Thursday 5 June 2014

Is it time to widen the focus of co-operative housing and look at new forms of finance ?

graphic showing rent relation to landlord costs
Here is a simple proposition.  When people pay rent, it is not used to line the pockets of a property owner (e.g. Buy to Let) but used to cover the costs of providing the accommodation, with a little surplus for a rainy day and towards acquiring more properties so the benefit can be shared.  The resulting rent would be cheaper as the "top slice" of profit required for the landlord is taken out of the equation.

What's more, if the property is owned and democratically controlled by those tenants, they will take care of their homes and will seek ways to manage and maintain the property that save money, because it is in their own mutual interest. We are talking about a housing co-operative.  It's a no brainer in a country that is suffering from a housing crisis and in which rent is spiraling out of control to satisfy the needs of investors.

However, there is a problem.  In order to buy the property you need to have sufficient money to put down as a deposit.  This is the primary reason why housing co-operatives are not as prevalent as you would expect given they are a "no-brainer".  The problem of accessing capital to lever in finance to purchase the house has come up again and again with potential housing co-op start ups. So maybe we need to have another look at the financing of housing co-ops.

I have been involved as a professional advisor to housing co-operatives since 1998 and was an active member of a 70-member housing co-operative which is a Registered Provider (holding various officer roles including Treasurer) for 12 years.   In addition to supporting existing housing co-ops to improve governance or operational matters and to acquire properties, I have also worked with a number of capable pre-start groups who have had their intentions and efforts frustrated.

Blue sky thinking

I am challenging some of my own views here.  I'm not necessarily saying that what I suggest in this piece is how I want the world to be, but if we aim to grow the co-operative elements of the housing sector we need to broaden our horizons beyond our current focus and personal desires.  So, skies ahead

There has been a tradition of those who speak for the UK Housing Co-op "movement" to focus on public sector housing and public funding for housing co-operatives.  They are doing a great job which needs doing, but this is only part of the housing landscape.  To make demands of the public purse to support co-operative housing while all political parties are committed to reducing public spend - winning a bigger slice of the cake while the cake is being reduced in overall size - should not be our only tactic.   Additionally access to public monies also brings with it the regulation of being a Registered Provider which carries an  administrative burden requiring scale and, from my observations, a tendency to move from a radical to a conservative focus.  I used to find myself fighting a battle to retain the members' interests over the regulators demands - and winning, I might add.

This means that we have a widely accepted construct in the UK that to be a "housing co-operative" worthy of note you have to a) be of a certain size and operate in a certain way, and b) only provide housing for rent for people in need.  So what of those who are not technically in need but want to avail themselves of co-operative housing?  There's a gap in the market, and the private rented market is set to boom by all accounts.  A case of need, a market, and co-operatives offering member benefit that provides a better offer than the market is fertile ground for co-operative development.

I believe there is room to encourage entrepreneurialism and growth of the co-operative control of housing by being widerin our definition of co-operative housing.  To grow co-operative housing we may have to challenge our own sacred cows.  There is a difference between what we ought to call "Co-operative housing associations" which is the well developed part of the UK sector and "co-operative housing" meaning housing that has some form of co-operative ownership and/or control. 

Moving beyond co-operative housing for renters

In the UK there has been a tendency to downplay any role other than the renter-landlord dynamic.  Why is co-ownership ignored?  It isn't ignored in the worker and enterprise owned co-operative sectors (notably the agricultural sector).  I am a huge fan of common ownership in general and social ownership of housing but we ought to accept exploring some level of co-ownership as an option if we aim to grow the co-operative movement and to use the advantages of mutuality to address housing issues.

Some people are interested in partial (or whole) private ownership of properties within a co-operative environment.  For instance, I have worked with a group who have potential members willing to sell their homes and invest in a co-operative to provide capital for a development in which they will live.  We had to unpick the difference between a mortgage holder who completes their loan and then has a vastly reduced household outgoing over time and the renter who pays rent in perpetuity.

People who have valuable properties may be interested in co-ownership, or may want to invest their equity to enable the creation of housing managed co-operatively in which they can live.  But do they get equity growth or just a reasonable  return on that equity?  And what is reasonable in this context - if the return on equity is not enough to cover the rent?  They have swapped a completed or near completed mortgage for a rental property and locked up their equity.  It throws up challenges.  But we should meet those challenges, not ignore them.

Maybe it is time to blaze a new trail for entry into co-operative housing for people other than renters.  My clients are still absorbing and considering the issues this has thrown up and what the final "offer" will be to the different "types" of member - all of whom will still have equal voting rights in how the co-operative is managed.

Co-housing is relatively small but growing in the UK. Some schemes incorporate private ownership and some Community Land Trusts offer private ownership but co-housing and CLTs are meeting specific needs (shared space and land ownership) that not all private owners will be interested in.

Ageing population

We have an ageing population who are asset rich but may require low level support if they are to stay independent in their homes.  There could be innovative co-operative solutions to meeting the support needs of home owners and the housing needs of others.  One brings equity, the other brings time.  Together they create a mutual solution.


What of the co-operativisation of leaseholders?  There are many leasholder companies for small blocks of flats that are established as share companies and often run by ex-bankers, stockbrokers or solicitors bringing private sector behaviours of hierarchy.  Co-operative principles could be introduced to these organisations and empower all the leaseholders, while providing the wider social benefits a co-operative brings over those of a private mutual.

"Buy to co-op"

What about "buy to co-op" instead of "buy to let" i.e. instead of establishing housing associations, we establish buy to let entities that just happen to be owned by the people who rent from them (or maybe even allow in investors in a limited capacity, or staff, using a multi-stakeholder model). They could provide a dividend return (profit share)s rather than the model of pre-distribution in the form of lower rents that UK Housing Co-ops offer.

Is access to capital the problem?

The biggest barrier to developing co-operative housing I have come across is access to sufficient capital to acquire a mortgage.  Some co-ops have used loanstock but this is fairly limited.  Withdrawable share capital probably isn't the right approach if you are fully mutual and only want tenants or occupiers controlling the housing, so should we be considering a different approach that enables outside investors to support the needs of tenants without the tenants giving up control over management - a hybrid of the Community Land Trust model and the Housing Co-operative model.  Radical Routes have been working to establish a secondary co-op that will own some of the equity in new-start co-ops: Co-operative Principles put into action to grow the movement.  Yet the Radical Routes members are a tiny percentage of co-operative housing in the UK. Another innovation could be mutual guarantee schemes (or co-ops mortgaging their existing owned assets to release development capital for other co-ops) which enable new co-ops to establish themselves in the early days when it is not profitability but access to capital that dictates the success, failure or growth rate of a housing co-operative.  Rather than ask the government and policy makers to act, I suggest our own movement does something. (Remember those Co-operative Values of self-help and solidarity?)

One innovation that I am certain we need to promote as a movement is inward investment from the co-operative movement into co-operative housing.   In particular, we could target pension funds held by large co-operative employers. There must be some mechanism that can be created - even in the current legal framework - which would allow a pension fund to invest in housing developments that just so happen to be co-operatives.  Maybe a "co-operative housing fund" that invests bonds or similar - I know nothing about pensions!  And if they are start-ups with higher risk then the returns
might be higher in the same way the traditional stock holders approach investments in high risk companies.

This would enable models other than the Registered Provider, which allows for a more diverse sector (lots of small co-ops as well as large ones). Some people I have met have been put off housing co-ops by their experiences in poorly run larger scale co-ops which devalue the individual operating on a tyranny by of the minority basis (like the state socialist approach of the needs of the individual being ignored or undermined for the "greater good" intone after me "The greater good"). Yes, part of the answer is to improve larger co-ops, but perhaps we need to question scale and encourage co-ops of all sizes.

Co-operative developers

If we are talking about co-operative involvement in the housing sector (which is what the pre-amble covered), why has the development side been left untouched?  Supply is part of the housing economy.  Mainstream developers have one goal:shareholder return.  What about co-operative developers - either owned by groups of housing co-ops, or as multi-stakeholder co-ops incorporating workers, customer housing co-ops (and maybe even investors) rather than operating purely for profit putting some of their profits into the community by funding CLTs or common ownership housing co-

Time to innovate?

Should we be innovating to address these capital issues (including more member investment) and move into less traditional areas - growing what for the UK would be a relatively new type of co-op housing? I.e. One that moves beyond the social housing sector and into the private sector.

Should our strategic innovation be to move away reliance on state intervention and toward self-responsibility, self-reliance as a movement and promoting Co-operative Principles 6 and 7 in investment away from government back to member users and other investors from the movement?  I am not saying ignore state controlled grant funding, but let's not be prisoners of it!

More co-operation!

1 comment:

  1. Great Idea! Social Housing is beautiful.

    Social Entrepreneurship is indeed the way forward!

    For a thorough presentation of Social Entrepreneurship and the impact it will have on the future of humanity,

    I strongly recommend a recent book, Social Entrepreneurship, The Secret to Starting a Business Worth Living For.

    A good review of the book can be found Here.