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Compared with last year’s forecasts, anticipated development is 36 per cent lower in the current financial year and 13 per cent lower next year (2021/22).

In particular, providers have made “substantial reductions” of around a third in forecast development for outright sale and market rent over the next five years, compared with 2019 forecasts. But expectations for low-cost homeownership are less affected, recovering to a level comparable with 2019 forecasts from 2021/22 onwards.

Low-cost homeownership and outright market sale make up a significant proportion of the sector’s current development programme, accounting for 40 per cent of homes planned for development over the next five years, with market sale concentrated in a relatively small number of providers.

In 2019/20, private registered providers were responsible for the development of 56,000 new homes, of which 49,000 were for sub-market rent or low-cost homeownership. Providers forecast the development of 356,000 new homes over the next five years.

The regulator notes that while the forecast reduction in development for sale could reduce the level of sales risk to which providers are exposed, simultaneously sustaining forecast levels of investment in new and existing supply is likely to put “increased pressure” on other funding sources.

Some providers have forecast that they will continue previously planned volumes of development for rent by replacing foregone sales receipts with increased levels of debt. This, the regulator notes, “will increase the importance of effective treasury management”.

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 says. 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 says.

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.”


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