SCENARIO TESTING FOR HOUSING ASSOCIATIONS

In a post Covid19 World

In the last few weeks two housing associations have been downgraded and weaknesses in the business plan scenario testing and effective rigour have been sited as reasons.

We can assume that the rational for wanting scenario testing is that the Regulator for Social Housing expects effective, planned and documented mitigation for reasonable risks. Unfortunately in a post Covid19 world the definition of reasonable is likely to remain stretched for some time. The noise from this virus will echo for years to come. The sector must act ahead of its next regulatory submission and continue to prove it is a going concern in the face of once in a lifetime risks materialising. The sector must pull together and demonstrate its skill in navigating this hurdle as a collective.

Here are examples of scenario testing that your housing association should expect the Regulator of Social Housing to be looking out for:

  • Sales risk. Assume no sales for 12 months. The government has advised moves to be postponed for the duration of the lock down and the Minister for Health (Edward Argar) has advised that this could continue for 6 months. Assuming moves don’t happen for 12 months is prudent. There is no reason to assume a switch to affordable rent as often taken in this scenario because that will also require a family to move. Assume sales units completing in the next 12 months are delayed by another 3 months beyond the year as the backlog of sales clears. The market is likely to me flooded for a short time. Assume no staircasing for 12 months as people hold onto their cash whilst there is economic uncertainty. Assume no active asset management sales for 12 months for the same reason.
  • Increase in Bad Debts. Covid19 may impact your residents hard financially. Bad debts may rise steeply until the economy recovers. Some reports state we are already in recession and a typical recession lasts for 18 months (balance.com). Assume bad debts rise by 20% for 1 year. Assume that existing bad debt balances are written off immediately.
  • Cost inflation. Assume costs rise by 10% in 12 months for 2 years before returning to regular rates of inflation. There will be some suppliers and service providers who inevitably go out of business. Economics suggests that fewer suppliers and the same amount of customers will drive prices up for the medium term before new entrants to the market become established.
  • Costs of Employment. HA’s with care or service facing functions / subsidiaries may need to hire staff to cover illness in the short to medium term. Assume a prudent amount of temporary staff cost increases proportionate to the exposure your housing association has to front-line service offerings such as care and nursing.
  • Interest rates return to previous levels. It would be out of character for the Governor of the Bank of England (Mark Carney) to hike base interest rates by more than 0.25% at a time. But these are unprecedented times and the regulator will be looking for prudence. Assume interest rates rise by 1.25% over the next 18 months.
  • Voids. People can’t move. Some affordable, social and market rented products may complete during the next 6 months. A backlog may build up for the sector and your teams. Assume voids increase by the proportionate amount. Enter a minimum of a 5% increase to demonstrate prudence.
  • Service charges. Service charge letters are likely to have gone out a month before the lock down. People may not have gone to the banks to increase their standing orders. People may not wish to change there standing orders in these uncertain times. Assume your service charge collection is 5% lower than what was collected last year on a like for like unit basis.
  • Covid19 Total Impact. Assume all of the above happen to make a worst case scenario.
  • Mitigation. You may need to demonstrate how far you can cut non-essential spend. This may include project works, development, component replacements and other major repairs. It may included contractors and some IT licences. The rent reduction may have focused minds on running lean but the depth of this recession may have to lead to drastic paradigm shifts in operation delivery.
  • Speak to your banks. If waivers are required on years forecast to breach covenants. Entering discussion early is the best policy. Operate a no surprises culture if you can. If you can get waivers in writing, inform the regulator.

If you’d like additional resource in implementing, reporting on and guiding on the above get in touch now. We are experts in conducting the scenario testing your housing association should expect the regulator to be looking out for.

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