We live in unprecedented times with the major impact of coronavirus on economies worldwide and forecasts of a global recession. But the Social Housing sector has entered the crisis in a position of relative financial strength. Robust stress testing in the run up to Brexit has meant Housing Associations have established a range of mitigations in the event of financial distress and are now acting quickly to implement these measures.
Funders active in both the private and public bond markets see the sector as far less of a concern than other industries trying to navigate the impact of Coronavirus, with investors welcoming issues from Optivo and Sanctuary at the end of March albeit with spreads widening from the historically low levels seen earlier in the year. The credit rating agencies remain relatively positive with Moody’s saying that while operational effects for HAs will be material, credit impacts will not, although HAs with material dependencies on open market sales are likely to be at greatest risk.
Maintaining a robust financial strategy at this time is critical to provide essential services. In order to manage the situation, we are seeing revised liquidity strategies involving early draw down of available facilities and increased cash holding to cover potential calls on cash in the short to medium term.
Some of the key financial considerations for our clients are:
- Remodelling of market sales units to alternative uses and reduction or loss of shared ownership sales
- Considering the impact of potential low or negative inflation in the short term, on the longer-term financial position and on property valuations
- The impact of a potential housing market downturn and whether this may trigger impairment charges as we saw as a result of the Global Financial Crisis.
- Modelling the impact of the “new normal” in terms of margins on new debt and the impact on treasury strategies.
- Maintaining cash reserves in the light of potential increases in bad debts and voids and of one-off costs such as IT infrastructure for homeworking if these are not fully offset by savings made from rescheduling of development and repairs.
- Where RPs are now holding significant cash reserves, reassessment of treasury policy and counterparty risks when investing funds.
- Designing and implementing appropriate financial controls which are fit for purpose in the new remote working environment
Through implementing mitigating actions HAs are well placed to survive the financial impacts of the Coronavirus epidemic, which is key in allowing them to focus on important operational issues. The financial landscape post lockdown is unknown but will be very different. Funding may be more expensive for HAs but it is still likely to be priced significantly below corporate rates, and indications are that funds will continue to be available for development when the time is right.
Kick-starting the housebuilding sector will be key to getting the economy back on track. Movement in the UK house price indices will be an important indicator in considering moving back to development of mixed programmes. RICS have called for a Stamp Duty holiday or rate reduction which if implemented may signal an upturn in the market. Though boards are likely to remain cautious about moving back to mixed tenure programmes.
“The next few months will be financially challenging but HAs are well placed to ride out the storm.”
The huge and increasing unmet demand for social and affordable housing for rent continues. And a large-scale grant programme for HAs and Local authorities would enable them to take on schemes from failed private developers to get sites moving again. Additionally, the availability of grant to cover the shortfall on conversion of existing shared ownership or open market sales would help to restart these developments.
Boards will also want to consider alternative models, for example the use of joint ventures, though the risk appetite of boards is likely to be reduced for some time. The next few months will be a financially challenging but HAs are well placed to ride out the storm. Those that ensure the risks are considered and mitigations are in place, by undertaking thorough stress testing and scenario modelling, will be the ones at the forefront of driving UK economic recovery.
Jim Lashmar, Director at Altair, expertise in treasury, funding, strategic business planning and development feasibility modelling. Click here to view Jim’s profile and contact details.