An ill wind

By contrast, the availability of private finance is less likely to threaten development programmes. Some top funders have stopped providing cheap loans to associations since the onset of the credit crunch. But they will be only too willing to re-enter the sector in a big way once associations are willing to meet higher loan costs.

Even so, access to private finance could eventually be threatened by the continuing deterioration in housing association finances. Latest figures unveiled by the Housing Corporation in its 2017 global accounts for the sector show that operating margins are being mercilessly squeezed through inflationary cost increases at a time of weak rental growth.

Larger super-league social landlords with big development programmes are suffering more than medium sized and smaller associations unable to develop at low grant rates. The risk for associations is that they will be left with great swathes of unsold low-cost home ownership homes – putting even greater pressure on their financial numbers and compounding the squeeze on their margins.

So far, only a small clutch of associations are having to revise their business plans to accommodate the squeeze. Ahead, though, lenders will be greatly concerned if financial difficulties extend to a wider spectrum. The challenging conditions faced by housing associations in delivery of the government’s £20 billion housing plans have prompted the Housing Corporation to beef up monitoring by its regulatory department.

Peter Marsh, deputy chief executive of the Housing Corporation, emphasised that greater flexibility to respond to changing conditions had been introduced to the development programme itself and to monitoring its progress.

‘Previously, grant allocations have been made for the whole of the programme, effectively requiring associations to fix the costings of projects a year or more before start-on-site,’ he told ROOF.

‘Now, phased grant allocations for the three-year programme will provide time for associations to be more certain of their project costings and demand for low cost home ownership homes. So far, only £3 billion of the £8 billion grant funding available for the 2018-11 programme has been allocated. Further bids for the next tranche are now being invited.’

At the same time, greater flexibility is being introduced into monitoring the development programme, said Mr Marsh.

Previously, the Corporation has looked into the affairs of individual associations through its yearly housing corporation assessments of their viability, management, governance and use of public subsidy and through its annual viability review. But now, business plans of 100 associations exposed to higher levels of risk, notably larger associations developing with or without grant, are being examined on a quarterly basis.

Key items being reviewed are their current business profile, credit lines, development pipelines and, crucially, the volume of sales and pricing achieved on low-cost home ownership schemes.

‘By getting closer to associations, we hope to able to see when an association may be getting into financial difficulties at an earlier stage than before,’ said Mr Marsh. ‘It should then be easier for us to help with devising solutions before difficulties become entrenched and begin to threaten viability.

‘We should also be able to see whether similar difficulties are being faced by different associations, for instance in their low-cost home ownership activities, and whether we should be making alterations to the development programme.’

The availability of credit does not appear to be the most significant short-term risk as average funds in place with associations will last for 29 months, said Mr Marsh. ‘However, if liquidity in this market is not restored within the next year, this risk will escalate significantly.’

Overall, the £20 billion capital costs of the programme are to be met through £8 billion grant funding and £12 billion private finance provided by associations, either through drawing down loans or tapping their reserves.

Already, associations have arranged most of their anticipated loan finance requirements for the next two years. Around £10 billion loan facilities have been put in place to part-fund development projects and to fund decent homes stock investment and other major repairs to existing homes.

However, if low-cost home ownership profits fail to materialise as anticipated, most of the loans will be needed to fund development and this could cause serious difficulties in meeting the cost of stock investment, possibly leading to expensive delays. The financial risks posed by the low-cost home ownership programme have been examined by the Corporation through capacity models looking at the impact of falling sale prices and falling sales volumes.

‘We believe associations can cope with a 20 per cent decline in prices without experiencing financial difficulties,’ said Mr Marsh.

‘Inevitably, though, a substantial decline in sales could have serious repercussions. Already, for instance, some housebuilders have called a halt to new building because they do not believe there will be sufficient demand for new homes for the time being. Associations could be faced with the same problem.

[However] provided good governance at associations spots demand shortfalls in time, and makes amendments to business plans, weak sales should not create insurmountable difficulties.

‘Potentially, though, this is a serious risk facing all associations with development programmes involving low-cost home ownership schemes. It is up to all of us, including the Corporation, to be extremely careful in preventing any failure in selling low-cost home ownership homes from damaging individual associations or the sector itself.’