UPDATED 6:00pm: The Salvation Army has put a major road block in the government's sell-off of state houses.

In a key policy announcement at the start of the year, the Prime Minister announced a plan to sell up to 8000 state houses to community groups, with the Salvation Army proposed as a group to take up the offer.

But Major Campbell Roberts believes that won't be happening, saying it doesn't have the resourcing required for such a huge undertaking.

"When we looked at all the complexities which were involved we felt that as one single organisation, one community organisation, we couldn't do it."

"It's far more complex than we were able to manage and that we couldn't guarantee that we were going to be able to improve the lives of tenants in state houses."

Roberts says the government needs to form a consortium to take on the operation of social housing.

Despite the setback, the government maintains it's got options beyond the Salvation Army for its sell-off.

Housing New Zealand Minister, Bill English, says the government hadn't pinned all its hopes on the Salvation Army.

"There's plenty of other interest in the government's transactions and over the next three or four months we'll be having detailed discussions with potential bidders."

English insists other groups are talking about pooling their resources to buy into state houses.

"We're finding there's a number of groups getting together with people who know how to raise money, know how to manage property while they stick doing a good job for the tenant."

Labour leader Andrew Little says the government has to seriously reassess what to do with the plan.

"The Salvation Army can't do it, there's nobody else who can. This is the end of the road for this particular policy for this government."

"They're back to square one."

Little says the Salvation Army had been held up as the ideal organisation to take on a portion of state houses.

Community Housing Aotearoa, which represents the community housing groups says there's growing wariness about buying into the government's policy.

Director Scott Figenshow says the state houses that are not fit for purpose, or in the wrong place, are the ones for sale.

"How does a purchase of that stock by a community housing organisation and paying a price that government wants for it going to change that?" he asks.

"If the Salvation Army has done a pretty rigorous look at it and found that the sums don't stack up, I doubt that they're going to stack up for many others."

Figenshow believes any group that buys state houses will have to invest heavily in improving the state of the houses they buy.