Is your housing stock unknowingly making negative financial returns?

Organisations are under more regulatory scrutiny than ever before to manage Value for Money, following the introduction of the Regulator of Social Housing’s (RSH), Value for Money standard in 2018.

The launch of this new standard, meant that registered providers could no longer afford to simply understand the basics about their assets. With the onus now on them to be in a position where they can clearly outline and demonstrate their strategy for delivering homes, which first meet a range of needs, and secondly ensure that optimal benefit is derived from each resource and asset.

Essentially, the RSH’s expectation, is that organisations such as yours, need to have a ‘forensic understanding’ of the costs and benefits of holding each asset. But that they must also use this information, in an effective way to drive decision making about assets, such as whether you should invest or di-vest in certain assets.

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How can you drive decision making about your assets?

There are two measures that organisations can use for this. The first being a ‘payback period’.

Payback Period

The payback period, in layman’s terms, is the length of time before an investment reaches its breakeven point. More often than not investments that demand a shorter payback, are regarded as being more favourable than those that do not, because that money can then be re-invested into other priorities more quickly.

There are numerous benefits of using this method; it is extremely simple for organisations to use and understand, but also how it offers a quick evaluation to determine whether a project can generate fast returns.

This being said, the method does have one major flaw. It ignores the time value of money, meaning that the method, does not take into account, that £10 invested now, will be worth more/less in the future, than its current worth.

The main issue with overlooking the time value of money is that by not considering the prospect that money received sooner, is worth more than money that is received later, due to its potential to earn additional revenue if it is reinvested; you are distorting the true value of cash flows – meaning that you will not be in an appropriate position to drive forward effective decision-making about your assets.

Net Present Value (NPV)

We recommend utilising the second method, which is conducting an NPV, or more specifically a 30 year NPV. NPV is a financial model that identifies the value of projected cash flows, discounted to the present.

This method allows you to effectively identify investment/di-vestment opportunities on each of your assets, by identifying those performing poorly on both an individual or grouped asset level – assisting you to comply with the expectation of the RSH Value for Money standard.

For instance, after collating the financial performance data and non-financial criteria for a recent client, we conducted a 30-year NPV for each of its housing categories (bedsits, bungalows, flats, houses and sheltered accommodation). The results not only provided the client with information on the best approach for their future asset management strategy, but it also showed that 19% of their stock was showing negative financial returns over the 30-year view (i.e. 19% of their stock was costing them more to maintain over the next 30 years than it would generate in income).

The question you need to therefore ask yourself is whether or not you are confident that your housing stock is profitable not only now, but into the future? And do you have tools and knowledge at your disposal to be able to identify and rectify this. If you have answered no to any, we can help, through our bespoke stock profiling service.

How we can help…

At Pennington Choices, we work closely with providers, to ensure that tenants and their lives are not put at risk. Our diverse and experienced consultancy team, is built-up with technical experts that work across fire safety, gas safety, electrical safety, asbestos management and water hygiene, to put in place practical solutions to any shortfalls that they may come across. We also have highly experienced management and financial consultants with extensive delivery experience in both social housing and construction sectors, who understand first-hand, the complexity and challenges our clients face.

We keep things simple…

The breadth of our experience across the housing sector, means that we know what to look for, and work with you to create an active asset management strategy, so that you can better understand the performance of your stock in line with the current regulatory expectations.