldn’t do more of these.
R151: We have talked to some council regeneration leaders who see collaboration with housing associations as vital because they have access to funding streams that councils do not. Does L&Q see itself in that role?
WA: We don’t usually pursue schemes like Build to Rent, which is one that I think you are referring to. We have significant balance sheets and prefer to raise money through debt capital markets or banking loans. The reason we don’t chase government streams is because they usually come with conditions that we often find are prohibitive for our aims.
We are double A rated and can go to the bond markets. We are building our own yield curve and are hugely attractive to lenders.
R151: So are there any areas where you see the potential for collaboration between yourselves and local authorities?
WA: In the current climate, local authorities should be looking at all their existing structures and options.
One big question is whether the current model where some councils hold their housing stock through arms length management organisations still works. If the purpose is that there is another body outside the council that can take the blame when things go wrong then I get it. But that comes at a cost – the client/purchaser relationship is not the most efficient way forward.
It may be a good time to have a conversation with us about a new model where they create a new vehicle which is owned 50/50 with us.
We would give them a capital receipt on day one to the value of half their stock, which they could spend on new development.
We could then guarantee that we would double the operating margins they are currently getting. This could mean they are getting the same dividend from owning 50% of their stock, along with the massive capital receipt.
This would allow them to deliver more homes without increasing their borrowing – it is releasing capital from assets they hold.
They would lose a bit of control – we would run the vehicle without interference from the council – but it is to an organisation with a track record of delivering and managing affordable housing.
I am just floating this as an idea – I haven’t even modelled it internally, but I am willing to have that conversation with councils. Some might want 100% ownership of their assets but they tend to put restrictions on themselves, and then wonder why their assets are not peforming to expectations.
R151: What other advantages might councils reap through such a model?
WA: In L&Q we still have to do a lot of work on pay and rewards for staff but we are doing better than most local authorities. We are able to attract better talent, which will help to reduce management costs.
Nobody tells us what to do with our balance sheets, whereas councils face external and internal restrictions. There are convoluted processes to release finance which we do not face.
We are trying to get to an operating margin of 50% within five years. The fact that we have a critical mass helps.
Councils’ finance departments won’t have housing treasury experts and they often have to pay for external advices on things like stock condition surveys. We do this sort of thing every day and have smart people employed directly by us.
Admittedly, councils have VAT benefits that we don’t but I still prefer our advantages.
R151: Do you think that the housing association sector has an appetite to borrow from local authorities who are looking for new counterparties?
WA: Perhaps some of the smaller ones that can’t attract the normal market might be but I can’t see the larger ones being interested. The problem is often that if local authorities want to onlend from the Public Loan Works Board then they will probably put some conditions on. We would certainly take cheaper money if they didn’t ask any questions but the reality is they would want some conditions, which is a deal breaker for us.
R151: Does the introduction of Starter Homes and their proposed definition as affordable housing present a threat to your business model?
WA: We have plans to increase the number of homes we are building from 2,500 to 5,000 a year within four years.
Of those, 1,000 will be for affordable rent. Whether that is through section 106 agreements or whether we fund it in a different way, that is our target.
Ultimately we are a charity and helping poorer people to get into affordable homes. That isn’t going to change due to the Starter Homes initiative.
Waqar Ahmed will be speaking at the Room151 Annual Conference in the Housing & Infrastructure Development stream.
