Boards must remain utterly focused on managing their risks

Managing these challenges requires the sector to stay utterly focused on risk management and underlines the importance of good governance.

This is not an environment in which boards could avoid all risks – it is about understanding the risks they are taking and having the skills to manage them.

Our experience, over many years, of organisations that get themselves into trouble is that the boards were often well meaning but didn’t understand the financial or operational risks they were facing. In current conditions, weak governance and groupthink will quickly be found out.

Our recent inspection work and analysis of private registered providers’ financial position shows that many organisations are managing these risks effectively and delivering both investment in stock and much-needed new homes.

Capacity to build

However, as we have flagged before, the situation in and around London is more challenging in terms of delivery. And, while there is no simplistic ‘London versus the rest of the country’ divide, it is clear that many providers outside of London currently have more capacity to deliver new homes.

However, it doesn’t matter where you are based as a provider or whether you are a not-for-profit, a for-profit or a council, it remains uneconomic to deliver new social housing without subsidy. This is because the rental income can never support enough borrowing to fund the construction of the property.

Ever since the financial crisis, the delivery of new social homes has been subsidised by a combination of resources generated by the RP (often from commercial activity), government grants or planning gain.

In the current economic environment, all of these sources of subsidy are insufficient on their own to make the development of new homes viable.

As providers have been putting together their business plans for 2025-26, they have needed to make judgements about how much each of these sources of subsidy will give them.

On each of them, events this year will hopefully provide greater clarity about how much they can support new supply. The Spending Review will help clarify the availability of grant in the future and the passage of planning reforms will help with planning gain.

The provision of internal subsidy from elsewhere in providers’ business will be more complex to determine. Some of this will be shaped by the final rent settlement and confirmation by the government on issues such as Awaab’s Law, the revised Decent Homes Standard and the Competency and Conduct Standard.

For some organisations (especially in London), the issue of the pace, complexity and financing of building remediation will also play an important role.

There is also no doubt that macroeconomic factors such as inflation and interest rates will also play a part in determining the free cash flow generated by the providers.

While all of these factors impact the cash flows available for new supply, the role of boards and executive teams should not be underestimated.

Clearly articulate risk appetite

Organisations that have a good grip of their cost base, a thorough understanding of their risks, a clear articulation of their risk appetite and a robust approach to risk monitoring and mitigation will be in a much better place to deliver more new homes for people who need them.

These are significant challenges for boards, at a time when there is also rightly a focus on the quality of existing stock and services to current tenants.

Our Global Accounts showed that the last financial year saw a record £8.8bn invested in existing stock and a post-pandemic record of £15bn invested in new homes.

These record numbers are going to be hard to maintain without boards remaining utterly focused on delivering their mission and managing their risks.

The sector has proved itself remarkably resilient in the past 20 years and as long-term businesses we are sure they will demonstrate that resilience for the next 20 and beyond.

Jonathan Walters, deputy chief executive, Regulator of Social Housing