The Homes and Communities Agency (HCA) has again published its analysis of risks facing the RP sector, in particular risks which would cause an RP to fail the viability element of the Governance and Financial Viability Standard.

Prior to the credit crunch, social housing had enjoyed a long period of relative stability but the outlook is now much more uncertain and a range of new risks have presented themselves to the sector.

The risks identified are broadly the same as those appearing in the 2012 analysis with welfare reform and diversification evolving particularly rapidly.

The risks

The HCA highlights risks under four broad headings.

Assets

  • Debt requirements and timing of sales receipts need careful monitoring to ensure poorly managed cash flow does not disrupt the development programme.
  • The HCA is keen to ensure that diversification does not put social housing assets at risk.
  • With more providers cross-subsidising social housing programmes through outright sales, there is greater exposure to the vagaries of the housing market.
  • Existing stock needs to continue to meet the decent homes standard and, with other distractions, there is a risk that the quality of ongoing maintenance is not sustained.

Liabilities

  • Existing debt needs monitoring in order not to jeopardise the attractive terms that many RPs enjoy.
  • New financing arrangements including engaging with capital markets or sale and leaseback schemes bring particular risks.
  • Exposure to Mark-to-Market needs monitoring.
  • Forthcoming changes to accounting standards (FRS102) bring risks in terms of the complexities of accounting for financial instruments and managing stakeholder perception where financial statements could potentially look very different.

Income

  • The affordable rent regime brings greater exposure to the housing market with rent levels being linked to local market rents.
  • Affordable rent and welfare reform bring potential cash flow volatility.
  • Pressure on local authorities means that certain providers are exposed should significant Supporting People contracts be lost.

Costs

  • Scheme deficits and the untested impact of auto-enrolment create uncertainty around future pension costs.
  • Differential inflation rates need to be managed (CPI for rents and RPI for costs).

Key themes

Planning vs implementation

In a number of areas, the HCA's regulatory approach was previously to gain assurance that RPs are formulating plans for dealing with issues such as welfare reform and affordable rent. The approach has moved towards gaining assurance on the quality and effectiveness of the strategies that are being implemented and how they feed into business plans and forecasts.

Volatility

A recurring theme in the risk analysis is the volatility of cash flows, making financial forecasting particularly difficult, for example in the following cases.

  • Housing development – uncertain timing and quantum of sizeable payments and sales receipts.
  • Diversification - no past experience of cash flows.
  • Affordable rent – rents fluctuate with the market.
  • Welfare reform – greater risk of arrears.
  • Supported housing – reliance on retaining contracts.
  • Pension costs – changes at each triennial valuation and the unknown impact of auto-enrolment.

'The board must understand'

In over 20 places throughout the document, the HCA stresses that providers/the board must 'understand'. In the new world of social housing a lack of understanding within an organisation and particularly at board level presents significant risk. The HCA wants assurance that:

  • organisations understand the risks associated with individual development schemes
  • boards understand the risks of each market they enter on diversification
  • providers understand in detail all contracts they enter into, for example sale and leaseback
  • providers understand their regional housing market
  • boards understand the risks when making investment decisions and relationships with institutional investors
  • boards understand the implications and obligations associated with new debt arrangements
  • providers understand the implications of FRS102
  • providers understand the impact of differential inflation rates on costs in relation to income.

The implication is that there needs to be a focus on the quality of boards, with a wide range of skills required amongst members. The HCA also notes that there should not be reliance on just one or two members who have understanding of, for example, derivatives.

Contingencies and exit strategies

The HCA is keen to gain assurance that providers have contingency plans or exit strategies in place should risks materialise to ensure ongoing viability and to protect social housing assets.

Other risks

While the profile gives a fair summary of the risks facing the sector, it is arguable that it omits two key risks for the sector.

  • The escalating cost of senior staff remuneration is hard to forecast with certainty. Whilst costs need managing it is nevertheless important to provide competitive packages to senior staff in order to attract and retain the best people. Costs associated with dismissal can also be high and need to be factored in when reviewing staff structures.
  • The perception that the sector delivers poor value for money presents a risk as government and public support is key to the ongoing success of the RP sector. The typically weak value for money statements within financial statements (on introduction of the direction 2013) risks reinforcing this view.

Conclusion

RPs should ensure that they are addressing the risks highlighted in the 'Sector risk profile 2013':

www.homesandcommunities.co.uk/sites/default/files/our-work/sector_risk_profile_2013_full.pdf

and check that they can give assurance to the regulator that the risks are actively managed and understood.

We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2014. code 13/051 exp: 31/07/14