ao link
Twitter
Facebook
Linked In
Twitter
Facebook
Linked In

You are viewing 1 of your 1 free articles

How COVID-19 has tested HAs’ business plans

The pandemic and its economic aftermath are stretching the business plans of housing associations like never before. Gavriel Hollander looks into how they are responding. Illustration by Elly Walton

Linked InTwitterFacebookeCard
Sharelines

How COVID-19 has tested housing associations’ business plans – @gavhollander reports for @insidehousing #UKhousing

“We never stress-tested a pandemic. Congratulations to anyone who did!” @gavhollander reports on housing association business plans for @insidehousing #UKhousing

“We never stress-tested a pandemic,” one housing association executive tells Inside Housing when asked about how they are putting together a business plan in the midst of the coronavirus crisis. “Congratulations to anyone who did!”

While remarks like that may come with a significant helping of gallows humour, they mask a more important concern: that social landlords’ business plans have been – and will continue to be – tested like never before as the impact of COVID-19 continues to play out.

Indeed, earlier this summer the Regulator of Social Housing (RSH) recognised this reality when it pushed back the deadline for the submission of business plans and financial forecast returns (FFRs) by three months to 30 September, saying that it would “like assurance about how providers are responding” to the pandemic.

And you can understand why the regulator is seeking such assurance. It is possible to argue that coronavirus has hit social housing providers at the worst imaginable time. With the conclusion of the Brexit transition period looming into view at the end of the year and the cost of the zero carbon agenda already being factored into balance sheets, a global health crisis has piled uncertainty onto uncertainty.

So with just weeks to run until that new deadline arrives, what are the big decisions that boards are having to make in these new plans, and how are they making them?

For starters, the base-level assumptions that housing associations may have had about income have been thrown into disarray. There is uncertainty over rent inflation and the strength of the private sale and shared ownership market, as well as the level of rent arrears, empty homes and bad debt. That is all before finance chiefs move on to look at the expenditure side of the ledger.

In these circumstances, it is easy to see why some are exercising caution like never before. “Over the last few years we’ve had really good predictability around spend and income,” recounts Rob Griffiths, deputy chief executive and chief financial officer at 23,000-home Longhurst Group. “[This year] we are spending a lot more time thinking about the scenarios that we’re going to run against the base plan.”


READ MORE

Councils face low financial impact but ‘significant operational stress’, says Moody’sCouncils face low financial impact but ‘significant operational stress’, says Moody’s
RSH calls for submission of post-coronavirus business plans by SeptemberRSH calls for submission of post-coronavirus business plans by September
Waqar Ahmed: navigating through the crisisWaqar Ahmed: navigating through the crisis

Jonathan Walters, deputy chief executive at the RSH, says there are four key areas in which housing associations are going to have to make assumptions when it comes to business planning: rental income, sales income, repairs expenditure, and their ability to raise money on the open market.

“Building homes for sale or rent is a long-term activity so the more uncertainty there is, the less of it you’re going to want to do”

Mr Walters accepts that the level of guesswork that associations will have to apply to business plans at the moment could lead to a more cautious attitude from boards, particularly when it comes to big-ticket expenditure, such as development.

“Building homes for sale or rent is a long-term activity so the more uncertainty there is, the less of it you’re going to want to do,” he tells Inside Housing. “So I wouldn’t be surprised if we saw less [development].

“On the other hand, a lot of housing associations would say building homes – dealing with the housing crisis – is one of their strategic priorities and, therefore, one of the things they will do is to continue to build through uncertainty, when other house builders will maybe retrench a bit more. So we know there’s a debate going on within boards at housing associations about where to strike that balance – I think it’s a really hard call at the moment.”

When it comes to rental income in particular, the pandemic has forced associations to look at their forecasts with fresh eyes. And with the government’s furlough scheme coming to an end in October, the uncertainty over whether tenants can continue to pay rent is likely to remain for some time.

“People are saying arrears and bad debt haven’t been affected as badly as they thought they might be,” Mr Walters says. “But everyone is watching very closely for the end of the furlough scheme. People are going to have to make some kind of assumptions about whether that process will lead to more bad debts and more arrears.”

Mr Walters says that typically the associations the regulator has spoken to are reporting increases in arrears of between 0.5% and 1%.

The different economic profile of tenants across the country will mean that rises in arrears will vary between providers. John Donnellon, chief executive of Blackpool Coastal Housing – the ALMO that looks after 5,000 homes for the North West council – says there has been a 3% increase in arrears in 2020 compared with last year.

“We are slightly worried about October and the end of furlough. That might make a difference in a place like Blackpool”

“I think people put on furlough were panicking a little bit about the long and medium term, so perhaps they have been more reluctant to pay rent than normally,” he suggests.

Mr Donnellon believes that the council’s coffers should recover that shortfall “within the next year or so”. But – similarly to many social landlords in less affluent parts of the country – he has concerns about the immediate future.

“We are slightly worried about October and the end of furlough,” he explains. “That might make a difference in a place like Blackpool.”

At Longhurst, Mr Griffiths says that arrears are at roughly the same level they were at in February, but he accepts that this could change in the autumn “with furlough unwinding and redundancies likely to increase”.

Longhurst has seen more voids since the start of the pandemic, as properties take longer to let after they become empty. While the percentage of empty homes was “hovering around 1.1%” of total stock in January, it now stands at 1.8%. This might sound like a relatively small change, but for Longhurst, this equates to a £560,000 hole in its balance sheet this year. Extrapolate that across the sector and the money soon adds up.

Of course, arrears and voids are only two parts of the package when it comes to rental income. Assumptions are also being made about how much social rent will increase, given it will be based on a September Consumer Price Index that is expected to come in at 0.5% or lower. Mr Griffiths, for example, says that Longhurst is using a figure of 2% rent inflation from 2022/23 onwards as a base level but will map out lower inflation scenarios, too.

“We’ll stress-test it lower [in terms of] rental income, but with costs increasing at a faster rate.”

Jim Lashmar, a director at housing consultancy Altair, says associations he has spoken to are preparing for a low-inflation environment. “Before this, most people were seeing 2% [inflation] for the first couple or three years [of their plans], but we’re seeing considerably below that now,” he tells Inside Housing. The impact of this, he adds, is delays to repairs programmes in “nearly all the plans we’ve seen”.

And rental income is not the only bottom-line item where a significant amount of guesswork is taking place. Larger associations are ever more reliant on outright sale to generate revenue and – here too – the impact of coronavirus has forced organisations to rethink.

As the severity of the pandemic became apparent in March, L&Q took the immediate decision to strip out all “non-essential spend” from its business plan. This equated to a £66m cut in spending, with another £300m deferred. The decision was largely taken because of the uncertainty around the 110,000-home association’s sales programme.

Ed Farnsworth, deputy finance director at L&Q, explains how the group developed a “worst-case scenario” plan in which it assumed sales profits of zero.

“We demonstrated that we could remain covenant-compliant without generating any sales on the back of finding that £66m of non-essential spend. So we in effect created a robust financial plan that was not reliant on sales.”

In fact, L&Q’s sales in the first quarter of the year were running at close to 50% of its original projection, despite what Mr Farnsworth describes as “some of the worst trading periods in recent history”.

He adds: “That has given us confidence that although we think this year is going to be difficult in terms of sales, we are seeing a bounce-back and we are seeing strong demand coming back through our pipeline.”

“The cost of fire safety is impacting on our capacity to develop. We’re having to be more creative about how we keep building at the same scale"

Nevertheless, L&Q’s business plan is still just as conservative as others in the sector, even if its long-term development ambition of building 100,000 homes over 10 years remains intact. For instance, it has scaled back its reactive maintenance services, keeping an ‘emergencies-only’ model for the time being.

In fact, Mr Farnsworth reveals that L&Q tested the idea of stripping out non-essential spend in January, before COVID-19 was part of the conversation, given the pressures on housing associations over fire safety spending, the zero-carbon target and the volatility of the private sale market. There is a similar story at Peabody, which was also already adapting its business plan to a new environment.

For Brendan Sarsfield, chief executive of Peabody, the cost of fire safety works made necessary in the light of Grenfell is perhaps a bigger medium and long-term game-changer than the current crisis.

“Our business planning had changed prior to COVID because of fire safety,” he tells Inside Housing. “The cost of fire safety is impacting on our capacity to develop. We’re having to be more creative about how we keep building at the same scale. We are still committed to doing as much as we can – our commitment to regeneration is undiminished – but there is an inevitable impact.”

Mr Sarsfield says that, although Peabody “didn’t explicitly stress-test a pandemic”, the 66,000-home association did try out various other scenarios since 2019. These include one in which sales would stop entirely.

“Last year we improved our financial liquidity and this protected us during the uncertainty of lockdown,” he adds. “What I’ve learned from this is that all stress-testing helps you protect the business, even if we can’t guess the actual crisis that will emerge or how bad it will be.”

Mr Sarsfield echoes Mr Walters in saying that associations need to strike a balance between caution and their primary function: to provide homes. “[The crisis] does make you more conservative as a business,” he suggests. “It is critical we aren’t too conservative, though.”

Mr Walters stresses that the regulator will not start “telling people how to run their businesses” but “if you’re being more aggressive, then you expect us to want to understand how you think that’s going to work”.

Finding the perfect blend of prudence and ambition has always been one of the trickier tasks for social housing providers putting together long-term plans. Now more than ever, striking that balance is going to be crucial.

Sign up for the IH long read bulletin

Sign up for the IH long read bulletin
Linked InTwitterFacebookeCard
Add New Comment
You must be logged in to comment.
RELATED STORIES