ASSET MANAGEMENT AS A TOOL TO LEVERAGE ADVANTAGE FROM SELF-FINANCING.

DICK JOHNSON – WESTMINSTER CITY COUNCIL

 

INTRODUCTION

INTRODUCTION

SUPPLY AND DEMAND IN THE HOUSING MARKET

ANALYSIS OF MARKET IN WESTMINSTER

STRATEGIC ASSET MANAGEMENT

ANALYSIS OF CURRENT PRACTICE

APPLYING IT AT WESTMINSTER

OUTCOMES

REALITY CHECK

CONCLUSIONS

WESTMINSTER

Occupies small footprint 8sq km

Lowest ctax and highest social rent

Council faced with significant fiscal reductions

Constant flow of change and re-organisation

Commercial Focus/outsourcing/tri-borough

Identifying HRA Investment opportunities

Growing core competencies

Looking at growing the stock

THE HRA

Achieved decent home 2006

Majority of stock flats 99%

Fully funded stock investment requirements

High performing ALMO

Value of stock

Impact RTB

Two pools for debt

Component accounting

Strategic Asset management plan

INDICATIVE HRA BUSINESS PLAN

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 300

100,000,000

200,000,000

300,000,000

400,000,000

500,000,000

600,000,000

700,000,000

HCFR Debt Cap Closing HRA Working Balance Capital Programme

BEFORE SELF FINANCING

• Tight government regulation and control

• National subsidy system

• Lack of incentives to innovate or grow HRA

• RSL’s seen as vehicle for delivery new housing

• The Residualisation of LA Housing via LSVT and funding constraints

• An investment gap of £19bn in 2000

• Although requirement to undertake Business planning fairly light touch applied

• Decision making Time horizon only 1-3 years

POST SELF FINANCING

• More local choice and local control

• Need to be more customer and market focused

• Need to be more strategic and make longer term decisions

• Need to implement better business planning processes

• Need to develop new skills and competencies

But….

• Reduction in Public funding for LA’s and RSL’s

• Need for 240,000 new homes every year

• Constraints on capital receipts and borrowing

• Competing priorities for available investment

DEMAND AND SUPPLY IN THE HOUSING MARKET

AGGREGATE PROJECTIONS OF FUTURE HOUSING NEED BY REGION

AGGREGATE PROJECTIONS OF FUTURE HOUSING NEED

CHANGES IN HOUSE PRICE AFFORDABILITY BETWEEN 2000- 2010

REDUCTIONS IN HOUSE BUILDING COMPLETIONS OVER TIME

ANALYSIS OF HOUSING TENURE 2009

owner_x000d_occupied67%

private_x000d_rented16%

local_x000d_authority8%

housing_x000d_association9%

Total

COMPARISON OF LA & HA STOCK BY AGE

pre-1919 1919-44 1945-64 1965-80 1981-90 post 1990 -

100

200

300

400

500

600

700

800

local_x000d_authorityhousing_x000d_association

TOTAL PUBLIC SECTOR ASSETS BY SECTOR 2009

Central Govt33%

Public Corporations9%

Local Gov-ernment (ex

housing)43%

Local Government hous-ing16%

£bnThe open market Value ofLA assets is in ex-cess of £400bn

ANALYSIS OF THE MARKET IN WESTMINSTER

BREAKDOWN OF HOUSEHOLDS IN WESTMINSTER BY TENURE

PROJECTED HOUSEHOLD GROWTH FROM 2008-2033

199119921993199419951996199719981999200020012002200320042005200620072008 2013201820232026202820330

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

0

20

40

60

80

100

120

140

160

180

200

GREATER LONDON WESTMINSTER

SOCIAL HOUSING DEMAND, STOCK PROFILE AND TURNOVER

HOUSING NEED VS SUPPLY

Bedsit 1 bed 2 bed 3 bed 4+ bed0%

5%

10%

15%

20%

25%

30%

35%

40%

Waiting ListCouncil Stock

RELATIVE AGE OF STOCK

1900-1919 1919-1945 1946-1964 1965-1988 1989 to Date0

1000

2000

3000

4000

5000

6000

2775

1256

2928

5261

30

BREAKDOWN OF STOCK

Flexible Owner

Leasehold

Rented Flats

Rented Houses

Shared Ownership

Temporary Accommodation

CHANGE IN ASSET VALUES

ANALYSIS of CURRENT PRACTICE

SURVEY RESULTS

• SAMPLING FRAME 20% OF LA HOUSING POPN

• 50 RESPONSES

• SURVEY UNDERTAKEN IN JULY 2012

• RESPONSES FROM PREDOMINATELY LARGER UNITARY

• REPRESENTED LA’S HOLDING 30% OF TENANTED STOCK

• 65% RESPONSE RATE FROM LONDON LA’S

SURVEY CONCLUSIONS• In 2012 there was a diversity of asset management

practice in the sector

• More focused on current rather than future need

• Only around 1/3rd of LA ‘s measured the performance of their stock

• Most respondents believed that self financing and localism would lead to step changes in asset management practice

• Majority thought this likely to lead to more of a market Orientation

STRATEGIC ASSET MANAGEMENT

STRATEGIC ASSET MANAGEMENT IN HOUSING

“The range of activities undertaken to ensure that the housing stock meets the needs and standards now and in the future in the most efficient way” Larkin 2000

“the systematic process of planning, acquisition, transfer, reorganisation and management of physical assets in the most cost effective way”Kenley 2009

STRATEGIC ASSET MANAGEMENT IN HOUSING

PORTFOLIS ANALYSIS

• THE THEORY IS BASED ON

THE DECISIONS ARE

????

HOLD/REDFINE USE – AS LONG TERM INVESTMENT

DOG

DIVEST – DISPOSE AND REINVEST FUNDS

CASHCOW

INVEST – TARGET PROPERTY THAT FITS THE STRATEGY

STAR

ACQUIRE - TARGET PROPERTY THAT FITS THE STRATEGY

PORTFOLIS ANALYSIS

PREREQUISITE'S

• COMPREHENSIVE DATA ON ASSET MANAGEMENT INVESTMENT REQUIREMENTS OVER 30 YEARS

• ACCURATE DATA AT BLOCK LEVEL

• AND A METHODOLOGY FOR ALLOCATING TYPES OF COSTS NOT HELD AT BLOCK LEVEL

• RENT DATA AND ASSET VALUATIONS FOR ALL THE STOCK

• PERFORMANCE DATA EG SATISFACATION LEVELS, ABILITY TO REDEVELOP

• UNDERTAKE A COMPREHENSIVE INCOME STREAM/NPV ANALYSIS OF THE WHOLE STOCK

• AN ANALYSIS OF THE LOCAL MARKET AND FUTURE NEED

WHAT WE DID

• In 2011-12 we undertook a comprehensive Income stream Analysis of the whole stock

• Collected non financial data on performance and future use and development potential

• Developed a disposal and acquisition strategy where when a property becomes vacant we undertake an options appraisal if in target group for disposal

• Set targets for a growth in stock and reduction in lifecycle running costs

• Are developing more holistic estate plans

• Looking at meeting future needs of wider group of residents

KEY NPV ASSUMPTIONS 

Current Base Model Assumptions.

1.     100% leaseholder recovery of major works

2.     Leaseholder recovery calculated by bed space

3.     2.5% contractor inflation

4.     6% discount rate

5.     Average management cost, decoration and repair of £1800 per unit

6.     Apportioned M&E costs

7.     Actual target rents

 

Income Stream Value model

Where n = 30 years

I = Discount rate = 6%

Rt = Rental income

RV = Residual Valuation

Et = revenue and capital Expenditure

INCOME STREAM ANALYSIS EXCL RESIDUAL VALUE

COMBINED INCOME STREAM ANALYSIS

OTHER CONSIDERATIONS

Financial ConsiderationsNPV: is it costing more to maintain than the

revenue it generates?

Business ConsiderationsIs it core business?

Does it meet our needs profile?

Quality ConsiderationsSatisfaction with neighbourhood

Property turnover rateLetting time

Repairs callouts

Development PotentialRemodelling potential

Existing densityPlanning constraints

Value

Decision about future of property

ISSUES/CHALLENGES

Welfare reform

Timing of major works

Estimating residual valuations

Operating in a rising market place prices up 18%

Historic nature – conservation areas and planning regulations

Impact RTB, Cil and Mayors policies

High number Lessees

Improving asset management data

Housing construction Boom

OUTCOMES3 major regeneration projects circa £150m

425 new fit for purpose homes

New significant public realm, employment and skills training

Opportunity for radical public service remodeling

Acquiring 115 additional units including new s106

Stock maintained at decent homes+

Debt largely repaid over life of plan

Headroom for additional investment

BUT also….

An Active programme of strategic asset management focused on voids

REALITY CHECK• The Black Swan

• Limits of rationality

• Sensitivity and risk management

• Behavioral change – competency

• Requires good ITC systems and asset management data

CONCLUSION

• Need for a more market oriented and professional Approach to Asset Management

• Importance of strategic planning (Fail to plan – Plan to fail)

• Dynamic environment – market, govt polices, lifestyles

• Need to develop core competency that support strategic asset management

• Income stream analysis is a helpful tool – but ….