Sector Risk Profile: RPs forecast ‘substantially lower development’ and more debt to replace sales receipts

Debt and new finance

 

Providers are forecasting a “historically high level” of need for new debt facilities over the next five years, at £41bn, the report shows. It highlights that this increased reliance on debt within business plans is underpinned by “assumed continued low interest rates in forecasts”, and warns that “should rates move higher, the sector’s financial performance and ability to service debt would weaken”.

 

As at September 2020, the sector has agreed £111bn in debt facilities, with £83bn of this debt drawn and repayable.

 

A combination of a stepping back from non-social housing activity, including market sales, and projected “significant increases in spend on existing stock”, will see EBITDA MRI interest cover levels suppressed over the next five years, the report said. The latest forecasts indicate that the aggregate cover for the sector over the next five forecast years is 165 per cent, compared with 181 per cent in 2019, the report said.

 

The regulator said that this tighter interest position will increase the importance of effective monitoring of existing loan covenants to mitigate the risk of covenant breaches.

 

On new funding and financing options, the regulator emphasised that it does not favour any particular approach over another, but expects to see evidence that a critical assessment has been undertaken, with the use of “independent, impartial, specialist external advice as appropriate, especially when considering innovative and/or complex funding structures”.

 

The report said: “Boards will need to manage relationships with investors and lenders and manage counterparty risk, particularly where long-term debt may be sold on to other parties.”

 

More broadly, the RSH cautions that with credit ratings in the sector clustered in the low single A band, weakening operating performance risks feeding through to falls in provider credit ratings, as could further falls in the UK sovereign rating.

 

“Falls in provider ratings, especially into low investment grade or further, could see decreased investor appetite resulting in upward pressure on margins, or changes in the range of potential ratings,” it said.

 

Managing risk

 

The Sector Risk Profile also referred to the opportunities posed to the sector by ESG. “The current high demand for ESG investments and increasing prevalence of ESG reporting standards has the potential to further increase the range of funders available to the sector and lower costs.

 

But it noted: “ESG-based lending and reporting will bring new stakeholders and accountabilities to providers.”

 

And it highlighted that the sector must work hard to safeguard its reputation as it faces the need to make “difficult choices as to its future direction and purpose, which will require effective strategic-level control and risk management”.

 

“Failure to make, justify and manage these choices effectively could have profound consequences for the sector’s reputation and viability and the experience of current and future tenants,” the regulator said.

 

These strategic decisions centre around the balance providers must strike between “essential ongoing investment in the existing housing stock” and contributing to new supply.

 

It added: “Providers’ stock is a long-term asset and boards will need to ensure it continues to meet evolving stakeholder expectations, in particular with regard to building safety and energy efficiency.

 

“Failure to provide accommodation that is safe and of appropriate quality or to effectively respond when issues relating to stock quality arise can result in significant consequences for tenants, as well as having substantial implications for the trust and confidence that tenants and other stakeholders have in their landlord and a provider’s reputation.”

Operating risk

 

The regulator noted that following the immediate economic impact of COVID-19, rent collection rates reduced to 97.2 per cent in the first quarter of 2019/20 – the lowest level recorded since income data was first collected in 2013. These recovered to 98.3 per cent in the second quarter, but the regulator warned of “potential for further pressure on arrears” from tenant unemployment and reduced incomes over the next few months.

 

Elsewhere, the regulator warned that all registered providers must ensure they monitor and manage counterparty risks, including the concentration risk of entering into significant contracts, whether around construction or landlord services.

 

Referring to for-profit providers, the regulator noted the trend for these to be “constituted primarily as funding vehicles” with most functions outsourced. It emphasised that boards of such providers “should be aware they have the same landlord responsibilities as any provider and ensure that they own and manage the associated risks”.

 

The warning comes after the government’s Social Housing White Paper, published last week, announced new economic regulatory powers to be introduced through legislation, which would help the RSH to better “follow the money” on third parties.