Reform & Revolution 4 – The financial crisis

Published by Jon Land for 24dash.com in Housing and also in Featured

Each month, 24housing investigates – through personal testimony – the top 10 events, chosen by our panel of experts, to have shaped housing in the last 60 years. This month we reach number four in the countdown: the 2007 financial crisis.

As the credit crunch tore its way through the UK economy – with housing in the eye of the storm – London and Quadrant, who had just made Ujima Housing Association its fourth acquisition in five years, was faced with an enlarged group structure and an expanding development portfolio. Recalling the drama, Finance Director Waqar Ahmed tells Ross Macmillan how lady luck played her part in the group’s financial resilience.

When did the credit crunch hit L&Q?

Although a lot of people were talking about the credit crunch in 2007, nothing actually happened in 2007 really, apart from that we all discovered what sub-prime meant.

In May/June time we had started to hear from some of our lenders who were telling us at various functions and dinners that they would be unable to lend at the rates we’d been used to. However, the beauty for us is that we put in place sufficient funding for around two years so it was more of a long-term concern than a short to medium-term concern for L&Q.

The crucial year for us was 2008 – that’s when we started to feel the enormity of the situation. From June to August 2008 we had not sold a single property. That was very unusual for L&Q. Previous years you would have easily been selling between 50 and 60 shared ownership properties a month. But if you look at the UK’s net mortgage issuance that year it was around £40m – down 99 per cent from what it was the previous year when it stood at £34bn. No wonder we didn’t sell any properties!

What conversations do you recall having at the time?

I remember when the House of Representatives rejected the £700bn US bailout package in September. That was a bizarre night. At midnight I was on the phone to L&Q’s chief executive, the treasurer, my head of treasury. From that point on nothing was certain.

That’s when I started to get worried about L&Q’s exit strategy. My view at that point was if we can’t sell, we’ll shift everything over to the intermediate market rent, but I started to think – what if the Government defaults? What if the UK gets down rated? What if people don’t get their housing benefit payments from Government? We were all nervous about an Iceland or Greece happening to the UK.

Was there panic in the group?

We were concerned with the crisis and what was going on around us, but we didn’t panic. We were aware of it immediately; we revised our financial strategy – put in a new capacity indicator internally. We rescheduled our financial models on the basis of not being able to sell a single property and assuming everything had to go through the rental market. We increased our contingencies and our discount rates. All the assumptions became harder and tighter. We also carried out a review of our entire development programme. Anything we had not committed to – i.e. approved but not committed to – we reassessed it on current valuations and estimates and if it wasn’t viable we withdrew. At that time we had around 6,000 homes in development and I think we knocked off about 600-700.

We didn’t feel the need to have any conversations with banks at that time because we already had funding in place. We put in place a short-term facility just in case we required it, but in the end we didn’t and we cancelled it. As far as L&Q was concerned we knew that we’d survive. The proof is in the pudding from August 2008 – at the peak of the credit crunch – we had a development pipeline of about 5,000 homes. Today our pipeline, you could say with all the regeneration activities, is 18,000 homes.

Did what was going on impact you personally – did you feel the pressure of being the FD of one of the UK’s biggest housing associations?

Once you get into that mindset of being a risk manager, being commercial and forward thinking, you take things as they happen. Everything is business as usual here, you know. We may have discussions and debates but once we make a decision we go with it and move on and people are just too busy to reflect on why we did it that way or could we have done it that way, etc.

Had the rescue package for Ujima been later, meaning renegotiating its loans at the peak of the credit crunch, would you have entertained it?

Had Ujima come a few months later we would have had a tougher negotiation period with banks, but yes we would have entertained it.

In January 2008 we renegotiated all Ujima’s loans and brought them on to L&Q’s balance sheet. In addition to that, on 31 March 2008 we collapsed L&Q’s group structure from 21 companies down to five – that meant consent from lenders, renegotiating loans, amalgamating loan documents, renegotiating margins, etc – you know, we did a great job. What we decided to do was rationalise the entire group structure and review our governance arrangements.

By the time the credit crunch filtered through to the housing world in April/May 2008, Ujima was integrated into L&Q and all the loans were amalgamated so there were no conversations about repricing. Had Ujima been a few months later I think we would have had a tougher negotiation period with banks.

The fact it happened before the credit crunch I’d like to say was foresight on my part, but that would be a lie. It was pure and utter luck that the timing was so perfect.

Were you distracted by the Ujima press coverage?

If you read the papers, you’d be forgiven for thinking that in L&Q all we were talking about was Ujima, but I can assure you that certainly wasn’t the truth. It was the fourth acquisition we did inside five years, people just got on with it and did it. The only downside was the ongoing tribunal case which was in the papers, there was a police inquiry we had to provide papers for and really that’s just distracting you from what you really want to do, which is run L&Q.

Are you surprised more housing associations haven’t gone under?

I’m not surprised at all. If you look at your core social hosing business it is pretty much recession proof in any event. The rents we charge are well below the market so that client group exists. Where I think the exposure was potentially on those housing associations that ventured into large scale development and some unlike L&Q were probably taking a greater risk than they should’ve done e.g. they were banking on house price inflation to make schemes work. We never assumed that. I don’t think there was an FD in a developing RSL that wasn’t worried about its cash position.

Was there a turning point?

The comfort came when the government nationalised the banks. That was, irrespective of your own personal political views, a brilliant decision. It was a difficult decision to make for Gordon Brown, nationalising banks like the Royal Bank of Scotland, and not one he could make easily, but it was a brilliant decision because it stabilised the volatility that you were seeing in the bond market, in guild rates, in spreads. It also gave comfort to people like Moodies and Standard and Poor about the UK’s credit worthiness and it did change the nature of where the recession was going. After that point you did potentially see an upside.

Are we out of the woods yet?

The aftermath of the credit crunch is not over yet. What we’re left with is in London alone 300,000 families on the social hosing waiting lists and a supply at best of 25,000 new build every year. We’re left with a larger group of people who are unable to buy a home outright or unable to afford to pay market rent.

In addition to that, with possible less public subsidy, and with the demand for housing increasing, the credit crunch, in effect, signalled the end of the way housing has been provided for the past two decades. We’re certainly not out the woods yet.

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Financial crisis – in a nutshell

The crisis has been levelled at US banks dishing out high-risk loans to people who couldn’t really afford them. These loans were traded to global investors in the US, UK and far and wide – until a steep hike in interest rates and the collapse of house prices, caused homeowners to default on their mortgages and investors to suffer huge losses.

Credit markets then froze, as banks became reluctant to lend to each other, for fear of taking on bad loans, which caused a massive cash flow problem. Overnight mortgages become harder to get, less homes were sold and repossessions rose. The impact on social housing providers was twofold. Those with large development portfolios now had stock they were unable to sell and cash calls from banks led to many having to re-price their loan agreements at higher rates.

The financial crisis – a UK perspective

September 2007 – depositors withdraw £1bn from Northern Rock. It is nationalised just six months later

April 2008 – 20 per cent of mortgage products are withdrawn from the UK market, ending the 100 per cent mortgage

April 2008 – the first annual fall in house prices for 12 years is recorded by Nationwide

August 2008 Former chancellor Alistair Darling warns that the economy is facing its worst crisis for 60 years

January 2008 – the Bank of England cuts interest rates to 1.5 per cent, the lowest level in its 315-year history

October 2009 – government pumps billions of pounds of taxpayers' money into three UK banks in one of the UK's biggest nationalisations. Royal Bank of Scotland (RBS), Lloyds TSB and HBOS have a total of £37bn injected into them