The use of large up-front fees and disproportionate deposits has already resulted in significant cost consequences for one care provider.
Operating and development costs
At its core social housing is an asset management and home building activity and therefore the cost of building materials is very important. Given that many of these materials will be imported, once current inventories have been exhausted and assuming the pound’s devaluation by the market remains/continues this will affect purchasing costs.
For building materials the key exchange rate is with the Euro. Given the relatively high value of the pound in recent years, the current rate amounts to a 10% devaluation against the 5 year average (average figure includes current rate).
An increase in material costs isn’t the only factor. The building industry relies on immigration for labour and the devaluation may present an immediate reason for a reduction in internal EU migration, which would also increase costs. It is worth noting that some commentators have said there might be a surge in internal EU migration over the next couple of years during the negotiating period. If so that increased immigration would help to offset the effect of the increase in material costs.
The most important impact upon development will be likely reductions in land values and the resultant reduction in ability to offset construction costs against land sale prices. Developers therefore may be well advised to develop now while you can, as it may only get harder in the future.
Another factor in reducing the cost of development will be the combined factors of the reduced share price of builders, reducing their capacity to borrow, and potentially, depending on their gearing, forcing them to give up options or developments especially on more marginal sites. This should present an opportunity for associations to spend their extensive existing funding. We have seen a surge in joint developments with builders; is this the opportunity the sector has been waiting for to make long term joint developments the “new norm”?
The impact on the financial markets will inevitably also affect the funding of defined benefit pension schemes. The fall in share prices and gilt yields, if continued over the medium term, will mean a widening funding gap. This in turn will result in higher employer contributions as schemes look to plug gaps. Where staff benefit from defined contribution pension schemes, the change in the level of their pension pot will directly affect the amount of money available to them to fund their retirement. We may therefore see people delaying retirement, which will in turn impact on career development and job opportunities for the younger members of society. If
so this opportunity won’t be there once the banks and markets stabilise.
The housing sector as a whole has never really embraced “exotic” financing; of course some larger associations will have sophisticated finance arrangements with currency elements but they will hopefully be of a size to weather any current impact.
Since last Friday we have already seen a fall in gilts with yields on government bonds falling to an all time low. The fall in bonds with longer maturities (to which most RP bonds are linked) was less significant.
Whilst this fall will provide an opportunity for housing associations to fix at low rates the flip side is the risk of margin calls on unembedded swaps so ensuring provision is made for this will be important. The fall will also mean an increase in mark to market exposure which could impact on those looking to refinance in the next three to six months as this may reduce capacity to borrow.
Some treasury advisers are warning that the bond markets are likely to be volatile for the next three to six months and therefore those that are planning to approach the capital markets during this period should ensure they have a ‘Plan B’ in place as regards any additional borrowing requirement and their ongoing liquidity.
For those with credit ratings, a lowering of the UK’s credit rating is likely to lead to housing association credit ratings being lowered (Moody’s have today changed the outlook to negative for 42 housing associations and Standard and Poor’s have already downgraded the UK’s overall credit rating from AAA to AA yesterday).
Notwithstanding the above the overriding message is one of ‘its business as usual’ – the sector has experienced most of the above previously and is arguably in a stronger position now to weather such changes. There are no signs of policy changes coming from the main lending banks to the sector and until the markets settle it is to early to say whether there will be any significant changes for housing associations.
Change of sentiment
EIB withdrawal from UK
The EIB did have big ambitions to lend into the UK’s social housing sector. So far it has lent £0.5bn and it has just signed a deal with THFC to lend £1bn. From the EIB’s statements it looks like the THFC deal is safe but the bank has made clear its plans for future direct lending of another £0.5bn, would be in doubt following a Brexit vote. Given the very competitive cost of recent loans from the EIB the departure would be one of (the now many) factors pushing up the cost of borrowing.
Make every effort to avoid breaching EU Grants
We already referenced headline grants in our introduction; certainly if you are in receipt of a current programme EU grant, now is not the time to breach a grant condition. Many might say that the previous attitude couldn’t be described as “understanding” anyway.
EU law remains
Until Britain has formally withdrawn from the EU, it will be difficult for the government to repeal the European Communities Act 1972. The principles set out in the Factortame (cod wars) case, that UK law has to be interpreted in the light of European law, and that damages are available from the state for a breach of European law will continue to apply until the point of exit.
Government policy change
This is the great unknown, especially given the tumultuous year social housing has experienced. As our introduction mentioned, the new Conserative Government (since that is what it will be) may well consider itself released from the manifesto commitments. Here are three areas to consider for the near term: -
Policies requiring expenditure
VRTB was always to be self-financing so providing that continues to be the case VRTB may well be a policy that continues. Other than limited funding programmes on shared ownership and care and support, there are no major funding programmes andsurely the movement now knows it is on its own.
What will be the view of the sector?
What? More change! Can it get any worse? Well if there is an overwhelming need to increase funding due to low tax receipts social housing might be viewed as an easy target. Further housing benefit reductions? A helpful interpretation of housing grants actually being loans and tradable? Worse – given most increased funding options would make ONS reclassification irrelevant – go the whole hog and nationalise the sector taking the opportunity to dispose of all high value housing along the way. At what point would the public say enough is enough?
What is going to happen to deregulation?
So will the deregulation measures in the Housing & Planning Act 2016 be put into force – consents and regulatory changes are anticipated to come into play in September? If they do come in that would inevitably increase interest in non-RP housing trusts (on which see our previous ebriefings here).
The government announced on 16 May that it will provide a fund of £400m to cover the costs of removal and replacement of cladding to high rise residential blocks which have failed tests.
Whilst some people are under the impression that preparing a Lasting Power of Attorney (LPA) is simply a case of completing a form and ticking a few boxes, it is about far more than this.
A big fear for some people facing divorce and the inevitable carving up of the matrimonial assets. They seek assurances that such assets will be “ring-fenced” and retained for them.
Thinking about the legal status of being a cohabitant probably isn’t at the top of the ‘to do’ list.
When an individual is thinking about making a gift to another individual, consideration needs to be given to the Potentially Exempt Transfer (PET) trap.
We are now only a few weeks away from the biggest change to data protection laws in over 20 years. Are you compliant?
The tragedy, in this case, is that there were options readily available to the midwives that they could have used. This was not a case of having to go above and beyond.
Arising from the recent Family Division announcement, people who think they are legally divorced may in fact still be married.
The SCCS has issued providers in the scheme a series of updated and new documents in order to assist with their National Minimum Wage review.
To receive invitations to our events, as well as information and articles on legal issues and sector developments that are of interest to you, please sign up to Newsroom.