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Lower viability ratings are evidence of a sector striving to meet housing need

Recent “regrades” of housing associations to V2 are anything but bad news, says John Bryant

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Last month’s announcement by the Homes and Communities Agency (HCA), regrading a number of housing associations from V1 to V2, has raised questions in some quarters over the strength and stability of the sector.

When we recall that ‘V’ stands for ‘viability’, it would be easy to get the impression that this is bad news.

Easy, but wrong.

The increase in the number of V2 gradings represents an announced change of approach by the HCA, which previously made little use of V2 grading.

The HCA considered, on reflection, that this approach did not make best use of the full range of possible grades so it announced that, starting midway through 2017, it would be making more use of V2.


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This means that an organisation that was previously graded as V1 might now find itself as V2 even if its underlying financial position was unaltered.

And it should be stressed, as the HCA has always made clear, that both V1 and V2 demonstrate compliance with the regulatory requirements in terms of financial strength.

“An organisation that was previously graded as V1 might now find itself as V2 even if its underlying financial position was unaltered.”

The lower grading does not mean that an association is only partly compliant, or compliant subject to reservations: it is as fully compliant as an organisation graded V1, albeit the latter’s financial strength will be greater.

It is only the lower gradings of V3 or V4 that indicate non-compliance. (A similar approach applies to the governance gradings: G1 and G2 are compliant, G3 and G4 non-compliant.)

And there is a second reason that an association might find itself graded as V2. This may well arise when a landlord has taken the decision to invest substantially in its housing provision, especially in the development of new housing.

“The benefit from development – namely, helping more people to meet their housing needs – has to be weighed against the risks involved.”

This will naturally involve using some of the organisation’s reserves and borrowing money commercially: in other words, it means less cash in the bank and a higher level of debt.

In order to boost the supply of affordable housing, an association may have chosen to enter into financial commitments that inevitably involve a certain degree of risk.

So it would be surprising if this were not reflected in the grade determined by the HCA.

In short, the benefit from development – namely, helping more people to meet their housing needs – has to be weighed against the risks involved.

But there is nothing new in this; it has always been part and parcel of what housing associations do.

And the strength and scale of the sector are testament to the fact that associations have an outstanding track record of striking this balance successfully.

Even leaving aside the effects of the HCA’s slight change of approach, a greater incidence of V2 gradings signifies not a weaker sector but one that is delivering its ambition to meet housing need.

John Bryant, policy leader, National Housing Federation

The Regulator of Social Housing’s Governance and Financial Viability Standard explained

The Regulator of Social Housing’s Governance and Financial Viability Standard explained

The standard

The Regulator of Social Housing (RSH) enforces the Governance and Financial Viability Standard and is one of three economic standards (the other two being the Value for Money Standard and Rent Standard) with which English housing associations are required to comply.

The standard, as its name suggests, comes in two parts: governance and financial viability.

Providers are granted a grading for each of these parts.

The Regulator of Social Housing assesses the association and then gives them a rating numbered from 1 to 4 for both governance (‘G’) and viability (‘V’).

A rating of 1 or 2 means the landlord complies with the standard, whereas 3 or 4 means they are not compliant and need to take action.

What the gradings mean:

Below is the RSH’s description of what each grading means:

Governance gradings

G1 – the provider meets our governance requirements as set out in our Governance and Financial Viability Standard.

G2 – the provider meets our governance requirements, but needs to improve some aspects of its governance arrangements to support continued compliance.

G3 – the provider does not meet all of our governance requirements. There are issues of regulatory concern and in agreement with us, the provider is working to improve its position.

G4 – the provider does not meet our governance requirements. There are issues of serious regulatory concern and the provider is subject to regulatory intervention or enforcement action.

Viability gradings

V1 – the provider meets our viability requirements as set out in our Governance and Financial Viability Standard and has the capacity to mitigate its exposures effectively.

V2 – the provider meets our viability requirements but needs to manage material financial exposures to support continued compliance.

V3 – the provider does not meet our viability requirements. There are issues of serious regulatory concern and in agreement with us, the provider is working to improve its position.

V4 – the provider does not meet our viability requirements. There are issues of serious regulatory concern and the provider is subject to regulatory intervention or enforcement action.

What has changed?

The Regulator of Social Housing is now issuing more ‘V2’ gradings, as part of a change in approach.

In November 2017, Jonathan Walters, deputy director for performance and strategy (now deputy chief executive), said the change was to ensure judgements were accurately reflecting the fact “the sector is taking on more risk”.

The RSH has now started using the term ‘regrade’ for organisations whose viability has been changed for this reason.

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