The big squeeze – Stress testing for real

What rent increase will you put through next year? Tenants – and shared owners – are struggling with the cost of living. You simply cannot ask these people for a rent hike of say 10% for inflation plus a 1% top up plus service charges. At the same time, the costs of managing and maintaining your homes are soaring. That’s before we even factor in the bill for net zero. There is no easy way out. You’re already trying to save money with leaner structures, new technology and sharper procurement. Of course, HQN does not have all the answers. There will be no easy one size fits all solution. But if we sit on our hands the imposition of a rent cap is a distinct possibility. Every day we see another government intervention – why not here? What HQN can do is help you and your board and your tenants think through the options in a measured way. 

Headline issues: 

  • Inflation is high – so inflation plus rent hikes for tenants and shared owners would set you on a collision course with them 
  • Inflation is high – so the costs of running the business are escalating and covenants may be breached 
  • We can’t cut our way out – is there any more fat to lose? Ofsted-style inspections of quality are coming 
  • We can’t necessarily borrow our way out – interest rates are rising and business plans are weakening 
  • We can’t necessarily trade our way out – chequered track record of commercialisation 
  • Silver bullets can miss – not every merger leads to a smooth operation… 

OK so what are the solutions? 

  • These begin with frank business plans – extract the hope value and stare reality square in the face 
  • You need to probe the true strength of the business under very foreseeable stresses (real life has already surpassed the imaginary stresses dreamed up by the Bank of England) 
  • Business plans need to be constantly updated to bring in the impact of a rapidly changing hostile world – where will the conflict over Ukraine lead? 

What can we actually do? 

On top of the traditional ways of making savings such as shifting operating models and merger you might need to: 

  • Negotiate covenant waivers with lenders – though the RSH will still apply their own interest cover test which may lead to downgrades 
  • Negotiate financial plans with the RSH (they were content with deficits in early years of stock transfers to facilitate investment, will they do the same for net zero? – Matthew Bailes a former regulator has called for rent flexibility to stagger the impact of the cost-of-living crisis over a few years) 
  • Have difficult conversations with tenants and shared owners about rents/service levels (this could well reduce your ratings on the mandatory satisfaction indicators) 
  • Have difficult conversations with staff and contractors about pay levels. 
  • A robustly challenged business plan is the basic starting point for your discussions/negotiations with tenants, shared owners, staff, contractors, regulators, lenders, and politicians. 

You can only move forward if lenders and the RSH have total confidence in your ability to do so. 

Different financial circumstances mean that we need different responses from landlords and the regulator to reflect the degree of difficulty. 

We have stress tested 100+ business plans for all shapes and sizes of housing associations. 

We can do this for you too. 

What do you get from HQN? 

  • A version of the model that works with the 2022 FFR format 
  • The model allows you to test instantly the impact of stresses and mitigations you specify on your cash and covenants 
  • In effect, the model is a ready reckoner with an easy to grasp dashboard of charts and graphs 
  • We leave you with a time limited version of the model that you update each time you make changes to your business plan 
  • Depending on what you want we can prepare the model for you and instruct on its use and/or use it alongside you for board and executive sessions and if you wish tenant and staff briefings. (Don’t forget that a rudimentary forerunner of this model was used at every stock transfer meeting for tenants). 

Here is what some customers say: 

“Both the Leadership team and Board members found the interactive session on stress testing our business plan extremely useful. It was a risk based session, looking to the internal and external environment to recognise headroom in the business plan, identify and quantify risks and mitigating actions.”
Kate Curran, Group Director of Corporate Services, Barcud 

“The stress testing tool has been a really useful and powerful tool for Magenta Living to demonstrate in a ‘live’ session what the impact is of single and multivariate stress testing on our business plan. The real time demonstration of the impacts led to robust discussions and an increased understanding of the various impacts on our business planning over the short, medium and longer term. The feedback on the tool, and the session, from the Board themselves was excellent and as a tool for the organisation to use quickly to demonstrate the impact of changes it is really helpful.”
Ann Monk, Executive Director of Finance, Magenta Living