Board Member Briefing: what do high interest rates mean for landlords?

“In the Liz Truss era, we were challenging ourselves over the fact that we were already in the midst of a perfect storm, so did we need to have a perfect storm on top? Or do we need to be thinking about stress-testing in a different way? A normal stress-test would apply a sudden 5% interest rate, but that has already occurred. Would they really move by another 5%?” Ms Ewen asks.

Another common test is to model financial viability if property values dropped by 30%. “But if they’ve dropped by 10%, do you apply the same test to that?”

For some associations the answer would be yes; for others that might not be necessary and could stand in the way of innovation or new development. The most important thing about a stress-test is to come away from it knowing “what levers you’d pull” if faced with a sudden rate rise, Ms Ewen says.

A hedging strategy is important because it helps to insulate the organisation, but it should involve discussions about the stability of external organisations, too: monitoring of the creditworthiness of contractors, for example.

This turbulence is inevitable, according to Jamie Thorn, finance consultant at Altair. The aim is not to manage risk out entirely, but to provide a clear plan to ride through it.

“Fundamentally the goal for boards when looking at global risk should be to understand the impact on the organisation, the early warning signs, and to focus on the mitigations and insulation, not prevention,” he says. “This hopefully means that external shocks have as little impact on the core operating business as possible, and ultimately social housing homes are protected.”

Be cautious

According to Andy Hulme, chief executive of Hyde Housing and a former banker specialising in housing finance, this is a time for caution – particularly for smaller landlords who may have less resilience.

Affordability over the long term is now much harder to predict. “The thing that is really easy to forget is that some of these core ratios that drive your compliance move really quickly. If two small things happen… something that is very comfortable is suddenly very tight. You need to think about diverse pools of funding and how the cost of that might change,” he says.

But new options around funding for social landlords have created new risks for boards. This is particularly the case for those with new capital marketing financing in place. Bond arrangements that were once attractive over 40 years might no longer seem so worthwhile. Associations are now likely to favour bonds over five or 10 years. That grants some agility, but it comes with risk: what do you do in 10 years if you can’t refinance?

“Organisations are now more reliant on comparatively shorter-dated bank funding, so there is also more refinance risk as organisations potentially need to refinance newer 10-year loans twice as frequently as the 25-year loans or bonds that used to be common. This also runs the risk of sector-wide demands for funding materialising en masse in 10 years’ time,” Mr Thorn warns. He urges board members to consider how their existing treasury policies protect them from those specific risks.

Mr Hulme says follow your gut. “The first question you should always ask is: is it good value? Does it feel like good value? Does it serve your short and long-term objectives?” he says.

“You need to look for something that you can afford to repay. The sector has not always looked at cashflow; we look at surplus and rent roll and homes management, but the sector hasn’t understood enough about cashflow. That’s where you can find yourself in trouble if you call it wrong.”

Check up on check-ins

The economy is currently turbulent, so it’s important that financial decisions aren’t sidelined or led by an expert sub-committee. That might mean asking a lot of obvious questions to make sure the answers are clear and consistent. Ms Ewen says board members should go as far as setting regular formal check-ins on existing strategies and corporate plans.

“Just because you’re set on a path doesn’t mean you have to stick to that path if the environment is changing around you,” she says. Setting out a series of golden rules or triggers for action can also be helpful.

Boards might choose to have a very low threshold for pausing development programmes if, for example, interest rates rise again or house prices drop. Another trigger for a rethink could be local issues that challenge your financial assumptions, such as holding too much unsold new build stock. Each association will need to set its own rules and trigger points, but boards should ensure they are in place.

Mind the gap

A decade ago, boards may only have needed one or two finance experts at the board table, but that situation has now changed. Mr Hulme says it’s time for a skills gap audit for every board. “The reality is that in a world where everything is good and money is cheap, the ability to count matters a bit less,” he says.

But in a world where the numbers are very tight and the ask of landlords is greater than ever – with fire and building safety regulations, retrofit projects and new development all requiring complex financial packages to support them – financial skills are now critical to a board’s success.

“Having multiple people around the table who can interrogate the numbers and ask smart questions, and look ahead, is more important than ever. You’re stuffed without that, honestly,” Mr Hulme says.

But while understanding the impact that rates and market movements have on the stability of your organisation is a crucial skill for all board members today, for those who join from a different specialism it can be a fast learning curve.

Those who need it should demand training to get themselves up to speed. Most associations will offer an induction for board members and some internal training, but there are also regular ‘finance for non-finance leaders’ courses offered by both lenders and lawyers. Chairs should offer these opportunities to their members regularly.

“You can ask questions outside of the meeting,” Ms Ewen says. “Board member networks, where they can chat to others and reach out to other board members with a finance specialism, are also useful.”

Mr Hulme adds: “The wisdom of the masses is always greater than the knowledge of the few. Even if you look to the biggest banks in the UK, they don’t just make up their own mind. They’re looking at what the other banks are saying, what the IMF [International Monetary Fund] is saying, and you need a board who can pull that together into a narrative.”

Come together

This is a good time to consider merger proposals. With larger size comes greater resilience to rate shocks or market movements, and an opening up of options when it comes to securing finance.

Mergers may be complicated, but the process will be worthwhile if board members keep asking how the move will improve customers’ lives. “Why is it better for customers? The answer might be as simple as ‘we are not viable without it’ and that’s definitely not good for a customer. It could be that simple,” Mr Hulme says.

“And then with that North Star, that real clarity as to why you’re taking those steps, you can know that whatever you do you’ll find your way through that process.”