Finance: a leap of faith

Associations are in a healthy financial position, but there are risks to that strength, some of which arise from government policy, according to a report published by the Chartered Institute of Housing next week. How these risks are tackled may well determine just how far associations really are independent bodies.

To assess the potential role of associations in the changing environment they face, the institute commissioned HACAS Consulting to use strategic financial modelling techniques to assess the future financial viability of the housing association sectors in England and Wales.

The results of this modelling show that the sector as a whole is in sound financial health, and existing development capacity can continue at current levels whilst maintaining the same favourable financial ratios. It does however show that whilst the traditional sector is vulnerable to a variety of risks, in the medium to long term the large scale voluntary transfer sector has growing financial capacity.

The decisions government makes are clearly going to have a major impact on housing associations. In associations it sees a sector of maturing social businesses with a record of meeting social needs and financial strength. It may wish to use the strength of the sector to help take forward its policies on regeneration and social exclusion. The widening of associations' permitted purposes and the recasting of the approved development programme would certainly point in that direction. It clearly does want to see moves to improve efficiency across the social housing sector and sees the Best Value regime as the vehicle for this. Its plans for rents and housing benefit may however be most crucial for associations.

The report shows that there are a variety of risks inherent in the sector. The main uncontrollable risks relate to inflation and interest rates. In particular, a combination of high real interest rates together with low RPI would cause problems for associations. The major risk for the sector is however a future constraint on the rental stream. The forthcoming housing Green Paper with its likely reform of housing benefit, and moves to strengthen links between social rents and the "size, location and condition of the properties", is likely to have a significant impact.

Although the sector can absorb some reduction in rents, it is important that the government does not taker a simplistic "low rents good, high rents bad" approach. The sector's ability to meet its reinvestment needs, maintain stock condition, provide the necessary social support and meet tenants' increased expectations must not be weakened. The problems created by under-investment in the local authority sector are a clear warning here.

Moreover, moves to develop a more coherent rent structure will create winners and losers. Whilst the impact on individual associations will be determined by their financial profile, the report shows that it is likely to be greatest for associations working principally in areas of low demand. It is vital that the changes do not weaken associations in those areas if the government wants strong, locally-based associations, able to play a full part in regeneration. These policy changes therefore need to be handled with great care, taking into account how financial stress within the sector can be managed and the reputation of the sector maintained.

The changes are likely to impact on the shape of the sector. The report shows that there are only limited financial drivers towards merger in the system at present. This is likely to change if rent and best value pressures lead to a more demanding operating environment. One change may be that stronger associations could be less willing to take on weak associations as merger partners. This would mean the sector is less able to "self-rescue" where there are problems which have the possibility of damaging its exemplary track record with funders. Combined with the government desire to utilise associations to meet its policy objectives, these developments may encourage the Housing Corporation to take a more interventionist role in shaping the sector than it has hitherto, as has happened with Welsh associations.

Even if this does not happen, the corporation's role as nanny of the sector needs to be appraised. Are associations now mature enough bodies to be allowed more scope and less detailed regulation, with the acceptance that there is the potential for failure? The adverse reaction to the corporation's Regulating Diversity proposals showed how associations do not see a heavy procedural approach as being appropriate, given the fine balance between maintaining confidence in the sector and stifling risk taking and initiative.

The corporation's decision to rethink the proposals means that there is an opportunity to reconsider their role. In its policy conclusions, our report calls for the corporation to take a more strategic approach to the regulation of associations which would build on reducing schemework and "procedural" approaches and strengthen the lead regulator role. To achieve this, the corporation will have to appraise whether the skills and information it has available are the right ones.

The report also supports the idea which has been put forward by the National Housing Federation of moves towards a contract style approach to approved development programme allocations and suggests moving towards a more flexible use of grant in the light of the need for capacity building and the likely impact of Private Finance Initiative-style development.

There are clear choices for associations as to how they develop within a diverse sector: whether to consolidate as social landlords, to specialise in one area of provision, to widen their scope to prioritise regeneration or to provide a range of products. Whatever they choose, they need a clear view of themselves as social businesses. With a customer base which is predominantly people on low incomes, to prosper as independent businesses they have to take a strong interest in the economic capacity of their customers and respond to government policy initiatives aimed at developing it.