It was exciting to be in a packed room for the 2022 Social Housing Finance Conference – the first one in three years. As you would expect, much of the discussion focused on the current economic and political instability, and what registered providers (RPs) can do to keep ahead of the curve.

Below are the key messages for housing providers we took away from the conference.

Current economic predictions are gloomy

The rising inflation means that RPs were warned to expect the following:

• A further 10% increase in build costs and the cost of responsive repairs – in addition to the circa 20% price hike we have already seen, with labour costs not far behind.
• An anticipated 50% increase in fuel prices, and 40% increase in wheat prices, driving inflation to around 10%. This will lead to interests rates of 2-6% (likely to be the higher end of this range) before inflation settles to around 3-4% and interest rates at around 4-5%. 
• Increased arrears as social housing tenants struggle to meet spiralling living costs.  This could also result in public disorder. 
• Private sector rents to increase around 20-25% over a five-year period, driven by increased demand and insufficient supply.

Sector regulation focuses on quality and customer engagement

To comply with the Regulator of Social Housing’s (RSH) standards, RPs are encouraged to focus on three key questions:

• Is our stock in a good condition?
• Do we provide quality services?
• How can we build as many homes as we responsibly can in this challenging environment?

The Regulator also encouraged RPs to stress-test major repair costs increasing by 20-40% and sales volumes reducing significantly. 

It is expected that RPs should have a really good understanding of the condition of their stock and the likely cost of bringing it up to the appropriate standing, as well as a proper understanding of their clients. RPs should have a culture that empowers staff to raise concerns.

Questions that the RSH might raise with individual RPs are about:

• Rising inflation – particularly increasing differential inflation as costs rise but income may not rise as quickly
• The impact of interest rate rises on existing financial instruments
• Affordability for residents, including shared owners who face 8-10% rent increases based on RPI.

Risks for the sector

In addition to the economic factors mentioned above, a number of other key risks for the sector were identified, including:

• Rental income: This year’s rent increase was around 4.5%, which is significantly lower than inflation of circa 6%, already meaning that income is not keeping up with inflation. This could be squeezed further as more customers slip into arrears. There is a real risk the Government could bar RPs from increasing rents by CPI +1% next year, as this could mean a 10% increase for individuals already struggling to make ends meet.
• Investment in existing stock: The amount of necessary investment needs to be identified and stress-tested. 
• Recruitment: RPs are finding it increasingly difficult to recruit the right employees amid higher demand for new homes to be built and existing homes to be managed better.
• Ability to balance risk: Standard and Poor recently asked investors what they perceived to be the key risk in the sector. The overwhelming response was the sector’s ability (or lack thereof) to balance risk and conflicting priorities. This is likely to differentiate stronger and weaker RPs for investors. 
• Profitability in joint ventures: Particularly where managing stock for “for profit” RPs, you need to check that there is sufficient financial return and avoid lengthy tie-in.
• Complexity: Keep things simple in project/joint venture structures wherever possible as complexity results in vulnerabilities.
• Reputational risk: Protecting your reputation becomes an issue particularly around fire safety and disrepair. As housing moves up the political agenda, it is imperative that RPs are well regarded
• Data: A “push” is needed in the sector to ensure that data is being collected and used appropriately, for example to identify where there might be disrepair issues. 

What RPs can do now to tackle common risks

• Plan for the above risks and other possible eventualities, and stress-test your business case.
• Have a clear plan for how you will manage unforeseen events, such as the pandemic.
• Focus on collecting, analysing and taking the right measures from data.
• Get to know your stock and customers really well so that you fully understand what kind of investment is needed – particularly before setting targets for new development.
• Take action to increase the diversity of backgrounds, thought and skills on boards and leadership groups.
• Consider stock transfers and void disposal programmes to run an efficient portfolio.
• Establish clear objectives for incremental improvements to make your business more sustainable, so that you can access sustainable finance. To do this, you need the data to be clear about your baseline position and to be able to measure those improvements. 

Conclusion

Although discussions around the economic and political backdrop were sobering, it was a helpful and lively discussion around what RPs can be doing now to protect their businesses and the wider sector. The key message is not to wait for legislation, regulatory changes or economic squeezes – act now to improve the health of your organisation as we navigate challenging waters. 

How Capsticks can help

Capsticks aims to be the firm of choice to registered providers, offering a full service across development and planning law, corporate and securitisation, housing leasehold and asset management. Our experts can answer all your questions around stock transfers/void disposal programmes; green/sustainable financing and joint venture models that really work. 

If you have any queries around what's discussed in this article, and the impact on your sector or organisation, please speak to Susie Rogers to find out more about how Capsticks can help.