VALUE FOR MONEY

INTRODUCTION

WeseeValueforMoneyasawayofgettingthemostoutofour resourcestoachievemoreforourcurrentandfuturetenants.

It is a fundamental businessprincipleandis an integralpartof our overall strategyrather than a separateactivityor strategy.

Bernicia isanefficientbusinesswithagoodtrackrecord ofimprovinghousingstock,building newhomesand developing financialstrength. Wehave always recognisedtheneedtogenerate efficienciesandinturnsurplustoinvestinourbusiness,improve theservicesweprovideand buildmore homes.

Wehave therefore drivenValuefor Money for our own endsbuthave since2012 beensubjecttoregulatoryrequirementsto explainwhat we doto stakeholders. Thisinvolves reportingon ourreturn on assets, the absoluteandcomparativecostsof deliveringservicesandhow we have generatedValuefor Money gainsandwhere these have beeninvested.

Our regulatorthe Homes andCommunities Agency,requiresus, as partof its regulatory framework, to preparean annual self-assessment reportto our residentsandstakeholder. Thissets out how we complywith the Valuefor Money Standardandour plansandpriorities for the future.

OUR APPROACH

Our approachstarts with the Boardsettingthe strategicdirectionandprioritiesfor the Group. Delivery of Valuefor Money is drivenbyour focuson two key corporateobjectives,developing our businessstrengthto optimisethe Groupresourceswhichare then investedto provide qualityhomes andservicesanddeliverour addedvalue objectives.

Bernicia’sValuefor Money principlescentrearound:

  • EffectiveGovernance;
  • CustomerFocus;
  • Bestuse ofourAssets;
  • ManagingResourcesandPerformance.

Governance structuresenablethe Boardto leadthe way on Valuefor Money througha full and robustplanningprocess, involvingall our key stakeholders. Thisis supportedandinformedby customer focusreflectingtheneedsofourtenantsandresidents.

Weunderstandourassets, byway of bothstockconditioninformation andthe experienceof our peopleandinvest time in understandingtheir value bothnow andin the future.

Our dedicatedpeopletranslate these plansinto actionplansto achieveobjectivesanddeliver thestandardofservicesrequired;managingresources andperformance to ensure we consistentlydeliverquality,value for money servicesandcomparehow we performagainstour peers.

Thiscommitmentto servicedeliveryandhighqualitysustainableassets is only madepossible byourstableandfirmfinancial foundations,whichwe monitor andpublishto providenot only information for future planning,buttransparencyandaccountabilityto all our stakeholders.

Wehave workedto embedValuefor Money into all we doandbelieveour approachis evident from the way we run our businessandwhat we achieve.

Two key events occurred during the year. Firstly the discussions we had commenced with another provider (Four Housing Group) were successful and led to a business case for merger being approved by both organisations. Regulatory approval was subsequently received and the merger was formally implemented on 1st June 2016. Secondly, we put in place plans to deal with the impact of the four year rent reduction from April 2016 that was announced by the government in July 2015. Both these events have had a major impact on Bernicia’s value for money strategy and further details are provided in the sections below:

MERGER

On June 1st 2016 Four Housing Group joined Bernicia thereby creating an organisation with 14,000 properties and an annual turnover of £70m.

The merger meets Bernicia’s strategic objectives. We believe it is the most significant single action that we can take in terms of its impact on our ability to deliver value for money.

In developing Bernicia’s future business strategy the Board recognised that as a strong organisation with an excellent reputation for getting things done, Bernicia would be an attractive proposition for organisations considering strategic partnerships, alliances and, or mergers.

As if to demonstrate this view, Bernicia were approached by a National Registered Provider with a view to joining their existing Group structure. In considering the approach, in detail, members and tenants took the opportunity to determine that the Group’s strategy for joining with other organisations would centreon the key criteria of being a strong regional housing association based in the North East of England. This was a particularly important requirement of our tenants and local authority partners, who wanted the Group to deliver maximum value for local partners and communities within the North East, at a time, when, arguably this was needed the most.

Bernicia’s growth and development strategy was to centre around the commitment to the North East and seeking opportunities to join with other local organisations to enhance the potential to deliver our strategic objectives, build more homes, provide cost effectiveness and contribute to other social initiatives. The approach from Four Housing was therefore timely and fitted the Board’s criteria.

A business case was subsequently prepared and approved by both organisations and regulatory consent gained. The merger was formally implemented on 1st June 2016.

Joining in partnership means expertise, resources and costs can be shared, achieving greater value for money through generating efficiencies and savings without reducing services. This will enable us to deliver more in terms of improving services, building new homes, and regenerating the communities in which we work. The merger will create an organisation that is more robust and better able to manage the risks presented by an ever changing operating environment and provide better safeguards against, for example, the impact of Welfare Reform and rent reduction.

The merger will result in two respected and high performing organisations coming together to create:

  • A strong regionally focussed housing company based wholly in and committed to the North East.
  • An organisation with a combined turnover of over £70million with existing undrawn facilities over £26m and with access to unencumbered security of over £59m.
  • A merged company that will deliver £2m of efficiencies per annum by year 4.
  • An organisation which will have the capacity, skills and knowledge to deliver more new homes.

The Bernicia website will be updated with further details of the merged organisation and our plans for the future as these are progressed.

RENT REDUCTION

The government’s July 2015 budget made changes to the rent formula for the sector. The commitment made the previous year that rents would increase by inflation (CPI) plus 1% each year for ten years was replaced in the July budget by a four year annual rent reduction of 1% pa starting from April 2016.

Our initial assessment of the impact of the rent reduction was that:

  • In 2019/20 rental income will be £4.6m (13%) below the previously forecast amount.
  • Between now and 2019/20 total rent received will be some £10.2m less than the total previously expected in the same period.

In response we developed proposals to examine 5 areas of the Group’s business, these were:-

  • Assets.
  • Finance.
  • Services.
  • People.
  • Efficiency and Growth.

From this work we agreed a series of measures to be implemented with effect from April 2016.The Board also acknowledged that the Group should undertake a strategic review with an aim to ensure that the loss of future income could be managed to ensure the objectives of investing in new and existing homes, improving services and continuing added value projects could still be achieved.

The Group’s current position is also strengthened by having, in April 2015, completed a financing arrangement providing some £50.5 million for future investment and re-financing of existing loans. Bernicia is therefore, free of any requirement for funding within the next 5 years.

Savings of £2.8m pa were identified with the main area being asset (£1.7m pa). Bernicia has previously undertaken significant investment in its housing stock, modernising homes to the “Bernicia Standard” and carrying out significant sustainability projects which have included remodelling of properties and improvements to estate infrastructure and communal environments. We now hold 100% stock condition information and using this information a review of the requirements of our stock over 30 years has been undertaken. Following this review it was forecast that the identified savings could be achieved whilst still maintaining our homes to the agreed Bernicia standard. Savings of £0.55m pa have been identified within the services budget and a similar amount from staffing budgets.We also have identified additional income that we can generate of c£200k pa from other activities.

The savings are realistic and achievable.The implementation of the measures as identified above, together with the prudent approach to the financial plans enables the Group to manage the impact of the loss in rental income.

The merger and the efficiency savings that can be achieved will create additional resilience in the Group’s business plan to withstand any future financial challenges.

KEY ACHIEVEMENTS IN 2015/16

In addition to the merger and establishing our rent reduction strategy, our key achievements include:

We completed 93 new homes during the year at a cost of £10.3m with just £1.4m (14%) funded through grant from the HCA. These new homes will require a £3.7m internal subsidy to bridge the gap between their net cost and the income they will generate over the next 30 years.

Whilst our preference is to retain property where possible, we have completed the demolition of 16 properties where there was no long term demand for these homes due to the geographical isolation of the estate from local facilities and amenities and decommissioned two sheltered housing schemes as the accommodation no longer met the needs of existing or prospective tenants.

A £40m private placement funding arrangement was completed at the start of the year, this will reduce our overall cost of funds and provide finance for the next five years of our planned investment programme.

Year 3 of our stock investment programme was successfully delivered investing £11m with the benefit of £1.2msavings on contract procurement. We also continued to roll out mobile working including the introduction of hand-held technology for tradesman creating efficiencies in the way we work. In addition we have identified with future savings on the programme of £1.7m pa. Bernicia has previously undertaken significant investment in its housing stock, modernising homes to the “Bernicia Standard” and carrying out significant sustainability projects which have included remodelling of properties and improvements to estate infrastructure and communal environments. We now hold 100% stock condition information and using this information a review of the requirements of our stock over 30 years has been undertaken. It is now forecast that the identified savings could be achieved whilst still maintaining our homes to the agreed Bernicia standard.

An estate management company was acquired during the year to compliment and strengthen our portfolio of trading companies and increase the future contributions they make to our social housing business.

We have embedded our approach to the provision of pre-tenancy advice and support to prevent tenancy failure, something which now forms part of our day to day management service. Our Intensive Housing Management Team helped 255 tenants during the year, with 66% of completed cases achieving a positive outcome. This approach has resulted in strong rent collection and arrears performance including a significant reduction in amounts transferred to former tenant arrears,an indication that our advice and prevention initiatives are working.

We have delivered a number of added social value initiatives during the year including: fitting 785 adaptations to our homes, at a cost of £91,000 to support continued independent living; delivering 160 work experience and school engagement opportunities for young people including work taster days, employability skills and school engagement through our Runway Programme; and a focus on environmental awareness has seen us achieve the SHIFT (Sustainable Homes Index for Tomorrow) silver award during the year.

In last year’s VFM Statement we set ourselves the challenging target of achieving efficiencies with a value of £1.9m in 2015/16. The table below sets out how we have performed:

Asset management savings exceeded their target significantly thanks to savings on the procurement of contracts and securing grants towards energy efficiency works.

Operational savings were below the target level as a number of changes were put on hold as a consequence of the merger discussions with Four Housing.

HOW WE PERFORM AND HOW WE COMPARE

We believe that comparing our performance with that of our peers can provide an important benchmark across a range of outputs. It provides key business comparisons, helps us understand areas of strength and weakness and identify areas for improvement. For a number of years we have therefore compared both our financial and operating performance withthe sector as a whole and our peer group. We use the HCA’s Global Accounts Analysis of the sector (the latest available is for 2014/15) and Housemark.

At the time of writing the full Housemark VFM analysis and report had not been received. When it is detailed consideration of the results will be undertaken by officers and by our Tenant Scrutiny Panel. This will be used to inform our priorities in future years. The Tenant Scrutiny Panel will use the information to inform their decisions on which areas they will undertake service reviews on. Appropriate action plans will be developed and implemented.

Thefollowingtablesshows Bernicia’sperformancefor 2015/16 and2014/15 andprovidesa comparisonwith the peergroupand,where the information is available,the latest HCA global accountsanalysis.

Financial Analysis

The comparative data is from HCA Global Accounts Analysis - 15/16 figures not available

The costs of major repairs remained high when compared to our peer group and national benchmarks. Our costs reflect the requirements of our stock transfer subsidiary, Wansbeck homes. As we have now completed a number of agreed sustainability projects, we expect major repair costs will continue to reduce. Given the nature of our stock and our commitment to the Bernicia Homes Standard we do not expect that this will fall below our peer group median level.

Housing Management

The comparative data is from Housemark

We’ve also seen a reduction in amounts transferred to former tenant arrears, an indication that our advice and prevention initiatives are working.

Customer Satisfaction

The comparative data is from Housemark

During 2016 we received the results of the 2015 customer satisfaction (STAR) survey.The results are in line with expectations with satisfaction levels largely consistent with peer group medians for 2014/15 but down from the high levels reported in the 2012 survey. In the 2012 survey significant increases in tenant satisfaction were evident across all core indicators in comparison to 2009. The level of investment and consolidation and improvement of services in years leading up to 2012 undoubtedly had a positive influence on results.In reporting the results of the 2012 survey, a note of caution was exercised, that in the case of Large Scale Voluntary Transfer organisations satisfaction tended to increase due to the level of investment in the early years and then show signs of decrease once ‘the honeymoon’ period was over.

We maintain good resident satisfaction across a range of indicators, a reflection that our homesand services continue to meet the needs of our tenants.Three key indicators are shown below:

Findings from the research will inform Bernicia’s approach to improve access via channel shifting whilst confirming assumptions on the level of knowledge and understanding of Universal Credit.

A copy of the 2015 STAR survey is available on our website under ‘Strategies & Reports’.

BEST USE OF OUR ASSETS

AssetManagement

TheBerniciaGroup’spropertyandassets are crucialto our longterm businessplans.Wehave implementedan Asset Management Strategywhichgovernsthe decisionswe make on future stock investment. Thisisbasedonfullfinancialappraisalofcurrentstock collectively and individually,togetherwith the assessment of other factorssuchas socialandenvironmental issues of eachestate enablingus to take a view on the future potentialof eachasset we own.

Toinform our investment decisionswe consider:

Wehav

Thisinformation tellsusalotaboutourpropertiesandestatesaswehaveafullfinancial appraisalof our currentstock,helpsus form an overall assessment when makingdecisionsto invest in our existinghomes.

IntakingthosedecisionstheBernicia Board willbalancefinancialinvestment decisions againstthe overall objectivesof the organisation, whichtakes into accountissues suchas the geographicalareas where we operate,the localhousingmarkets andthe nature of the communities that we want to help.Of particularnoticeis the relatively deprivednature of our communities andthe positiveimpactthat goodqualityaffordablehousingcanhave to the qualityof their lives.

During2015/16 we have:

  • Successfullydeliveredyear 3 of our stockinvestment programmeinvesting£10.5millionwiththebenefit of£1.2 millionefficienciesresultingfromourprocurementmethodologykeycomponentprocurementandhaving100% stockconditioninformation.
  • Successfully managed the potential impact to sustainability works of a contractor going into administration.
  • Phase 2 of Burnside regeneration, a scheme to enhance and protect 100 homes,is nearing completion, allowing the allocation of a number of long term void properties.
  • Regeneration of a 7.5 acre brownfields site adjacent to the town centre in Ashington continues after the 1st phase completion of 66 homes during the year. This mixed tenure scheme of 104 properties supports and compliments an overall strategy to regenerate the town centre of a key settlement in Northumberland, where Bernicia has significant stock holdings.
  • Completed the demolition of16 propertiesat EastSleekburnas there was no longterm demandfor these homes dueto the geographicalisolation of the estate from local facilitiesandamenities.
  • Decommissioned two sheltered housing schemes as the accommodation no longer met the needs of existing or prospective tenants.
  • Developed 93 new homes, 70 of which were delivered through the HCA's various affordable homes programmes and 23 section 106 units acquired from developers.
  • Acquired an estate management company to complement our existing portfolio of trading companies and increased the forecast return to Bernicia from these activities by £200k pa.

In terms of assessingthe overall returns from our assets we have developedour own asset management matrix. Thisuses a rangeof indicatorsincludingdemandandsocio-economic factorsto assess future sustainability of our estates, andprovidesus with an indicationof the socialvalue that our estates provideto our communities.

We update our asset management matrix every three years. During 2014/15 we further enhanced this matrix to include the impact of Welfare reform, resulting in a number of estates with high concentrations of 3 bedroom houses moving into the medium high risk category. The current classification is shown below:

  1. Low Risk – 64%
  2. Medium – 13%
  3. Medium/High – 22%
  4. High Risk - 1%

We plan to update this matrix again in 2016/17, once the position on an a number of factors that will impact on the sustainability of our homes is clear, such as the intention as regards the future funding of supported housing.

FinancialReturnonAssets

Weuse amodeltoannually assessthefinancialreturnfromourassetsthatdeterminesthenetpresent value of eachof our estates andpropertytypesoncecurrentandfuture expenditureandincome assumptions are factoredin. Theresults of this analysis from the last three years is shown below: