Landlords face ‘difficult decisions’ to ensure financial resilience, regulator warns

Finance and compliance

The RSH said that providers will face difficult trade-offs that will need to be communicated transparently and appropriately to stakeholders.

Providers’ cost of borrowing is expected to increase, the regulator said, while they face the prospect of a tighter rent cap. 

The RSH said that rapidly increasing interest rates and declining real household incomes increase the likelihood of a material housing market downturn and these factors will inevitably weaken financial performance and reduce capacity to manage downside risk.

It said that providers are now implementing mitigation plans to ensure continued delivery of strategic objectives as far as possible while maintaining viability.

The RSH warned that as boards make choices on priorities, they will need to continue to undertake stress-testing to be able to maintain mitigation plans that remain robust to possible future shocks.

The regulator said that boards must ensure that appropriate treasury management and governance processes are in place to effectively monitor existing loan covenants to mitigate the risk of breaches.

It said that providers should act early to communicate with lenders, including seeking waivers where essential safety works might threaten covenant compliance.

Development and maintaining existing stock

The report said current high inflation, skills shortages and supply chain disruption continue to increase the costs of development, while declining household incomes and rising interest rates raise the risk of falling house prices and slowing sales.

The regulator said that providers will need to consider carefully how to assess and prioritise investment in new development, ensuring that investment appraisal approaches remain up to date, and projects are tightly managed.

Boards must use accurate, up-to-date and robust data to ensure they understand the condition of their stock, the regulator said. 

Delaying investment in existing stock could increase cost pressures over the long term and damage the sector’s reputation, the regulator warned.

The sector has faced a wave of negative media coverage over the past 18 months, partly after ITV uncovered appalling conditions being faced by some social housing residents. 

As part of post-Grenfell reforms, the government is giving more powers to the RSH to improve conditions for tenants. Among them are new ‘tenant satisfaction measures’.

However the RSH said it is “essential” that boards do not wait for the introduction of the measures. It said they should embed the systems and processes that will allow them to meet the new data requirements and improved outcomes for tenants.

Fiona MacGregor, the RSH’s outgoing chief executive, said: “Providers must take a strategic approach to managing the significant risks we have identified in our Sector Risk Profile and act appropriately to maintain their continued financial viability.

“Boards and councillors are the custodians of people’s homes, and it’s absolutely vital that tenants’ homes, safety and the delivery of essential landlord services are not put at risk.”

The report also highlighted the risks associated with private investment in the sector and how properties are managed. 

The regulator said that private investment has allowed some providers to grow rapidly, but that this funding has the potential to be more expensive than debt.

“Furthermore, rapid growth can heighten the risk that managerial capacity may not keep pace,” the report said. “Several for-profit providers have recently been established with tightly defined roles within wider corporate structures, with no staff and most business functions outsourced.”

It added: “It is for boards to assess the risks associated with any new types of funding they take on. Boards must ensure that there are no potential conflicts from the influence of funders over strategic direction and that the board remains appropriately independent.”