Lime Legal

Risky business

Published 01 March 2024

Falling income and rising costs will put housing associations and their most vulnerable customers at risk, according to ROOF's annual survey of finance directors. By Emma Hawkey and Julian Birch

The warning of finance directors in some of the UK’s top housing associations is stark – all but three of the 20 finance chiefs who responded to ROOF’s annual survey of the UK’s largest social landlords had no doubt that more associations will find themselves in financial difficulty by the end of the new financial year.‘Short-sighted and ineffective business planning is hiding the true problem for a lot of RSLs,’ says the finance director of one large southern landlord.

A colleague in a large UK-wide association agreed there could be trouble ahead for social landlords, ‘either due to the realities of rent restructuring or as a result of past under-investment in their homes, or inappropriate investment in new development’.

One finance chief singled out smaller associations for trouble: ‘The way Housing Corporation partnering works will mean a lot of associations cease to develop. They may be strong financially as a result, but they won’t be able to attract good staff and gradually they’ll become moribund organisations. That will be a slow process. Smaller and medium sized associations which stop getting grant will think they can start doing things with key workers, sub market rented, private sector leasing – and other risky, non-supported ventures. That’s where there will be trouble sooner.’

Even the less pessimistic finance directors were still wary: ‘If boards and management are prepared to make tough business decisions then the answer is yes. If they are, then it’s no,’ said another at a southern association.

‘Some may be underestimating the proportion of homes not meeting the decent homes standard,’ warned another UK-wide finance boss.

The finance chiefs predicted more mergers, or intervention from the Housing Corporation, for associations in financial difficulty.

One identified specialists in supported housing as being particularly at risk. ‘When it comes to care, local authorities and government seem to have their heads in the sand regarding what is an appropriate price for the standard of service they want.’

The government’s new way of funding housing and care was marked out as a particular threat by more than one third of respondents. ‘Trying to get new schemes up and running is hard because revenue and capital funding are no longer linked,’ said the director of finance at a large northern association.

‘We’ll be developing fewer homes this year than last because there is not enough grant funding for extra care housing,’ said the finance director for a specialist association.

But the greatest threat – identified by 85 per cent of respondents – was seen as the rising cost of building and maintenance. Many finance directors linked the spiralling costs of development and maintenance with the cap government has placed on rent. ‘It’s a simple problem,’ said the finance director of one giant association. ‘Income can rise at inflation plus 0.5 per cent, but building and maintenance costs rise at inflation plus 2 per cent.’

A colleague in the North West agreed: ‘If income continues to rise at a lower pace than costs, over time the quality of services will inevitably suffer.’

Indeed, half of those responding to the survey predicted that various financial pressures on their own businesses would be sufficient to make them reconsider the cost-effectiveness of helping people in greatest need. ‘These pressures are pushing us towards managing a greater proportion of tenures other than general needs housing, as this is a loss-making activity and has to be subsidised by other tenures and management contracts,’ admitted the finance chief at a large southern association. ‘It could however be argued that there are good social reasons for mixing tenures more effectively in social housing developments, and there is a strong argument that those on low regular incomes – key workers – are also in great housing need.’

In order to sustain loss-making services, large associations are dependent on cross-subsidy. ‘Our core business is helping people in greatest need, but these pressures are driving our strategy to find other ways of paying for it. We’re looking at new markets – sub market sales for example. In the short term this is a cost, but it’s investment in the truest sense of the word, and will increase the money we can spend on subsidised housing.’

But does diversification into new markets to find new sources of income mean housing associations will put themselves – and their customers – at risk? ‘It will depend on how robust their monitoring and investment appraisal processes are,’ warned the finance director at a stock transfer association based in the north. ‘Many are looking to diversify in order to respond to the government’s ‘sustainable communities’ agenda. Those with less robust arrangements may get into difficulties.’

Another LSVT finance chief struck a note of caution: ‘What people should remember is that local management is very important. We don’t see ourselves as big developers, we’re not all about building ourselves up to have the capacity to do that. It’s all a bit macho really. If you’re good at management, then do that.’

A third LSVT director mentioned the the new system of regulation and inspection for associations. ‘The squeeze is on. There has been an element of featherbedding for housing associations. They haven’t been challenged on costs like local authorities are. Now the pressure is being brought to bear, and I predict a lot of mergers.’

He predicted the impact of the new inspection regime and targets on the attitudes of private lenders will be interesting. ‘People will be looking for economies of scale. There will be pressure to perform to new targets not in business plans, and new challenges. If people don’t work out ways of doing it themselves, it will be done for them externally.’

ROOF surveyed finance directors at the 40 biggest English housing associations (by units). 20 responded