De-risking plans to build more council houses

By Bob Hide | 23 April 2020

With local authorities in many parts of the country spearheading the development of more council housing, it is important that they de-risk their activities as far as possible. With a number of future challenges and uncertainties facing the housing sector, horizon scanning could help them to de-risk their funding model and ensure the continuity of social housing projects.

A perfect storm of factors, including the reduction of government grants for social housing and issues surrounding rent affordability and land supply are presenting challenges for registered providers. The Government’s Future Homes Standard, which is due to be introduced by 2025, and uncertainty surrounding Brexit may also present social, economic and political risks which make it more difficult for registered providers to plan ahead.

In regions with a combined authority, such as the West Midlands, registered providers are benefitting from strategic regional guidance for housing provision, as well as access to innovative funding models. Nevertheless, to stay competitive at a time of increased demand for social housing, it is vital that organisations across all parts of the UK put in place scenario-based plans and ensure they are ready to react to a range of potential risks and opportunities.

Horizon scanning can help to inform the decision-making process, helping organisations to make important structural choices or high-risk investments. Such techniques allow them to conduct scenario planning for the short, medium and long-term by considering what their operating environment might look like in five, 10, 15 or 20 years’ time. For example, the implementation of the Future Homes Standard is likely to introduce stricter design requirements, which could have a knock-on impact down the supply chain.

While there may be a tendency for decision-makers to shy away from scenario planning based on extreme potential outcomes, it is worth bearing in mind that significant market changes can alter the landscapes of UK industries beyond recognition. For example, the COVID-19 pandemic, which few people could have predicted, but may have considered in a well-facilitated horizon scanning exercise, is disrupting organisations of all sizes and sectors. With the possibility that the crisis could trigger the introduction of more austerity measures by the Government, it is essential that registered providers prepare for this eventuality.

To optimise results from horizon scanning, organisations should start by considering what the future might look like in 20 years’ time, and plan backwards. For the social housing sector, it will be important to take into account a number of potential scenarios, which could have a minor or major impact on the funding or political environment. By working backwards, registered providers can develop a future roadmap, planning out the action that they would need to take in each of the emergent scenarios considered. The lack of certainty surrounding the UK’s future trading arrangements should also be a key consideration.

A significant obstacle for registered providers that is unlikely change over the next few years is that of securing access to finance. Stringent lending criteria and the reduced availability of grant funding have caused organisations to explore alternative sources of funding, including the bond market. Consolidation between smaller registered providers is allowing some organisations to take advantage of this finance opportunity by increasing their scale, while lowering their risk profile.

At a time of significant economic instability, social housing developers can’t be certain what the future will hold. To mitigate risk as far as possible, they should plan for all eventualities. Risk-modelling techniques, such as horizon scanning, could help organisations to prepare for the changes that lie ahead, while protecting future supply of much-needed council-owned properties.

Bob Hide is managing director at risk management consultancy, Equib.

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