Crunch Time for the Social Housing Sector

Transcription

1 Crunch Time for the Social Housing Sector September 2008

2 Contents Page Introduction 1 1. The state of the economy and Government Housing Policy 2 2. Social Housing feels the Crunch 4 3. Warding off the storm RSL defence strategies 6 4. Conclusion 8 5. Our Advice 9 6. Baker Tilly in the Social Housing Sector 10

3 Introduction Welcome to Baker Tilly s Registered Social Housing (RSL) Credit Crunch Survey. Over the past few months our social housing clients have increasingly been raising the issue of the tightening credit situation following the recent credit crunch and its significant ongoing consequences for their organisations. In order to understand more fully what impact this is having on the RSL sector, we undertook a survey in August 2008 to establish the perceptions of senior RSL executives on the topic and how it is directly affecting their organisations. We also wanted to see the steps Boards are taking to adopt their organisation to a rapidly changing and uncertain economic climate. We were pleased with both the volume of replies and the senior level of executives who responded to our survey. Over 80% of the respondents were in senior positions, with over 50% of the responses coming from finance directors, representing a range of RSLs covering Large Scale Voluntary Transfers (LSVTs) and Traditional Housing Associations. The majority of respondents came from mid size RSLs with 5-10,000 housing units, with a third having 10-20,000 units. In the following pages we examine the perceptions/trends and take a view on some of the results we have found, as well as providing information for you to benchmark your views against your peers. In summary, our survey will show that you are optimistic that the economy will recover in 2009, however you believe the housing sector is feeling the crunch and RSLs acknowledge this by the fall in sales and prices, and by not pursuing commercial development opportunities. With long term lending facilities in place most of you are avoiding the current difficulties in obtaining finance. Of significant concern is the fact that 75% of you think RSLs will encounter financial problems in the next 12 months, yet a third haven't looked at risk management controls or started any extensive cost cutting. We believe it is too early as yet to assess whether the recent measures announced by the Government will significantly help alleviate the pressures besetting the social housing sector. Please feel free to contact me, or your local RSL contact, if you would like to discuss any of the issues this survey has highlighted. Gary Moreton Partner, Chair - Social Housing Group Baker Tilly Tel: gary.moreton@bakertilly.co.uk Social housing website: 1

4 1. The state of the economy and Government Housing Policy Predictions for recovery Although volatility in the global economy altered the economic outlook for 86% of respondents, most believed the instability will be short lived. An overwhelming 81% thought that rates of growth will recover in the next 12 months. The chart below shows the majority of directors predict 2009 as the turnaround period. When will the economy recover to previous growth rates? However, two thirds of respondents (68%) do not concur with Gordon Brown s optimism that the UK is better placed than other major economies to survive the global credit crisis. Official figures last month revealed the economy had nil growth in the second quarter, with rising expectations that the economy will shrink, matched by the recent OECD prediction that the UK economy was headed for a significant downturn that will put government spending plans in danger. Capital Economics, an economic consultancy, became the first analysts to forecast an annual fall in GDP for Although these predictions are far from set in stone, senior executives should definitely prepare for a slowing if not halting economy. Gary Moreton, Chair - Social Housing Group Some optimism for the Government Even though there were mixed views on the current Government s social housing policy, most respondents were very clear on what the Government should do in the short term. 76% of respondents believe that social housing will remain a priority for the current Government in the run up to the next election. Despite this, 73% expect the Housing Corporation and its successor body, the Home and Communities Agency, only to inject the same or lower funding than at present. 2

5 This could well be based on the Housing Corporation s publicised perceptions that RSLs have spare capacity and should be using internal funds and private finance Peter Howard, Social Housing Audit partner There was some reassuring news for the Government. 88% of respondents did not expect the credit crunch and general economic conditions to impact adversely on repairs programmes and the achievement of 'decent homes' standards by the targeted date. This should provide some relief that the Decent Homes programme is still broadly on track. With regard to short term government policy, 70% of respondents believe it should make additional funds available to allow RSLs to buy hard to sell homes from house builders in an attempt to kick-start the housing market. The government of the day did this to great effect 15 years ago. 3

6 2. Social Housing feels the crunch As the credit crunch unfolded there was widespread disagreement as to whether the storm would be constrained to the financial sector or spill out to the wider economy and even the public sector. The evidence from our survey shows that 78% of respondents consider that the credit crunch has had a significant impact on the social housing sector primarily in the areas of: development of new social housing, sales of new homes at market rates; and shared ownership tranche sales. Interestingly, only about a third (31%) stated that they had encountered difficulties with lenders, either in renewing existing facilities or in securing funding for new schemes. This view is supported by the fact that 76% consider that their current funding arrangements are adequate. This is probably because many RSLs still have undrawn loan facilities or have yet to try to obtain additional finance. Evidence suggests however, that banks are taking a harder attitude when renegotiating with rates being pushed up and/or additional conditions being demanded. David Lewis, Social Housing Audit Partner The chart below shows that most executives consider current funding arrangements to be adequate. Has your organisation considered refinancing as a consequence of the credit crunch? 4

7 Going under - Financial viability of the sector questioned Of big concern is the ongoing financial viability of some of your peers. Respondents appear to have a low level of confidence in the current financial viability of the sector, with three quarters of respondents stating that they expect to see other RSLs having significant financial difficulties in the next 12 months. Coupled with the following, that two thirds of respondents anticipate increased issues over arrears and bad debts over the next year, there are clear indications that the credit crunch will/has impacted tenants and RSLs. This makes for worrying reading for senior management and the Housing Corporation and its successor body, the Tenants Services Authority, as its regulator. The chart below shows increasing concern for financial viability of RSLs. Following the reported collapse of one housing association in the last 12 months, do you expect to see other RSLs having significant financial difficulties in the next 12 months? 75% Yes 25% No In a downturn you must focus on credit control to spot client weaknesses and assess the impact key supplier failure may have. Having identified imminent pinch points, early professional advice is essential to plan the course of the business accordingly. Edward Corrigan, Business Services Partner Commercial Development put on hold as property sales slow One of the consequences of the crunch is that 54% of respondents organisations are no longer pursuing new commercial development opportunities to help fund social housing projects. We believe this is a result of increasing difficulties with selling surplus properties on the open market. 47% of respondents were affected by this and were having to drop prices to achieve sales. In addition, 69% believed that first tranche Shared Equity scheme sales are becoming more difficult due to greater difficulty for individuals in obtaining funding. 5

8 3. Warding off the storm RSL defence strategies If we take stock of the actions being taken, they are primarily in the area of greater risk planning and forecasting, putting a hold on recruitment and reducing spend in large scale IT investments. Forecasting and Risk Management high priority Timely and effective forecasting is essential in understanding your RSLs future position in a slowing economy. This is certainly becoming true for a significant majority of our respondents with 86% saying that financial forecasting is now even more important to their role in light of recent credit crunch developments. In a difficult market, the timely production of management information is vital to understanding and reacting to the trends and opportunities in the sector. Similar robust and accurate forecasts are vital to managing stakeholder expectations and maintaining management credibility. Furthermore, effective working capital management requires up to date accurate information in spotting warning signs early on. Keith Ward, Social Housing Audit Director 67% of RSLs are looking at revising risk management frameworks to take into consideration the availability of finance and the effect of the credit crunch. Treasury procedures and development risks were noted as being particularly important. However, this does mean that conversely around a third of respondents have not yet revised their risk management processes. The chart below shows revising risk management procedures and controls are a key priority. Are you now looking at revising risk management and controls to take into consideration the availability of finance and the effect of the credit crunch? 6

9 The number of respondents looking at risk management and forecasting is a welcome sign. By recognising key risks and managing them as part of a clearly articulated strategy, RSLs are much more likely to maintain stakeholder confidence in your managerial ability and the health of the organisation Chris Lauder, Risk Management Partner No panic to cut costs Most executives reaction when a downturn occurs is to cut costs, usually on resources which do not add value or profitability. However, interestingly 65% of respondents stated that their RSL has not been cutting costs over the past 12 months in light of the credit crunch. For those who are cutting costs, reductions are mainly in areas of: recruitment, restructuring; and implementation of new IT systems. A further 59% stated that they had not found pressure increasing for above inflation wage rises in the past year. It appears that the credit crunch has had little specific impact on additional cost-cutting; we are not sure if this is complacency or because RSLs have already been actively focusing on efficiencies over the last couple of years. In my experience a large proportion of organisations cutting costs may be missing a trick by ignoring more structural cost cutting strategies. Although restructuring and outsourcing can cause disruption to an organisation, it can make a company more flexible and responsive to sector change. Technology investment and process improvement should also not be overlooked, as it can generate cost saving by standardising and automating processes which could otherwise need more costly human resources. Peter Lunio, Associate Director - Management Consultancy 7

10 4. Conclusion The survey results have brought an interesting insight into the way the effects of the credit crunch are perceived within the social housing sector and also evidence of the actions being taken by RSLs. Although the senior management surveyed fully expect the current situation to lead to significant financial difficulties for some RSLs, most are clearly closely guarding the position in their own RSLs by regularly reviewing and updating financial forecasts and internal risk management. The efficiency agenda of recent years appears to have reduced the perceived need for drastic cost cutting measures by RSLs at this stage, but there is still concern over the impact on development, sales (including the viability of shared ownership projects) and on the ability of tenants to keep up with rental payments. The good news appears to be that RSLs expect a recovery to come within 12 months, and since the majority have adequate funding for the present time, most RSLs surveyed were therefore not overly concerned about the apparent tightening of credit, and hardening of attitudes by banks. 8

11 5. Our Advice Our 10 point plan for dealing with the Crunch Senior executives in the sector must take a structured rather than panicked approach to the challenges that the credit crunch may bring. By taking heed of our 10 point plan you can take advantage of the opportunities presented by the market slow down: 1. Forecasting - ongoing review and update of financial projections to provide an early warning of issues. 2. Risk Review - ongoing monitoring and update of risk management and corporate strategy. 3. Credit Control - increase emphasis on timely rent collection to identify and resolve issues. 4. Governance - ensure good governance and communication at Board and executive levels. 5. Treasury - monitor covenants and relationships with bankers generally. 6. Assets - review asset strategy and business appraisal techniques, carefully considering development and sales, including the viability of shared ownership projects. 7. Opportunistic - be ready for any opportunities which could arise at short notice, such as any government initiative over private developer housing surpluses. 8. Advice - ensure you obtain and use appropriate professional advice. 9. Cost Reduction - review cost reduction targets and accelerate reduction strategies. 10. Tax and VAT - review your tax and VAT strategy in light of the changing economic conditions. 9

12 6. Baker Tilly in the Social Housing Sector The social housing team Midlands Gary Moreton Partner Tel: Gary is Chair of Baker Tilly s Social Housing Group and specialises in advising RSL and not-for-profit sectors. He regularly lectures to the sector on financial, governance and risk management issues. Gary has spent the last 15 years advising the sector and has been a member of the Board of a local housing association for some years. His experience includes advising on matters affecting the sector such as strategic and business planning, mergers and acquisition and group structures. South Edward Corrigan Partner edward.corrigan@bakertilly.co.uk Tel: Edward acts for a number of clients in the Social Housing sector. He has been trustee of a registered care home charity in Bristol for ten years as well as a co-opted audit committee member of an LSVT. He is also a member of the District Technical Advisory Committee of the ICAEW. East Peter Howard Partner peter.howard@bakertilly.co.uk Tel: As a Client Service Partner, Peter has extensive experience in the provision of the audit functions in the social housing sector. He is the Internal/External Audit assignment partner for a range of RSL clients across East Anglia. London David Lewis Partner david.lewis@bakertilly.co.uk Tel: David is responsible for the provision of audit and related advisory services to our social housing clients in London and the South. His clients include LSVTs, mainstream RSLs, ALMOs and other social housing providers; their activities cover general housing needs, care and special needs. North Keith Ward Regional Director keith.ward@bakertilly.co.uk Tel: Keith specialises in auditing in the social housing sector. His wider housing experience includes involvement in a number of group re-organisations, merger and due diligence assignments. He is a regular presenter at conferences for the National Housing Federation. Scotland Janet Hamblin Partner janet.hamblin@bakertilly.co.uk Tel: As a Client Service Partner, Janet specialises in the provision of the audit functions in the social housing sector. She is the Internal/External Audit assignment partner for a range of RSL clients across Scotland. 10

13 Technical Philip Brown Director of Social Housing Tel: Philip Brown is a specialist in the Social Housing Sector. He is head of Baker Tilly's social housing technical team, giving specialist advice on audit and accounting issues, having had over 15 years experience of advising and auditing RSLs. Peter Lunio Associate Director - Baker Tilly Management Consultancy peter.lunio@bakertilly.co.uk Tel: Peter has over 15 years of international consultancy experience in a variety of roles and industries. He brings a wealth of both strategic/operational knowledge and expertise in business process improvement in back office systems, benchmarking, change management, project management and outsourcing and advising growth companies. Tax Services Graham Batty Senior Tax Manager graham.batty@bakertilly.co.uk Tel: VAT Services Steve McCrindle VAT Partner steve.mccrindle@bakertilly.co.uk Tel: Graham is responsible for direct tax and has over ten years experience in social housing. A chartered accountant and chartered tax adviser he has advised RSLs, both charitable and non charitable, on a wide range of direct tax issues including group structures, conversion to charitable status and general tax planning strategy. Graham is a member of the technical committee of the Association of Taxation Technicians and a former member of its council. Steve and his VAT team have many years experience of the sector, which they have used to develop a bank of knowledge and ideas that can optimise the VAT benefits and savings available to our clients. He has successfully represented clients at VAT tribunals and has saved significant amounts of VAT for RSLs on matters such as charity VAT reliefs, group reorganisation, property and land transactions. Introduction Baker Tilly is a leading independent firm of chartered accountants and business advisers. We specialise in the not-for-profit sector, where our client base and presence has increased continuously over recent years. We have over 150 social housing sector clients, ranging from traditional RSLs to LSVTs, ALMOs and other specialist housing organisations. We operate a national Social Housing group, comprising some 100 staff, who advise our housing clients. Our social housing group provides training and technical updates for staff and clients, runs seminars and provides technical advice. Our Services Audit We are passionate about providing a thorough and rigorous audit that is designed to deliver a high quality service. Our audit provides assurance to the Board and feedback on risk and governance issues, as well as adequacy of controls. We work with our clients to build effective working relationships with regular contact, so that we are able to help identify opportunities and address potential problems quickly. Risk management RSLs are required to provide financial statements that give a true and fair view of their organisation. To be able to make these statements there is a need for robust risk management procedures. We are able to offer a range of solutions from the facilitation of workshops through to identifying risk, assessing likelihood and impact and developing action plans. We can also assist in reviewing and updating existing and new risks, the embedding of risk management, linking to strategic planning and reporting to the Board/management. Strategic planning We work with clients to assist Boards/management in assessing and implementing changes to existing strategies, as well as developing new ones. We have the experience to work with RSLs to help plan and examine current and future strategies and formulate action plans. Pensions We have a dedicated team of staff who advise on pension issues, including defined benefit and defined contribution schemes. They are on hand to advise and give a second opinion on a variety of pension matters including a review of the effectiveness and appropriateness of pension schemes, advice on pension deficiencies and alternative options. 11

14 What our clients say Baker Tilly has been reappointed our auditors for a second term of office. By working with management and the Board, they have amply demonstrated their proactive support and ability to add value to our company. Their advice is constructive and practical. Paul Field, Finance Director & Company Secretary Sandwell Homes Limited Investment management We are committed to developing long-term relationships with our clients and delivering pro-active, creative advice to meet specific needs. Our approach is to consider the current financial situation and objectives in their entirety, before giving advice on the most appropriate strategy, which will help achieve the best return on your investment. Debt Management Our debt management service includes Individual Voluntary Arrangements. We have worked with RSLs to assist their tenants on debt management, to the benefit of the tenant and RSL. Business Process Improvement There is continuous pressure for the sector to drive through cost savings and improve efficiences. Eliminating unnecessary costs from day-to-day operations is a major part of focus for senior management. Our team comprise staff who have worked in industry, in logistic and process management, who advise clients on areas such as efficiency and effectiveness of systems and processes, adequacy of reporting, control and risk procedures. Corporation tax We have a dedicated charity and social housing tax team who offer a range of innovative and effective tax mitigation techniques, that can help social landlords implement appropriate internal procedures to maximise their tax position. We have advised a number of RSLs to set up group structures and convert to charitable tax status, to minimise their tax exposure. VAT Our expertise and experience in this area can assist providers in reducing the burdens VAT compliance brings. We can ensure that the available VAT reliefs are fully utilised, planning techniques are adopted and compliance tasks are simplified. We provide assistance to RSLs undertaking new projects to mitigate the VAT costs of the project. In addition, we can review current systems to look for opportunities to reclaim VAT that has already been accounted for or not yet reclaimed, to simplify the accounting systems and to provide training to development and accounts staff, so that they will be aware of the relevant issues. Other Services We are able to advise on a range of additional areas including: Group structures/re-structures Due diligence IT Consultancy Board Training and facilitation Marketing Fraud investigations About us 30 UK offices 280 partners Over 2200 staff No.1 Auditor to Top 3000 Charities No.1 Auditor to ALMOs No.3 Auditor to Social Housing Top 500 Over 150 RSL clients What our clients say Baker Tilly have always impressed us with their level of knowledge of the issues facing the sector and the solutions they bring us. Robert Tamburrini, Director North Glasgow Housing Association What makes us different? Our core values in our service Passion to excel - We work with clients to really make a difference Can do attitude - We deliver results and empower people so they are able to deal with clients effectively Respect and integrity - We are robust and honest in our opinion Team work - We work together with our clients and aim to build strategic partnerships on mutual respect 12

15 About Baker Tilly Baker Tilly is a leading independent firm of accountants and business advisers that specialises in providing an integrated range of services. We provide our growing and established business clients with audit, accountancy, personal and corporate taxation, VAT, management consultancy, corporate finance, IT advisory and restructuring and recovery services and our Private Clients with a wide range of advice and support. The firm has national coverage through its network of offices and is represented internationally through its independent membership of Baker Tilly International Baker Tilly UK Group LLP, all rights reserved, 08/08 Baker Tilly UK Audit LLP, Baker Tilly Tax and Advisory Services LLP, Baker Tilly Corporate Finance LLP and Baker Tilly Restructuring and Recovery LLP are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountants in England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. Baker Tilly & Co Limited is authorised and regulated by the Financial Services Authority to conduct a range of investment business activities.