Download full analysis of how the credit crunch is affecting social housing (PDF - 4mb)
Welcome to Baker Tilly’s latest social housing credit crunch survey.
As with our previous study last August, our aim here has been to understand what impact the continuing financial crisis is having on Housing Associations (HAs) - whilst examining the latest steps being taken in response.
In August 2008, we discovered that the credit crunch was starting to bite and that some organisations were experiencing a fall in property sales and prices and a number were experiencing difficulties with their banks. The report highlighted a fall in commercial development activity and the introduction of a number of cost-cutting measures, but on the whole there was great optimism for a speedy economic recovery in 2009.
Since then the UK has entered into recession, unemployment has exceeded two million for the first time in over a decade, and many once profitable banks have become part-nationalised.
In the context of this worsening economic picture, we felt it appropriate to take another look at how the sector is performing and to highlight changes in attitude and activity as a result.
We have compiled the opinions of senior executives from ALMOs, LSVTs and traditional housing associations. The majority come from mid-sized organisations - 40% own and manage between 2,500-10,000 units, while 30% have property portfolios exceeding 10,000. Overall those responding were responsible for more than 750,000 residences in the UK.
We hope you find the report useful and if you would like to discuss any issues contained within it or have comments, please contact us.
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Associations that believe the credit crunch is having a significant impact on the sector
2008 – 78%
2009 – 96%
Associations expecting their peers to suffer significant financial difficulty
2008 – 75%
2009 – 94%
Associations experiencing problems with lenders
2008 – 31%
2009 – 46%
Associations expecting full economic recovery
2008 – 81% expecting recovery in 2009
2009 – 73% expecting recovery at the end of 2010
Associations that consider the HCA and TSA provides sufficient support in the current economic climate
HCA – 69%
TSA – 51%
Associations scaling back commercial development activities
2008 – 54%
2009 – 78%
Associations not having reviewed risk strategies in light of the credit crunch
2009 – 33%
2009 – 12%
Associations that have reviewed forecasts in light of the credit crunch
2008 – 86%
2009 – 99%
Associations actively cutting costs
2008 – 35%
2009 – 61%
Associations taking strategic opportunities resulting from the current climate
Yes – 87%
No – 13%
Source:
2008 – August 2008 survey
2009 – March 2009 survey
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V-shaped recovery now looks unlikely
It is clear from this latest survey that the level of pessimism amongst senior social housing executives has increased significantly over the last nine months.
In August 2008, 86% of respondents thought economic instability would be short-lived, with 81% expecting the economy to recover to previous growth rates by the late summer of 2009.
These expectations have changed considerably since then with almost three quarters (73%) now believing a full recovery will not be until the end of 2010. This significant turnaround in views is further backed up by the fact no association now expects the economy to bounce back by the end of this year.
Of greater concern is the number of senior executives who showed a lack of confidence in the UK’s ability to weather the recession.
Since last summer, numerous fiscal initiatives have been launched and billions of pounds injected into the economy. Despite these unprecedented and co-ordinated measures, only a quarter of respondents think the UK is well placed to meet the current economic challenges. This sentiment remains consistent with that expressed in our previous credit crunch survey.
This study did however detect a growing acceptance amongst associations that as the economic picture worsens; the chances of it impacting on their organisation will increase.
The response to the question concerning future grant payments illustrates this point clearly. An overwhelming 77% said they expect social housing to remain a high priority for the current Government, however 64% accept the amount of money available through the Homes & Communities Agency (HCA) will in the future either stay the same or decrease.
Sector agencies - HCA and TSA
In addition to the worsening economic conditions, associations have of course been adapting to the introduction of the Homes and Community Agency (HCA) and Tenant Services Authority (TSA). This survey offered a good opportunity to test the water and examine how senior executives thought they were working.
Although there was no unanimous response, 69% currently consider that the HCA provides sufficient support. Conversely, despite numerous statements of intent, there is no overall consensus that the TSA is doing the same.
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The impact increases
When comparing the results of this survey to the one conducted last year, the credit crunch is clearly affecting the social housing sector more than ever.
In August 2008, 78% considered the squeeze on liquidity to have had an impact on the sector. This has now risen
to an overwhelming 96%.
We also revisited the question posed in the earlier survey concerning whether associations were experiencing difficulties with lenders when renewing existing facilities, or when securing funding for new schemes. Here the proportion increased from less than a third (31%) in 2008 to almost a half (46%) in 2009.
For those experiencing difficulties, the vast majority (74%) said increased margins have the greatest impact. Of even more concern is that out of those reporting difficulties, 26% said banks were unwilling to lend. Funding is clearly being highlighted as an increasingly important issue.
Peer pressure
One of the most startling results from the latest survey is the number of HAs which expect other associations to suffer financially over the next 12 months. Three quarters of respondents in August 2008 said other housing groups would face significant difficulties in the next 12 months. This has now grown to 94%.
Although a noticeable number (70%) expect the proportion experiencing difficulties to be less than 10%, almost one third believe the affected proportion will be more than 11%.
The survey also revealed increased levels of concern in relation to the credit crunch’s impact on tenants. Last year two thirds of respondents expected increased rent arrears and bad debts over the next 12 months. This has now increased to 81%.
Commercial developments continue to be hit hard
One of the more tangible results from the credit crunch has been the reduction in the number of associations building new commercial development to help fund social housing projects.
Back in August 2008, just over half (54%) said they were no longer pursuing these opportunities. This has now risen considerably to 78%, illustrating the high risk and the perception amongst senior executives that securing property sales will remain challenging in the near future.
Property sales
The latest TSA quarterly survey indicates that nationally there are over 10,000 unsold units. These well documented problems with property sales were also highlighted through our study where 81% of respondents indicated that shared equity scheme sales had become increasingly difficult in the last six month, (2008 survey 69%) with 84% having converted properties to alternative use.
Our empirical evidence supports this, with many associations converting previous shared ownership properties to temporary rentals.
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It was clearly noticeable in our previous study that some associations had responded to the economic environment by implementing wide ranging changes to their organisation in terms of risk planning, forecasting, recruitment and reducing spend in large scale IT investments.
This has continued. In August 2008, 86% claimed to have revised forecasts in the light of the credit crunch. This has now increased to 99%. 12% reported that they had still not conducted a risk review in light of the credit crunch.
Though it’s surprising that this figure is not 100%, it’s still ahead of risk strategy reviews where 12% of HAs have still not taken action.
Cutting costs
Cost cutting has continued to move up the agenda of social housing senior executives compared to nine months ago.
65% of respondents last year had not started cutting costs in the light of the credit crunch. More recently however, almost the same proportion (61%) has now taken action in this area as a result of the impact of the credit crunch.
Different associations appear to be reacting in different ways with organisations considering or already implementing a broad range of initiatives.
The introduction of new technology and general organisational restructuring continues to score highly. The proportion that have put recruitment on hold now stands at 32% with 18% saying that they have considered or implemented a redundancy programme.
Although the statistic of less than one in five may appear low compared to the private sector, it does tally with Baker Tilly’s RSL Back Office survey conducted earlier this year. Here we found 22% of housing associations looking to reduce staff in departments such as IT, finance and HR.
Maximising opportunities
Our latest survey certainly reveals a willingness amongst senior executives to adapt to the fast changing economic climate. In fact 87% believe the present climate provides opportunities for their organisation.
60% said they are purchasing excess stock from developers and just under half (49%) claim to be acquiring land and property. 51% of those responding yes, said they are also seeking some form of strategic alliance and 79% said that they expected to see an increase in the number of mergers or takeovers in the social housing sector.
20% are actively looking at merger & acquisition activity.
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Like our previous survey, this report provides an interesting overview of how social housing organisations are shaping up to the impact of the credit crunch.
On one hand, there appears to be a number of concerning issues. The proportion of associations that believe the credit crunch will affect the sector has risen to 96% and expectations for a full economic recovery have lengthened considerably. HAs appear to be experiencing more problems than they were nine months ago when dealing with banks, whilst over 90% think their peers will suffer significant financial hardship in the future.
Cost-cutting and other restructuring programmes are however now in full swing and the vast majority of the senior executives have revised their risk strategies and financial forecasts.
Though the number of redundancies does appear relatively low, most organisations do seem to have drawn up tailored survival plans which include a broad range of initiatives. These include implementing new technology, the formation of strategic alliances and the redistribution of effort away from commercial development. The fact that nine out of 10 associations believe the current climate offers an opportunity for their organisation should certainly be viewed positively.
The sector as we know is highly dynamic and has responded successfully in the past to what has been a fast changing economic and regulatory climate. This survey indicates that the sector is continuing to rise to the challenge.
Associations can’t afford to be complacent however and over the next 12 months they must continue to work hard to regularly review financial forecasts, assess risk, keep an open dialogue with bank, and take advantage of the right opportunities when they present themselves.
Quite simply, associations that remain alert and operate proactively will be in an even stronger position for when the economy eventually does recover.
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The social housing sector is not immune from the effects of the credit crunch, and those challenges and opportunities can bring their particular issues. Senior executives must therefore take a structured rather than knee jerk approach. In the light of the findings of this report we have updated our credit crunch action plan to help Associations take account of the developing market.
Focus on the now
- Increase emphasis on credit control – the timely collection of rents will increase cash flow and reduce likelihood of bad debts.
- Examine discretionary spend – taking actions now to identify discretionary spend will allow more flexibility in the future.
- Cost reduction – review cost reduction targets and accelerate strategies.
- Review tax and VAT opportunities – implementing alternative strategies are likely to lead to changes in the
- treatment of tax and VAT. Ensure your tax position is maximised.
- Review covenant compliance – confirm and monitor all covenants. Review in the light of revised forecasts
- and sensitivities and if covenants appear tight, explore options now. Be prepared.
- Confirm banking arrangements – avoid surprises and act promptly. Involve lenders at an early stage. Do expect pricing adjustments for new loans and build into your plan. Review property valuations to assess bank cover.
- Asset strategy – review asset strategy and business appraisal techniques in the light of the changing environment, for example property sales v alternative uses, updating valuations, etc.
- Management and Board Skills – does the management team and board have appropriate skills to deal with current issues? Is training and external advice needed?
- Avoid complacency – Complacency is not an option as the sector is not immune to economic pressures.
- Circumstances are changing fast and the political environment looks likely to change over the next 12 months. Plans and strategy should be considered now.
Focus on the future
- Review financial forecasts – remember this is an ongoing process. Reassess assumptions and sensitivity to take account of changing circumstances.
- Review risk maps – regularly review and update risk strategy in line with changing environment and conditions.
- Review business plan – this is a working document, review and update actions to meet changing conditions.
- Opportunities – be proactive and not simply reactive in identifying opportunities. Ensure you evaluate them
- carefully as choosing the wrong one can tie up valuable cash resources and prevent more appropriate opportunities being undertaken. Be ready now for future opportunities.
Download full analysis of how the credit crunch is affecting social housing (PDF - 4mb)