Welfare Reform – “Just how much will it all cost?”
The government’s Welfare Reform changes will begin to affect all housing organisations from April 2013 when the bedroom tax and housing benefit cap are introduced. The impact will continue to increase well into the future until all affected tenants have been transferred to the proposed direct payments system.
Most organisations have already reflected the reforms within their risk registers and have identified a number of repercussions on their on-going businesses. However, now is the time for all Chief Financial Officers to ensure that their long-term financial models, which underpin the organisation’s business plans, are reviewed, updated and, most importantly, tested for these important changes. This will then provide executives, boards and regulators with a view of the organisation’s forward financial position and the main risks to its financial health.
If you are involved in this process, either updating the model or considering the results, then you may want to consider the following:
Rental income – will the imposition of housing benefit caps mean an internal review of rental levels, especially for three and four bed-room properties? Will this change the valuation of those properties and, possibly, prompt a recalculation and reduction of target rents?
Rental arrears – do you really know what percentage of your tenants are receiving housing benefit and how many of these are under-occupying their properties? Up-to-date tenant profiles will allow you to model how much housing benefit your tenants may lose which will then inform your assumptions for the potential increase in rent arrears.
Bad debts –the cap on bedroom size, as well as the move to paying HB direct to tenants, will alter bad debt levels. Do you have the information to estimate the impact and have you modelled this?
Void properties – are you anticipating an increase in voids levels for stock with rents higher than benefit caps?
Future cashflows – direct payments will gradually alter the cash inflows to the organisation as more payments to tenants are made in arrears. What assumptions are you making to re-profile your cashflow? Have you tested the possibility of a government IT system collapse which could mean a one-off requirement for additional working capital?
Housing management – has your organisation developed a Financial Inclusion Strategy? Do you envisage supporting your tenants with benefit counselling or debt management services? These tenant support skills will be in demand and are likely to attract premium remuneration.
Loan covenants – increased arrears and voids assumptions will gradually decrease interest cover ratio levels while any reductions in property value will affect asset cover ratios. How do your predicted levels compare to those covenants agreed with your lenders? Also, pay particular attention to any loan covenants that are cashflow based. This is not an exhaustive list of financial modelling issues but should be your “starter for ten”!
Susan Kane can be contacted on 07870 685 891, email: email@example.com
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