English regulator warns sector’s financial headroom leaves ‘very little margin for error’

Boards and councillors “need real skill and judgement”

 

The RSH said that boards face increasingly difficult decisions as they navigate carrying out “much-needed” improvements to existing homes and delivering hundreds of thousands of new social homes, with reduced financial capacity.

 

“Boards must maintain a real clarity of purpose to successfully navigate these competing demands while remaining financially viable,” Ms MacGregor said.

 

While the financial pressures on local authorities are different, the non-financial risks and challenges that they face are very similar to those of housing associations and other private registered providers, the report said.

 

“Boards and councillors will need real skill and judgement, underpinned by the right information and the willingness to provide effective challenge, if their organisations are to continue delivering for current and future tenants,” the RSH said in the Sector Risk Profile.

 

Financial viability

 

The RSH said that while the private registered provider (PRP) sector (representing housing associations and for-profit registered providers) continues to retain many sources of financial strength, including a strong liquidity position, its weakening financial position has “continued to intensify”.

 

Last year, and for the first time since 2009, the cost of servicing debt exceeded net earnings. In aggregate terms, forecast PRP sector interest cover over the next five years is just 111 per cent, according to the Sector Risk Profile.

 

The report showed that the “strongest financial pressures” are seen in London and other urban areas where large numbers of flats need building safety work.

 

“Landlords are taking action to manage viability risks, including deferring uncommitted development and arranging loan covenant waivers,” the regulator said.

 

“However, reduced financial headroom reduces the capacity to manage downside risk and increases the risk that a governance failure leads to financial distress.

 

“PRP boards need a strong internal controls framework and a thorough understanding of where risk sits within their organisation and can flow around their group structure.”

 

The RSH added that it will continue to engage closely with landlords where its analysis suggests that financial performance is weak and reflect this in regulatory judgements.

 

“Where a landlord identifies a potential problem with, or threat to, its viability we expect it to give us early warning,” the regulator said.

Tenant safety

 

The RSH said that fire safety remains a “key priority”, particularly in multi-occupied medium and high-rise buildings.

 

The Grenfell Tower tragedy highlighted the potential catastrophic impact if these risks are not addressed, and the importance of remediation being “completed at pace”, the regulator said.

 

Following the publication of Phase 2 of the report, the RSH urged all social landlords to read and learn from the findings that apply to them.

 

While the sector has made good progress on completing required risk assessments, around a quarter of buildings with identified life-critical fire safety defects either have no, or unclear, plans for remediation.

 

“Boards and councillors must ensure that landlords are taking prompt and effective action so that tenants’ homes are safe,” the RSH said in the Sector Risk Profile. “Where work will take time to complete, landlords should be taking interim measures to keep tenants safe.”

 

Speaking at the Labour Party Conference last month, housing secretary Angela Rayner said that the government will bring forward a new remediation action plan this autumn to “speed up the process” of tackling unsafe buildings.

 

Ms Rayner also said that Awaab’s Law, which would see strict new deadlines for landlords to tackle repairs, will be introduced in the autumn. 

 

In its Sector Risk Profile, the regulator said that boards and councillors should ensure they seek to understand tenants’ needs and take these into account when assessing the risks from damp and mould.

 

Service delivery

 

Boards and councillors must also make sure “strong governance arrangements” are in place to oversee service delivery and achieve the outcomes set out in the new consumer standards, the RSH added.

 

This will include collecting and reporting “robust and accurate data on performance”, including tenant satisfaction measures data.

 

It warned that providers will need to actively manage the ongoing risks from cyber security threats to ensure continued delivery of essential services.

 

“We know from our casework that landlords have room for improvement when it comes to engaging with tenants in a meaningful and impactful way,” the RSH said.

 

“Boards and councillors must take tenants’ views into account in their decision-making and let them know how their views have been considered.”

 

Alternative funding models

 

On alternative funding models, the RSH said that it is for boards to assess the risks associated with any new types of funding they take on.

 

“Where landlords are entering into partnership arrangements, boards must ensure that they are entering into agreements with an appropriate funding partner, ensuring that goals are aligned and that there is clarity about how a partnership may dissolve if necessary,” the RSH said.

 

“Boards must ensure that there are no potential conflicts from the influence of funders over strategic direction and that the board remains appropriately independent. Boards must also understand how governance and risk flow within wider corporate structures.”