Is the social housing sector doing enough to manage risk?

This article summarises the Sector Risk Profile 2018, a document produced by the regulator to summarise the main risks facing the social housing sector and the recommended actions registered providers should be taking to manage these risks and ensure financial viability is maintained. Whilst as a whole the sector has remained financially robust since the last report in 2017, there are areas in which risks are increasing in prominence and require additional focus.

In the recent publication entitled ‘Stakeholder Engagement Survey’ it was found that the Sector Risk Profile was the most useful publication for housing providers out of all the reports produced by the regulator.

How Does It Work?

The Governance and Financial Viability standards, produced by the Regulator, set out the expectations of organisations in managing their risk. The Board are responsible for understanding, identifying and managing all risks faced by an organisation, through assessing risk prior to making all key decisions. The Sector Risk Profile summarises the risks that exist in the housing sector and offers an analysis of how prominent these issues currently are.

Types of Risk

1. Strategic Risk

Health and Safety Risk – Boards are responsible for ensuring full compliance in all areas of health and safety to ensure the safety of tenants and staff. Despite an increased investment in fire safety following the Grenfell Fire, the Sector Risk Profile identifies the need for a focus on compliance in all areas of health and safety.

Reputational Risk – the social housing sector is under scrutiny by stakeholders and the public more than ever before in light of events such as Grenfell, therefore Boards need to take into account stakeholder expectations in all of its decision making.

Sales Risk – sale revenues make a more valuable contribution to the deliverance of affordable housing than ever before, therefore Boards should fully understand the markets in which they operate in order to fund the deliverance of affordable housing.

Value for Money – this standard came into effect from 1^st April 2018, and ensures that rent is used effectively. Providers must be fully transparent in order to meet this standard by evidencing strategies such as In Depth Assessments (IDAs) and annual stability checks to assure the regulator that compliance is being achieved.

Data and Safety Monitoring – it is important that providers ensure that their data is up to date, clearly formatted and accurate in order to achieve full compliance in both Governance and Financial Viability, since this is essential to meet the Welfare Reform and Work Act.

2. Operational Risks: Stress Testing

Boards must ensure the long-term viability of their organisation by conducting an in depth stress test against appropriate risks and relevant scenarios, in order to identify and subsequently implement the necessary mitigations. The Bank of England conduct a stress test annually, with the intent to assess economic risks appropriate at the time of completion.  Housing associations need to conduct similar tests in order to ensure financial strength is maintained to cope with adverse circumstances.

3. Operational Risks: Existing Stock

The social housing sector generates approximately £15 billion per annum from letting income, therefore this needs to be appropriately managed to cover all day-to- day running costs and major repairs costs.

Stock Quality – providers must have a comprehensive repairs and maintenance plan in place to maintain the quality of existing housing stock in the most cost-effective manner. This requires a clear governance structure to both enforce and manage the deliverance of responsive and planned repairs as well as understand the amount of investment required to adhere to the Home Standard.

Counterparty Risks – there are several cases of financial failures by large contractors, who lose control over the monitoring of risks associated with partner companies. As a result, it is essential that Boards understand that contracting out services does not mean that responsibility for compliance and risk management is contracted out too, the Board needs assurance that within these complex subcontracts risk is appropriately managed.

Costs and Inflation – the rate of inflation is a key factor that effects the ability of providers to meet all of their property needs, particularly the construction cost inflation. The fundamental risk for the sector currently is the impact that the recently introduced rent reduction may have, since construction and maintenance costs will continue to rise with inflation whilst rental income will remain the same because of the newly introduced rent reduction scheme. It has also been predicted that providers headline social housing costs will rise by 4% over the next year because total expenditure on repairs and maintenance is set to increase following Grenfell remedial works.

4. Operational Risks: Development

The development of new homes in the sector is projected to increase in output over the next financial year from 60,000 units to 80,000. Subsequently the level of risk will increase as unit volume increases. In order to mitigate this increase in risk, boards will need to appropriately assess the trade-offs between development and reinvestment in existing stock. Boards will have to assess the most appropriate way to fund new supply by assessing the balance between grants and borrowing, and also have the appropriate policies in place to manage the risk that economic downturn may have on land acquired for future development.

Market Sales – market sales were previously undertaken by a small number of large organisations, however in more recent years a small number of medium sized organisations have utilised this option in order to generate alternative income for investment in social housing. Properties developed for sale account for more than half of turnover for some providers therefore appropriate risk management of problems such as a reduction in market value need to be taken into account and mitigated.

5. Finance and Treasury Management Risks

Registered providers must anticipate market volatility in light of future economic and political uncertainty.

Existing Debt – registered providers are well positioned to repay and refinance existing loans but it is essential that providers have access to  sufficient liquidity at all times and effectively manage refinancing risk.

New Debt – housing association development can be funded by a combination of financial streams, these include, grants, internally generated cash and debt. There has been a recent increase in short-term borrowing, requiring re-financing to occur more frequently and meaning that the increased risk this may pose needs to be accurately reflected in risk mitigation strategies. In cases where housing associations engage with complex spending structures, specialist advice must be attained in order to identify and effectively mitigate any new risk.

Hedging Strategies – there are a range of financing opportunities available in the market, therefore registered providers should be aware of the different risks, and assets be appropriately secured in order to accommodate for all possible circumstances. In addition, the Board should ensure that they are aware of the differing risks associated with variable rate debt compared to fixed term in order to sufficiently mitigate risks in the market.

Lease Structures and Real Estate Investment Trusts – small housing organisations rent properties from providers known as Real Estate Investment Trusts (REITs). REITs introduce a private finance element into social housing and therefore create new financial risks in relation to the reliance on external parties for maintenance and renewal.

In Summary

An organisation must understand that the importance of every risk is dependent on the nature of the business that it is involved in, the relative size of the organisation and the level of uncertainty within the sector. The housing sector is facing an increased risk in Health and Safety, Reputational and Sales Risk, particularly being under more scrutiny than ever before in the aftermath of the Grenfell Tower Fire. Boards are responsible for the safety of their tenants and therefore they must ensure that they are not over reliant on sales income and that they take into account the needs of a range of stakeholders’ whilst continuing to deliver affordable housing.  The regulator seeks to ensure that Boards are conducting appropriate risk management techniques in all of the above areas, as the Sector Risk Profile highlights the range of considerations that need to be taken into account during decision-making.

To find out how we can help you to manage risk and overcome the mounting pressure to drive financial savings and operational efficiency,  please email Jenny Neville. 

The Sector Risk Profile 2018 can be found here.