Delivering new housing: how do we make it happen in 2024?

Posted: 6th March 2024 Michaela Booth, Director of Corporate Finance and Treasury

There has been an ongoing decline in the supply of new housing provision over the last 40 years. With waiting lists for social housing increasing and record numbers of households living in temporary accommodation, it is clear supply is not keeping up with demand.

This is not expected to change, with the 2023 global accounts noting the latest business plans for the sector show 16% fewer homes being developed over the first five years of projections compared to the prior year’s forecasts.

The financial model for the social housing sector has changed

Amidst continuing pressures within the social housing sector, reduced capacity poses a significant challenge to delivering new homes.

In 2022/23 operating surpluses declined by 9% hitting a 16.6% aggregate operating margin. Alongside this, we saw record levels of spending on repairs and maintenance (£7.7bn), without fully factoring in Net Zero Carbon requirements. Regulatory value for metrics and credit ratings suffered (particularly EBITDA MRI interest cover) as a result, alongside some interest cover ratios. Credit downgrades push some providers closer to B rating territory (impacting funding costs) and a shift from V1 to V2 was seen for some.

While the interest rate assumption in business plans was outpaced by reality, the discipline of the regulatory requirement to stress test plans under a perfect storm and to the point of destruction, alongside ensuring mitigations are in place to bring performance back to a viable level, meant many housing associations were able to quickly identify the coming risks as internal trigger points were reached, and swiftly take the actions identified in their plans.

Once again, despite an extremely challenging environment, the sector has proved to be financially resilient and adaptable, even if development aspirations have had to be curtailed or delayed; this is usually part of a mitigation strategy.

Delivering more for less

So how have housing associations been able to keep development going? We have consistently seen the following themes across the sector, and these trends are set to continue:

  • Renegotiating grant payments, minimising the association’s cost of borrowing to fund development.  Alongside access to the Social Housing Decarbonisation Fund.
  • Reviewed areas of operations and services to reduce costs and/or improve margins. Renegotiating contracts where possible.
  • Sales of existing assets – although it should be noted that future works for damp, mould, safety and zero carbon may see reduced values from that previously experienced.
  • Revisiting treasury and investment options (including covenants) and approaches to market
  • Creating partnerships – including joint ventures and mergers. Organisations coming together with the aim to reduce costs and improve capacity to deliver their objectives.
  • Working closely with for-profit providers as a partner and/or managing homes.

It will also likely to be a combination of the above, rather than a single action.

For now, it is important that housing providers thoroughly review their strategies, operations and understand the investment in homes required, including zero carbon strategies.  Finance teams can work to enhance the performance of the treasury portfolio and improve covenants to increase capacity to invest in existing and new homes. And partnerships and merger opportunities that arise are worth careful consideration.

 

We continue to work with our clients across all of these areas to aid the capacity to invest in new homes.

If you wish to know more about the work we are doing, please feel free to reach out to Michaela Booth or the wider Altair team for more information.

 

 

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