How was 2015 for you? I can safely say that the social housing sector and the regulator have never known a year quite like it.
There have been some significant government announcements and some fascinating discussions around board tables as providers get to grips with how they respond to the new operating environment. I wanted to share with you some reflections on what the year has felt like as chair of the Regulation Committee.
I think the best place to begin those recollections is back at the start of the year when we were putting the finishing touches to our new framework. At that point we had no foresight of what was to come in the summer budget, let alone the spending review or the work programme of the ONS. However, we had observed that the introduction of Affordable Rent had seen providers increasing their exposure to market activities and that the surpluses being delivered by many providers were due to cyclical factors such as low interest rates and rising house prices, rather than structural changes in the core business model. We also knew, because government had made no secret of the fact, that there was £12 billion worth of savings to be found from the welfare bill and it was inconceivable this wouldn’t impact on the incomes of many of the people providers house.
We can claim no credit for foreseeing the rent reductions nor the Spending Review move to a home ownership focused development model, but we did know that providers were increasingly exposed to the market and that 2015 would see those trends accelerate.
We do expect the number of providers to be at V2 once we have completed our review of business plans to increase.
It was therefore very important to us that providers were getting ahead of the changes and stress testing their business plans and developing contingencies for a range of possible outcomes.
I am pleased to say that following its 2 year gestation our proposals for stress testing, Asset and Liability Registers and improving board level skills to deal with a more commercial environment were welcomed by the sector. Many providers have already told us that the work they had done to meet these requirements had stood them in good stead for when they had to deal with some stresses for real.
I think it is to the sector’s great credit that it has dealt with the 1% rent reductions and the other policy changes during the year whilst remaining an attractive home for investors to place long term funds looking for a low risk return. It is also pleasing to see that since the budget there has been continued issuance of new debt in public and private markets that has been oversubscribed and attractively priced. Whilst it is certainly true that spreads have gone out slightly on HA debt and some organisations have seen their credit rating downgraded, these have been changes at the margin rather than a wholesale reappraisal of the credit worthiness of the sector.
Having said that, there remain challenges for the sector to deal with. We are currently reviewing all the business plans submitted to us at the end of October and it is clear that providers are planning significant reductions in management costs in order to maintain their margins and to continue to deliver new homes. Whilst it is commendable that providers wish to do this, it is important that they are able to see these plans delivered whilst maintaining the quality of their services and ensuring their stock is kept in good condition. Where necessary, we will be seeking further assurance from providers about how they are going to meet this challenge. It also seems clear to us that in responding to the changes in 2015 and the proposed reduction in income, some providers will have lost some capacity to deal with further changes or risks which arise.
Increase in V2s
In this context we do expect the number of providers to be at V2 once we have completed our review of business plans to increase. It is important to stress here that V2 is a compliant grade and we in no way see it as a negative comment. It does, however, suggest that some businesses are carrying more risk than previously, which seems to us to be a logical conclusion to what has happened in 2015.
So what of the year to come? I think 2 themes will dominate. The first of these is the government’s very clear commitment to increasing homeownership. Next year will see the introduction of the voluntary Right to Buy scheme and the roll out of government’s flagship starter homes and shared ownership programmes. I know from speaking to boards and chief executives that providers are thinking about how best they can support this approach whilst remaining faithful to their, often, charitable objectives and operating within their risk appetite. As a regulator we support the increase in house building, our focus will be to seek assurance that providers are able to manage the risks that come from the developments and can manage their businesses through a full economic cycle.
The second theme will be the government’s response to the ONS decision. As people get to grips with the announcements just before Christmas, it will raise a number of important questions about both the opportunities and risks for providers. As a Regulation Committee we believe that our core work about ensuring the good governance and financial viability of the sector will continue and the changes we set out at the start of 2015 will help us and the sector manage all the excitement that 2016 will bring.
This feature first appeared in Inside Housing on 24 December 2015