Circle Housing and Affinity Sutton in merger talks

<p>A deal would create the largest housing association in the UK with 127,000 homes. </p>

In a move sparked by chancellor George Osborne's controversial rent-reducing budget, two social housing firms, Circle Housing and Affinity Sutton have started merger talks.

If the companies go through with the deal, it would result in the creation of Europe's largest housing association. Circle currently manages 70,000 properties across the UK, while Affinity has a portfolio of 57,000, providing homes for almost half a million people.

A statement, which was posted on both companies' websites explained: "Two of the UK's largest housing associations are in the early stages of discussions about the potential to merge, and we are examining if consolidation will enable them to build more new homes and provide greater investment in local communities."

According to the statement, a merger could help deal with the shortage of new housing and would mean the companies could work more efficiently  in order to manage the "impact of government reforms".

Drop in social housing rent

The chancellor's summer budget included an announcement that rents in social housing would be reduced by one per cent for each of the four years from 2016. 

Explaining the difficulty of meeting this new requirement, the CEO of Affinity Sutton, Keith Exford, said there were "few effective routes to providing the social and affordable homes at the scale so desperately needed."

He said that both businesses are reviewing their business plans to find a way to deal with the reduction in rental income.

"As part of this we are also jointly exploring if we could raise significantly more capital together, allowing us to fund a greater building programme than we could if we stay apart," he explained.

Mark Rogers from Circle agreed. "Housing associations have a duty to address this issue, but the squeeze on government funding has made it difficult for our sector to find the cash to do so," he said.

He also noted that all discussions are still in their early days. "We passionately believe that the sector needs to transform and this is one potential way to make that step change."

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