A man and his son in a room. Social housing providers need to balance demand and sustainability

Investment in social housing set to remain robust despite economic turmoil

David Cassidy shares his views on how 2023 will shape up for a social housing sector that has so far proven resilient to the economic and social headwinds battering the UK.

David Cassidy

Head of Social Housing, Barclays Corporate Banking

Looking back at 2022

With a small handful of exceptions, our social housing clients’ financial health generally remains strong across the sector. They’ve managed to successfully soft-land some substantial development programmes, and some are still committed to building meaningful numbers of new homes each year over the next four to five years. Equally important has been the significant uptick in major repair spending as evidenced in the latest Global Accounts and an increasing momentum and focus on NZC spend.

In other news, our larger clients’ external credit ratings by and large held up, although some of those ratings may come under pressure next year. As possibly a prelude to that, we have seen a large number of regulatory downgrades in late Q4 reflecting the systemic challenges that are affecting all areas of commerce and society – not just our sector.

Turning to rents, the government set the social housing rent cap in England at 7% and although below inflation, this was higher than the 5% or less widely anticipated.

Lastly, like everyone involved in the sector, it was with huge regret that we heard in November the detail in the coroner’s ruling surrounding the tragic death of young Awaab Ishak in Rochdale. Quite rightly, this has sent shockwaves around the sector.

I know many housing associations have reflected on this news solemnly and deeply, have taken stock and are determined to be more proactive, develop better strategies and work smarter to prevent anything like this from occurring again. I think we all recognise the need for associations to increase their neighbourhood presence, stay on top of property inspections and manage their interactions with tenants effectively. There is clearly an operational imperative to make this happen.

The inflation challenge

On to the year ahead, I think we’ll see three key themes impacting the sector: inflation, income and investment.

Rising inflation, along with higher interest rates, will continue to be a challenge through 2023. This will of course impact on repair and maintenance costs for housing associations, as materials, labour, fuel and vehicle fleet operations becoming increasingly expensive. housing associations must plan ahead to ensure they are not complacent on their investment in maintenance.

More expensive mortgages could have potentially negative implications for newly developed shared ownership schemes, with more stretched affordability and purchasers likely to be able to afford smaller proportions at first tranche sale stage.

On the plus side, while staff costs are a significant component of fixed costs, the sector does not feel as vulnerable as some others to inflation-driven wage and salary increases. Also, many housing associations’ still have large loan positions at fixed interest rates for five to 10 years, bringing a level of stability, with only a relatively small number having to renegotiate terms each year.

Rising energy costs and Environmental, Social and Governance (ESG)

The latest Government energy support package will see the Price Cap removed at the end of March for businesses in England, Scotland and Wales, replaced by a new discount mechanism based on wholesale prices. Housing associations and partner organisations are likely to see a rise in costs. In terms of costs for tenants, we expect to see further energy cost support announced post April for the most vulnerable groups in our society.

The sector has already been spending on meeting the environmental element of its wider Environmental, Social and Governance (ESG) aspirations – whether it’s installing double-glazing or cavity wall insulation or bringing forward planned energy-saving and sustainability-related programmes. The majority of our loans to the sector clients are now sustainability-linked.

Any expectations of meaningful state support or grants for EPC improvements are probably unrealistic in the short term, given government spending constraints.

I think organisations will also need to consider the social element of ESG this year. For example, the growing focus on making senior management teams and board memberships more diverse and inclusive requires new and demanding DE&I objectives and targets to be set.

Uncharted waters for income?

Maintaining rent/cash collections during a prolonged recessionary period will obviously be crucial to protecting financial well-being in 2023 – particularly if energy cost pressure continues.

Cost of living pressures will remain this year and whilst the level of arrears is within historical norms, the broader challenges already mentioned add extra layers of concern.

The key factor for housing associations here will be making sure they have a clear strategy relating to rental income, including a focus on effective community and tenant engagement to identify potential domestic problems or changing circumstances early, and providing appropriate support and guidance to those who fall into arrears.

Investment outlook

I expect investment in the sector to continue to be robust over the next year, notwithstanding the demanding economic environment.

Investment in existing stock will be heavily focused on improving EPC ratings, with housing associations and others in the mass residential rental space working hard to identify what they need to improve to meet the EPC ‘B’ target by 2030.

In my opinion, we have the normal range of challenges that exist at any point in time and inextricably linked to the broader economic and social conundrums that confront us. Can the sector continue to thrive? A yes from me as I observe continued financial discipline, prudent controls and an ability to mobilise at pace when systemic issues arise.

We remain fully committed to supporting our social housing clients, whether that be through financial solutions, access to the capital markets, supporting clients on their EPC journey or assisting with community engagement capabilities where we can through initiatives such as our Life Skills programme.

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