How being proactive can build financial resilience for housing associations

As well as employing all the usual prudent measures to reduce costs, mitigate financial risks and protect funding lines, housing associations need to think outside the box and consider alternative sources of funding. The scale of the financial problems facing the social housing sector is unprecedented, and staying financially viable has become extremely challenging for some.

As not-for-profit organisations, housing associations reinvest any surpluses they make, which includes investing in retrofit or repair programmes and new development projects.

However, with rental income falling in real terms (due primarily to higher inflation, and the cap on rent increases rising by just 2.7 per cent last year), many housing associations have found it challenging to cover costs.

There has been some good news with regard to rent increases recently, however. The government confirmed that the cap of the Consumer Price Index (CPI) plus one per cent will last for the next 10 years, bringing greater financial certainty for RPs.

At the same time, regulatory demands are increasing, and housing associations must find the money to carry out retrofit programmes and improve the quality of their housing stock.

Many have also had to invest in upskilling or hiring more staff to ensure they can respond quickly and efficiently to the requirements of Awaab’s Law and other new and imminent legal and regulatory requirements.

Rather than halt new development altogether, many housing associations have scaled back their plans or paused projects to focus on making improvements to existing stock.

To save costs where they can, rather than looking to refinance existing loans with new lenders, they are taking a pragmatic approach by reviewing existing loan facilities and opting to amend or extend them wherever possible.

In the current economic environment, when considering how to approach their loan portfolio, it is sensible to take the course of least resistance. Depending on the relationship, for example, it may be possible to refinance an existing loan with the same lender. Hopefully this will be at a lower margin, but even if it is not, keeping the loan with a lender with whom a housing association has a good relationship can prove invaluable.

In other instances, it might be cost-effective for housing associations to break long-term, fixed-rate loans and refinance them, perhaps with a new fixed-rate loan and perhaps with the same lender. This is more common than you might think.

A growing number of housing associations have pursued carve-outs to their existing financial covenants that will allow them to invest in major initiatives, such as fire safety, decarbonisation or stock improvement projects, without breaching (or getting close to breaching) financial covenants.

A key area of concern for housing associations is interest cover covenants based on EBITDA MRI, which were agreed with lenders/investors at a time when the financial pressures on the sector were very different. While some lenders are willing to strip away the MRI element altogether, others are taking a more cautious approach, removing it for a limited time only.

Loan arrangements agreed with non-bank lenders, such as insurers and pension companies, may be harder to amend, as these institutions have less flexibility. But our clients are having success in agreeing amendments to historic private placements, even if it takes longer to put into place when compared with standard bank scenarios. 

While it currently makes sense to restructure and/or amend existing loan arrangements where possible, many housing associations also need to raise finance to deliver new housing developments and meet new regulatory requirements.

Without access to grants in the short term (until the SAHP comes online) and little wriggle room over rent increases, the money to invest must come from somewhere, and alternative ‘non-standard’ sources of finance could provide a solution.

The announcement of the creation of the National Housing Bank as a subsidiary of Homes England, and £2.5bn in low-interest loans from the bank to support the building of social and affordable homes, is really positive and will hopefully be part of the solution.

Before pursuing a refinancing deal, decision-makers should seek the advice of their treasury advisors to ensure, among other things, that they are getting the most appropriate product at the most competitive price and on terms that work for the organisation. The answer may not always be standard secured bank debt.

As a demonstration of good governance, a review and update of the business plan and budgets with advisors should be carried out annually to ensure the treasury strategy for the year ahead is financially viable. As part of that exercise, the strategy should be stress-tested against various worst-case scenarios to ensure the organisation can weather any potential challenges.

Treasury advisors can also provide support in other ways by leveraging their good relationships with lenders and/or investors, which can improve outcomes when refinancing options are discussed and agreed.

Over the past six to 12 months, there has been a significant increase in the number of new products coming to market, including National Wealth Fund-backed loans for retrofit projects provided by lenders such as The Housing Finance Corporation, NatWest, Lloyds and Barclays. Now we also have the announcement of the National Housing Bank.

To protect their financial stability in a challenging climate, housing associations need to make the most of their existing banking arrangements, but stay open-minded and consider all the funding options available to them.

Collaborating with other housing associations could bring economies of scale and might reduce the overall investment needed to deliver new housing developments.

Taking advantage of off-balance-sheet finance options to fund development and retrofit projects may also make sense, and it is possible that such schemes could be applied more widely in the future.

Jon Coane, partner and head of funding, and Michael Nutman, senior associate, Anthony Collins