How do you like your Brexit? Unscrambled

Joseph Carr sets out how housing providers can safeguard their financial health and turn potential disruption to their advantage as Brexit approaches.

In a world of Brexit uncertainty, there are a few things we can predict with a fair degree of confidence. A disorderly exit from the EU, which in the short term at least will see an economic downturn, will have a significant impact on the delivery of social housing and, unlike some other sectors, it will be impossible for housing providers to pass on much of any additional labour and materials costs to residents.

A Brexit-induced Sterling currency shock is anticipated and would most likely augur sharp falls in house prices and increased inflation and interest rates, presenting a considerable challenge to the social housing business model in several areas.

The good news is that the social housing sector is in rude health, as reflected by the RSH Global Accounts for 2018 – £156.2bn of assets, annual turnover in excess of £20bn and reserves of circa £50bn.

Although some registered providers will fund development programmes from the £23bn already available in cash and undrawn facilities, forecasts suggest that an additional £19bn of debt will be required for future programmes. The sector is regarded as an attractive investment proposition but, in the short term, Brexit is likely to result in less free flow of funds and increased costs.

In addition, would-be purchasers will also face a reduction in the availability, and increased cost, of mortgages. This is likely to impact on the shared ownership and outright sale markets.

Standard & Poor’s suggests that, in response to a no-deal Brexit, it would downgrade the credit rating of 50 per cent of its housing association clients – those with significant exposure to the property market. For some, this may reduce ratings below the investment grade threshold.

A fall in investor confidence in property construction and reductions in the availability of building materials and EU construction workers pose huge challenges for the development of new homes and maintenance of existing stock.

Many registered providers, particularly those in London and the South East, struggle to recruit and retain staff in care roles. There are currently 90,000 low-paid EU migrants working in adult social care. New immigration proposals will not ease these labour shortages and a no-deal Brexit would make the situation more severe.

Local economies are likely to be affected in different ways. For example, large car manufacturers in the North East could be starved of parts and the ability to maintain production levels. Potential significant redundancies, particularly if low-paid housing association tenants are involved, would severely impact the level of voids, rent arrears and bad debts in social housing providers, particularly large-scale voluntary transfers with a very significant local footprint. This could be compounded by the roll-out of Universal Credit.

However, the disruption that will be caused by Brexit presents an opportunity for social housing to reinvent itself, to rethink strategies and processes and to use technology and digitalisation, such as offsite construction and AI, to drive innovation and remove inefficiencies – this should, in the medium term, forestall the worst a disorderly Brexit has to offer. But brace yourself for a bumpy ride.

Key considerations for managing your organisation’s Brexit risks:

  • It is more important than ever to stress-test your business by scenario planning for the worst possible outcomes and developing implementable mitigation strategies for these scenarios. If you have not done so already, consider the likely consequences of Brexit and how they will impact on your business and your stakeholders, including your residents: know what proportion of your workforce and staff are EU migrants and assess the likely impact on local, key employers.
  • Communication and co-operation with other registered providers and key stakeholders, including local authority partners, will be crucial: revisit supply chain structures and plan for inventory time lags, integrate supply chains and transportation, and explore the possibility of joining forces to increase procurement sizes and secure key-customer status with suppliers.
  • Consider whether your organisation can carry larger inventories with reduced variety and lower shipping costs.
  • Many registered providers have already increased their financial liquidity ahead of 29 March 2019 to manage the risk of lack of funds or increased borrowing costs – is this an option for your organisation?
  • Improve the attractiveness of working in social housing for UK construction workers and care providers, by improving training and retention and career progression opportunities – introducing apprenticeships, for example.
  • Work with your trade body to negotiate additional government grant assistance to maintain the supply of new homes, including the ability to switch from homes developed for sale to homes for rent, during a property market downturn.

However orchestrated, the magnitude of Brexit will be too large for adopting a strategy of muddling through with incremental change to be sufficient. It’s been said that the process of unwinding from 45 years of EU membership will be akin to unscrambling eggs; for housing providers, it requires a properly thought-out and sector-wide plan that is well executed, to limit the impact on residents and your business.

Joseph Carr, director, Altair

This article was first published by Social Housing Magazine here.