RSH publishes annual Sector Risk Profile amid ‘intensely uncertain environment’

At the start of the pandemic, mean current tenant arrears increased to four per cent, but are now largely at pre-pandemic levels. The regulator warned of potential for increasing rent arrears from government policies such as reduced benefits, rising unemployment as government support winds down, as well as increased energy costs creating financial pressure on tenants.

Rent-setting is an area that the regulator believes the sector is largely complying with successfully. It said: “Overall compliance with rent regulations appears strong for both private registered providers and local authorities, who were required to submit rent data to the regulator for the first time during 2020.”

The RSH also remarked on for-profit providers, which have grown in number since 2015, and private investment in the sector. While private investment has ensured rapid growth for providers, the regulator highlighted that managerial capacity may not be able to keep pace.

“Boards must ensure that there are no potential conflicts from the influence of funders over strategic direction and that the board remains appropriately independent. Boards must bear in mind that they cannot outsource their responsibilities and ensure that they own and manage the risks associated with specific business models,” it said.

The regulator also referred to the media scrutiny highlighting tenants’ housing conditions. It said the Housing Ombudsman had seen a “marked” increase in complaints from tenants in the past year.

“Health and safety non-compliance, poor service quality and issues from outsourced service delivery, poor complaint-handling, incorrect rent and service charge setting, conflicts of interest, and executive pay have also all led to recent criticism of providers including from tenants, councillors and MPs,” the profile said.

Despite disruption from the coronavirus pandemic, development forecasts appear to have settled and 378,000 homes are expected to be developed over the next five years across all tenures. Low-cost homeownership and outright market sales accounted for 39 per cent of properties forecast to be developed over the next five years, compared with 43 per cent in 2019.

The top 10 providers make up around a third of the 111,000 low-cost homeownership properties and half of the 39,000 market sale homes developed by the sector, according to the RSH, while an additional 27,000 joint venture homes are forecast to be developed for market sale in this time.

Providers’ credit ratings are currently grouped in the low single A band, but the regulator warned they are “vulnerable to downgrades” from poor performance or the UK sovereign rate falling. Poor operating performance from providers could see reduced investor appetite that leads to riskier financing products.

The sector’s debt is currently forecast to increase from £85bn drawn and repayable in 2020/21 to £114bn in 2025/26, which is £6bn higher than 2020 forecasts. It includes £47bn additional planned facilities to be agreed over the next five years, standing at £111bn at the end of March 2021. The drawn amount on bond finance by providers stands at £45bn and exceeds the funding drawn from banks.

“More than 70 providers now hold published ratings and while many bonds have more limited covenant suites, providers need to still carefully ensure that these are respected. Failure to manage relationships with lenders or compliance with covenants can threaten financial viability and undermine the achievement of strategic objectives,” the regulator said.

Interest cover in the sector has “deteriorated”, according to RSH, because of remedial safety and fire safety works, backlog in repairs and required energy improvements to stock. Aggregate interest cover is forecast at 161 per cent, down from 181 per cent in 2019. Market confidence in the sector remains high as providers have capitalised on low fixed rates to refinance existing debt facilities.

The risk profile said: “The proportion of fixed rate debt (greater than one year) is 80 per cent in 2021/22, falling to 75 per cent in 2025/26, although this still leaves a significant volume of debt vulnerable to changes in interest rate.”

Fiona MacGregor, chief executive of RSH, said: “Boards and councillors are the custodians of people’s homes, and as society and the economy emerge from the pandemic, the social housing sector faces continuing challenge and public scrutiny.

“Providers need to closely monitor the risks they face, including those we have identified in our Sector Risk Profile, and take strategic action to manage them so that they can provide safe and good quality homes and services now and in the future.”