How should housing providers tackle interest cover challenges?

Although some funders are currently able to offer only time-limited interest cover covenant amendments – often where the term of the debt significantly exceeds the required spend – some associations have also been negotiating specific carve-outs for other categories of spend, such as fire remediation work.

Funders are also supporting the sector through amending other funding terms. A recent example includes the government backing an amendment to the Affordable Homes Guarantee Scheme allowing up to 50 per cent of funds raised for existing asset investment – with the remainder used to fund new developments.

We know that funders are looking at new facilities for providers to support the impact of significant capital spend for no additional income, however, the sector is also repositioning itself and looking to alternative options to address these issues.

Some recent mergers have involved rationalising assets to enhance geographical concentration – but also where investment in existing assets is less economically viable – and have also focused on strengthening financial viability rather than increasing capacity to develop more homes.

In this current climate, and as the National Housing Federation has rightly been pushing, certainty is needed for managing competing priorities to ensure providers can continue to build much-needed affordable housing and retain the development skills needed for the future. This could be through either a longer-term rent settlement or a differentiated rent settlement linked to improvements in homes that could alleviate the cost of living of customers to give social landlords, credit rating agencies and lenders greater assurance. 

Despite sustainable funding being a pivotal step in the journey to net zero, we haven’t yet seen the sector reap the benefits of this work – with most borrowers using a use-of-proceeds approach due to the costs and challenges with monitoring and reporting against sustainability indicators. 

Moving forward, should a pragmatic and consistent approach to reporting be found, providers may begin leveraging these frameworks, especially when funding investments in their existing homes.

Several major investors have launched for-profit registered providers, enabling them to own new and existing social housing assets. So far, this has had some relative success but has not plugged the gap created by the reduction in development brought by the sector.

High-quality data will also be beneficial and will no doubt play a key role in improving the sector’s financial position, as well as overarching strategic decision-making. 

Boards must be able to explain how they are allocating their resources and adding value to key stakeholders and demonstrate how well they understand their existing homes, using data from stock condition, building safety and decarbonisation surveys.

This is a critical piece of work that should be supported by collaboration and strengthening internal links between treasury, asset management and development teams to ensure all contingencies are planned for and a clear picture of the organisation is articulated for lenders, rating agencies and the regulator. 

Treasury advisors can be beneficial in supporting teams to take a more joined-up and considered approach to managing future investment. From advising on shadow credit ratings to delivering a measured financial plan, having a clear and informed financial narrative is the key to ensuring providers can continue navigating a challenging economic climate and delivering on their mission.

Organisations that prevent siloing their key service areas and instead focus on embedding a more holistic approach – with teams working in tandem with one another – are more likely to deliver against their core purpose and maximise their financial capacity.

James Tarrant, director, Savills Financial Consultants