Weakening of providers’ finances ‘continue to intensify’, says report
Housing associations’ debt servicing costs last year exceeded their net earnings for the first time since 2009.
The Regulator of Social Housing’s latest sector risk profile report, which outlines patterns of risk taken from providers’ financial returns, warns the sector’s weakening financial position “continues to intensify.”
The report shows registered providers’ average interest cover - which compares earnings to interest payments and is used as a measure of financial capacity – is below 100% for the first time in 15 years. One in four providers forecast aggregate interest cover will drop below 100% over the next five years, including 12 of the 17 providers with more than 40,000 homes.
RSH said landlords are taking action to manage viability risks, including deferring uncommitted development and arranging loan covenant waivers. But it warned “reduced financial headroom reduces the capacity to manage downside risk and increases the risk that a governance failure leads to financial distress.”
The regulator said boards need a strong internal controls framework a thorough understanding of where risk sits withing their organisation.
It said: “This will include having an accurate and up to date assets and liabilities register that provides swift access to information on a landlord’s housing assets and security position. Boards must closely monitor their organisation’s financial position and covenant compliance, engaging positively with funders at an early stage where compliance may be threatened.
“As boards make choices on priorities they will need to undertake stress testing of key assumptions, establishing robust, worked up mitigation strategies to address possible future pressures.”
The report said boards will need to look at options, such as finding merger partners, where viability is uncertain.
The report also revealed the extent to which the sector is pulling back on development. It said providers forecast building 300,000 homes over the next five years, 12% lower than forecasted a year ago. Outright sale has seen the greatest reduction in forecasts of 21%, while number of new units forecast by for-profit providers has fallen from 33,000 to 18,000.
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The RSH also flagged that insolvencies in the year August were higher than pre-pandemic levels with construction businesses making the largest contribution to the insolvencies total. It said contractor insolvencies have increased costs for providers.
It said: “Contractor failure has resulted in impairments from increased costs and development schemes delayed while new contractors are appointed.”
The RSH said however the sector’s overall liquidity remains strong, with £34.2bn of total cash and undrawn facilities, with business plans forecasting £48bn in new debt over the next five years.
Fiona MacGregor, chief executive at RSH, said: ““There is very little margin for error, and it is absolutely critical that landlords are well run, with robust systems for identifying and mitigating risks.
“Boards must maintain a real clarity of purpose to successfully navigate these competing demands while remaining financially viable.”
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