Social Housing Crisis Clinic: Experts talk finance

Published by Jon Land for 24dash.com in Housing

With the social housing sector beginning to feel the impact of the recession and with doubts emerging about the long-term financial viability of some RSLs, 24housing decided to call in the experts to set the record straight.

We asked our specially-assembled panel to help readers get to grips with the burning issues currently facing the sector and their answers are both revealing and reassuring. Jon Land reports.

The 24housing Expert Panel:

Phil Jenkins – Director of Global Infrastructure at RBC Capital Markets, Phil has helped some of the UK’s largest housing associations – including Places for People and Affinity Sutton – raise a total of £700 million through bond issues.

Gary Moreton – Gary is Chair of Baker Tilly’s Social Housing Group and specialises in advising RSL and not-for-profit sectors. He regularly lectures to the social housing sector on financial, governance and risk management issues.

John Holman – As Managing Director at Partners for Improvement Islington, John has overseen the completion of the UK’s first and largest housing Private Finance Initiative (PFI) refurbishment project.

How well do you think the social housing sector will cope with the continuing economic downturn during 2009?

Gary Moreton (GM): History has shown that the social housing sector has performed relatively well during an economic downturn, where there is an increasing demand for affordable housing for rent and increased government funding. The sector has matured and developed significantly since the recession of the 1990s and so in many ways should be better placed to cope with the resulting demands.
There are, however, specific aspects of this downturn which will cause particular challenges. There is not a shortage of available housing, with private builders lining up to sell surplus stock. The constraint is funding and in particular the difficulty in obtaining funds from traditional banking sources.

Phil Jenkins (PJ): 2009 is likely to be a challenging year right across the UK economy and RSLs will feel the effect of this most noticeably in terms of private finance. New finance will be scarce and with higher lending margins while RSLs will also be under pressure from lenders to increase the returns on existing loans. One of the problems for associations with development programmes is that they were based on assumptions on the cost of debt as well as house prices. The desire for banks to renegotiate existing terms on long term loans could therefore create additional stress on business plans.
The RSLs with large development schemes underway and unsold completed units will continue to face a very difficult housing market and will likely look to convert a number of units into rented stock in order to mitigate their cashflow position. On the positive side, demand for affordable rented housing is likely to soar given the wider economic problems and this will underpin already strong demand for RSLs’ core product.

GM: Phil raises a good point in that there is much evidence that banks are seeking to renegotiate existing terms not only on new loans, but also, where there are opportunities to do so, on existing loans. For example, where associations breach covenants, banks are seeking the opportunity to renegotiate. The renegotiation is typically at much higher interest rates with additional constraints. Every RSL without exception should be reviewing their banking covenants and stress testing their forecasts to assess whether they are likely to be in breach.

John Holman (JH): There will be increased pressures on social housing and support networks. The social housing sector will need to be innovative and nimble taking advantage of the opportunities that present themselves. It will be important to plan for the future, after the recession, so that recovery happens at the earliest opportunity.

Do you accept the assessment that some housing associations are on the 'brink of collapse'?

PJ: Our view is that for the most part the RSL sector is in a reasonably strong financial shape. There are a relatively small number of RSLs facing cashflow pressures (as opposed to issues around solvency), but we do not believe that these will end in a failure of any individual RSL. The social and political sensitivities around an RSL failure are likely to see problem cases resolved through co-operation between the regulator, lenders and other RSLs.

GM: Those housing associations that are well managed and have access to funds are well placed to take advantage of the opportunities presenting themselves from the economic downturn. They will have the financial ability and management skills to meet the relevant demands.
Conversely housing associations who have traditionally been reliant on property sales to generate funds to meet operating costs, or have over extended themselves with possibly over ambitious plans, will be experiencing additional challenges.
Baker Tilly recently undertook a survey into the effects of the credit crunch on the RSL sector. The survey was aimed at RSL Finance Directors. 75% of those responding thought that RSLs will encounter financial problems in the following 12 months, yet a third of those responding had not at that time looked at risk management controls or started any extensive cost cutting. I would certainly hope and expect that the worsening of the economic conditions since then have changed RSLs views. Every RSL without exception should have specifically addressed the ongoing effects of the credit crunch in their risk management procedures and financial plans.
It is certainly not impossible for a housing association to collapse, but it would be expected that this would be avoided by troubled associations being taken over by a stronger association.

JH: There has always been a need for good housing in good neighbourhoods. I can’t see this changing in the immediate future and housing associations will be central to it.

Should the Tenant Services Authority and the Homes and Communities Agency be considered forces for good in the social housing sector?

GM: Time will clearly tell, but they must surely be given the benefit of the doubt and support and co-operation to allow them to carry out their duties in these challenging times.

JH: I think so, it’s exciting. They have a big job to do and it’s early days. Both their heart and head seem to be in the right place which is a good start.

PJ: Speaking from a funding perspective, the presence of a sector regulator with robust powers of intervention and a remit to protect and encourage private sector investment into affordable housing must be viewed as positive. The TSA has carried forward and strengthened the role of the Housing Corporation in this regard. We broadly supported the idea of separating the regulatory and investment roles of the Housing Corporation through the creation of the TSA and HCA. As long as they are performing the roles for which they are set up then they should be positive for the sector!

Do you think the Tenant Services Authority should name the housing associations that have been placed on its 'watch list'?

PJ: No. Our view is that if RSLs are on a “watch list”, these problems should be addressed between the TSA, the RSL in question and its lenders (in certain cases) in order to monitor the situation and if necessary come up with a solution. We do not believe that this process is assisted by naming the RSL in question until such time as any statutory powers are enforced which may require disclosure.

GM: It is a self fulfilling prophecy that if the TSA names the troubled associations, additional pressures will be imposed upon those associations, funders will become more nervous, suppliers will withdraw credit, etc. such that the position is made worse, and could accelerate financial difficulties.
Although we would all expect the TSA as regulator to be closely monitoring financial viability within the sector, the prime responsibility must rest with the Board and Management teams of each RSL. They must take the initiative to update their risk management procedures, stress testing forecasts and plans, and setting appropriate plans and strategies to not only meet any challenges, but also to take advantage of opportunities.

JH: What would it have achieved? Focus on the solution and not the problems.

Are the Government's long-term targets for new affordable homes still realistic?

PJ: The ongoing collapse in the wider housing market makes it highly unlikely that the long-term targets for new affordable housing (which were ambitious in the first place) will be achieved. Even with increased grant rates, social housing schemes are generally linked to mixed use developments which are not being undertaken because of lack of sales demand for shared ownership and market sale housing. In addition, the RSL sector’s appetite for new development may be impacted by reduced access to private finance.

GM: In many ways we are in unprecedented times with the full affects of the downturn and the length of the recession open to debate. Any previous targets and forecasts, in whatever areas, surely need to be readdressed in the light of the current environment.
Phil correctly points out that social housing schemes have generally been linked with mixed tenure developments. In the present economic environment shared ownership, market rental properties and so on will be harder to finance, and therefore there will need to be a change from Government, local planners, funders and RSLs when determining future development schemes.

JH: The focus needs to be on building communities with supporting infrastructure where people want to live and work, not just houses or even homes. Delivery is, and will continue to be, a major problem. It’s a work in progress.