ASSET MANAGEMENT AS A TOOL TO LEVERAGE ADVANTAGE FROM SELF-FINANCING. DICK JOHNSON – WESTMINSTER CITY COUNCIL

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

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

REDUCTIONS IN HOUSE BUILDING COMPLETIONS OVER TIME

ANALYSIS OF HOUSING TENURE 2009

COMPARISON OF LA & HA STOCK BY AGE

TOTAL PUBLIC SECTOR ASSETS BY SECTOR 2009

ANALYSIS OF THE MARKET IN WESTMINSTER

BREAKDOWN OF HOUSEHOLDS IN WESTMINSTER BY TENURE

PROJECTED HOUSEHOLD GROWTH FROM

SOCIAL HOUSING DEMAND, STOCK PROFILE AND TURNOVER

HOUSING NEED VS SUPPLY

RELATIVE AGE OF STOCK

BREAKDOWN OF STOCK

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

7.7 Conclusions. 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 1/3 rd 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 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 % leaseholder recovery of major works 2. Leaseholder recovery calculated by bed space % 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% R t = Rental income RV = Residual Valuation E t = revenue and capital Expenditure

INCOME STREAM ANALYSIS EXCL RESIDUAL VALUE

COMBINED INCOME STREAM ANALYSIS

OTHER CONSIDERATIONS

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

OUTCOMES 3 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 ….