Time of reckoning?
Social landlords, during past decades, engaged in sensible commercial activities such as building homes for sale or market rent, to make profits or surpluses. This meant they had substantial reserves enabling them to borrow money comparatively cheaply, and as a buffer to help deal with unforeseen circumstances.
Today the reserves are being used up to deal with safety issues, energy efficiency and a backlog of repairs. The costs of these improvements run to billions of pounds, unsupported (in the main) by grants or help from government. In fact, unbelievably, the private sector has been offered millions for building safety, whereas the social sector has had to use their own depleted resources or borrow at increasingly higher rates.
For the first time since 2009, the cost of servicing debt last year exceeded net earnings. With an aggregate average interest cost ratio of just over 110 per cent, this will be a huge concern in even the strongest associations. So much is going out in interest that associations cannot easily make enough money each year to cover their debts and run the show. It’s dangerous territory that would potentially breach covenants and threaten bankruptcy.
This sorry state has been revealed in the RSH´s annual Sector Risk Profile 2024. While advice is correctly given that boards and management need to manage their resources and risks with great care we have created a dangerous situation for social landlords. More demands are being made by government, regulators and of course residents too that cannot be met within existing resources. Of course boards will not spend what they don’t have, but then this leaves them open to regulatory action and criticism that they don´t care!
The need to sweat the assets and borrow more to build new homes and meet shortfalls has been a government mantra since the 1980s. The significant reserves that associations ably accumulated through legitimate commercial activities were challenged and criticised as being unnecessary at the time.
The chickens have come home to roost.