Jonathan Pryor, partner at chartered accountant Smith and Williamson, said he did not think the pace of development in the sector could be sustained indefinitely.
Referring to the sector’s ambitious development plans, he said some associations were in danger of using up all their equity by stretching themselves to the limit.
By 2007, Pryor predicted, the sector would be worth £25bn, compared to £13bn today, and borrowing would increase from £7bn to £18bn.
This prospect raises the question of whether RSLs would be able to repay their debts and replace reserves. “Over recent years, associations have subsidised their development programmes, but this pace of development is not sustainable for all RSLs,” Pryor told delegates last week at a conference on private finance in social housing.
He predicted that associations would have to look more thoroughly at their long-term development plans.
He said: “At present too many developments are done close to the edge and I would not want to see this trend continuing in the future. I have seen cases where associations acquire some property and then a few years later decide to demolish and reconstruct the whole site.
“Even if a programme is not cash-positive, associations still go ahead with the development anyway.”
Pryor forecasted there would be a smaller number of new associations coming into the market as the safety nets – such as the capacity to increase rents – were gradually stripped away.
Such developments would leave some smaller associations unable to withstand financial knockbacks.
As a result, the sector could see more big collapses because associations would be unable to meet the debts on their development programmes.
But Pryor admitted consolidation and mergers could help prevent this.
Mark Hedges, controller of structured finance at Nationwide said he too believed consolidation was the way forward.
He said that with better economies of scale, RSLs would be able to spread their cost base over a greater number of properties.
Hedges argued that this did not mean growth in the sector was unsustainable, just different.
“Lenders will expect to see more consolidation in the sector, in the form of group structures, driven by cost control and more productivity”.
A more pressing issue for lenders, said Hedges, would be the size of these group structures and how responsive they would b e to tenants’ needs and concerns.
Source
Housing Today
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