Safety in Numbers
Mergers are the hot topic in the housing sector at the moment. It’s become increasingly apparent that we are at the cusp of a period of radical change for housing associations. When announcing the merger intentions of his business with Hyde and East Thames, the L&Q CEO David Montague called it a “tipping point”. In the same interview with Inside Housing he also said, “I think [more mergers] are inevitable. The big guys will merge with each other, the medium guys will merge with other medium-sized landlords and there will be some consolidation at the smaller end. I think in the future, you will see a smaller number of large organisations and not much in the middle.”
It was this picture of the future that got me thinking about how that vision compared with markets that have already gone through consolidations. The belief in economics is that competition is good. Through price competition, through innovation of products, and through improving services for customers, the benefits are logical. Merger activity brings scale, which can be used to drive economies, improve leveraging ability, and share best practices. There is an optimal balance in the market that can be found between size and competition, and it’s important that the housing association sector is able to find it.
Many of our national sectors and global organisations point the way to the challenges from merging past that optimal point. The UK energy providers are one example, with the market going through mergers and acquisitions until four dominant companies remained. The result appears to have been complacency, with the sector suffering a series of high profile issues related to pricing, billing and dreadful customer service. The result has been the introduction of disruptors to the market, smaller competitors offering better customer interaction, better pricing and a fresh approach.
The banking sector is another example. Through the 1980’s and 1990’s mergers were commonplace as small lenders and investment banks were swallowed up into increasingly large corporations in the name of leveraging power. One result was the large scale borrowing that resulted in the economic crisis of 2008 that many economies are still struggling to recover from. One of the major problems with that crisis was the perception that, due to their size and the potential knock on effects, some banks could not be allowed to fail. Under pressure, many governments, including our own, bailed out some of those affected, taking on their debt in the process. Some believe that action has significantly hampered recovery, and allowed the survival of some corporations that, in retrospect, should have been allowed to fail.
There is also a warning from the Dutch housing sector, in the story of Vestia which grew through a series of mergers before losing 2 billion Euros via interest rate swap deals in early 2012. It’s vital that the super-sized housing associations of the future retain and employ strong financial talent to guide them intelligently as they look to leverage their size and asset base in order to build.
I believe that mergers in the housing sector will bring big benefits. I think it’s the right thing to do in order to meet the demand for them to build more homes. Improvements in development output, digital innovation, sharing of services and combining spending power all help to justify the decision to merge. It may even be that this round of mergers is just the beginning; perhaps the future will be portfolios of 250,000 or more homes. What will be important though is ensuring that the sector is flexible enough to make, and recover from, mistakes. When you have fifty leading housing associations then the failure of one is a big problem. When you have five major players then the failure of one would be enormous. The bigger you are, the harder you fall comes to mind.
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