RSH says social landlords must make difficult decisions to “maintain financial resilience” as borrowing headroom reduces
The current adverse economic environment “is likely to impact” on housing association development programmes, the Regulator of Social Housing (RSH) has warned.
The RSH, in its latest sector risk profile document today, said housing providers needed to make difficult decisions about investment and development in order to “maintain financial resilience” and continue to provide services to tenants in the current operating environment.
The stark assessment by the regulator follows fears raised by G15 boss Geeta Nanda last week that housing association build rates are likely to be hit in any coming economic downturn, with the sector potentially unable to provide the counter-cyclical boost to housing supply normally expected of it.
The RSH’s report said providers continue to face high inflation and a tight labour market while the “residual impact of the pandemic on supply chains have increased costs”.
It said: “Providers are facing higher borrowing costs, both from substantially rising interest rates and from widening spreads on debt. At the same time, income streams are facing greater than usual uncertainty, with significant headwinds in the housing market and the government consulting on capping social housing rents increases.”
“Against this backdrop, providers are looking to undertake substantial investment in existing stock to deliver against quality, building safety, and decarbonisation commitments, as well as continuing to invest in much needed new housing supply.”
It said providers’ forecast interest cover – which measures interest on providers’ borrowings against operating profit and has to be maintained at an agreed level in many lending agreements – has also been reduced.
It said: “Reduced financial headroom is likely to reduce some providers’ capacity to cope with further financial shock and some boards will need to make difficult decisions to maintain financial resilience while delivering essential services”
RSH said while around 80% of debt in the housing association sector is fixed, a substantial number of providers have at least 25% of their debt at a variable rate and will now be facing “rapidly rising costs.”
These comments are in the light of big rises in the cost of borrowing in recent months, including significant increases since the former chancellor’s ill-fated mini budget, which has pushed up the cost of government gilts, against which housing associaiton debt is commonly pegged, significantly. Last week, Housing Today revealed that one G15 association, Optivo, had put all of its pipeline schemes on hold while it reviewed their viability in the light of the increase in financing costs.
The RSH said business plans from June 2022 envisaged £47bn of new debt facilities being agreed over the next five years, however it said it is “likely that these plans will change materially as providers implement mitigations in light of the deteriorating external environment.”
See also: How do we boost housing association development?
See also: What are housebuilding’s prospects in the wake of the mini-budget?
Fiona MacGregor, chief executive at RSH, said: ”Providers must take a strategic approach to managing the significant risks we have identified in our Sector Risk Profile and act appropriately to maintain their continued financial viability. Boards and councillors are the custodians of people’s homes, and it’s absolutely vital that tenants’ homes, safety and the delivery of essential landlord services are not put at risk.”
The warnings from RSH follow the end of a government consultation on limiting social housing rent increases to 5% in 2022/23 to help tenants in the midst of the cost-of-living crisis. Landlords had been expecting to be able to increase rent by the September consumer price index plus one percent, which would’ve allowed a maximum rise of 11.1%.
A government impact assessment said the plan would cost housing associations £7bn over five years. The G15 group of large housing associations in London has said the proposed cap would “significantly” reduce development of homes.
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