Rent and Service Charges

Risk Management Within Social Housing

Business Planning and Modelling

I remember a film I watched a few years ago. It is called “Margin Call.” The first thing that struck out was how Eric Dale (Stanley Tucci) and Peter Sullivan (Zachary Quinto) looked like Liverpool FC goalkeepers (one past and one present which I’ll let you work out). As Dale was in the lift I thought he was going to do an overarm throw to Sullivan with the flash drive!! (I prefer taking the stairs).

Dale was Head of Risks within the film who had his employment terminated from the unnamed investment bank. It seemed like he was onto something and before he completed what he was about to find out, two external HR persons escorted him off the building advising him his employment was being terminated after 19 years.

Sullivan who worked under Dale went onto find out that “the assumptions underpinning the firm’s at the time risk profile were wrong; historical volatility levels in mortgage backed securities were being exceeded, which meant that the firm’s position in the assets was over-leveraged and the debt incurred from those over-leveraged assets would bankrupt the company.”

As a result in what Sullivan established the Directors agreed to a plan in the very early hours of the morning. The CEO John Tuld (Jeremy Irons) decided that there should be a “fire sale of the problematic assets.” This was not ideal because it was in effect conning buyers because the firm knew they needed to sell all their derivatives before the market crashed.

The film made me think about some of the risks that exist within housing and it is essential to have a prudent business plan. This is especially when the Regulator of Social Housing has warned that due to the economic climate it is likely more housing providers will have a financial viability rating of V2 rather than V1. This made me create data which had side by side as follows:

- The Decent Homes Standard data that gets submitted to the RSH via the Statistical Data Return. It shows how many properties do not meet this standard and how many properties are not available for letting due to repairs needing to be carried out.

- The interest cover where this measures the amount of interest paid by a housing provider on its borrowings against its operating profit. The ratio shows the impact of gearing on a housing provider’s income and expenditure account.

Most providers have an interest cover of between 1 to 2 which is not too bad. Some had above 2 which is good and others had below 1 which is concerning. The summary of this is provided within the spreadsheet below.

Some debate has occurred within social housing about how new units can be built and funded whilst ensuring current operations such as repairs and maintenance do not suffer. My side by side data I have created seeks to crossover if housing providers have recognised how much they may need to spend in order to say bring properties up to standard whilst identifying what looks like a reasonable amount of new units to build.

A couple of providers I believe appear to perhaps have already had the margin call conversation. It could be that the Board and Directors may just be concerned in ensuring that interest cover was the only thing that mattered for them.

They may have felt that they were not bothered at all that service charges were not correct and were sent out unchecked leaving it to leaseholders to see if they would identify if there were mistakes causing overcharging (turnover). Some MPs have even called this as leaseholders being “cash cows”.

Nor that maintenance and repairs were necessary until the matter was taken by the tenant to the court which would have resulted in a lot of costs payable to legal firms they use (cost of sales).

In effect all that mattered was making sure there were new units built and the interest cover needed to be above a respectable level.

In the recent Regulator Board minutes, it describes in certain terms but not necessarily how I have described this kind of approach for Rochdale Borough Housing (RBH) as follows:

- RBH lacked leadership capability at Executive level and there were failures in leadership and governance.

- The Board at the time of the incident, did not have the necessary skills and expertise and there was a skills gap in property management and maintenance, but this was never addressed.

- The organisation’s strategy and focus moved sharply away from core landlord services and quality homes to development and regeneration.

- There was a lack of critical challenge or strategic thinking.

- Systems and processes were not joined up and teams were working in silos.

- There was a lack of understanding of the strategic importance of data analysis to drive business decisions at Executive level.

- A belief prevailed that damp and mould was a lifestyle issue.

Its about time that a few of these organisations recognise that the Eric Dale’s of this world are invaluable. Sensible, prudent and modern ways of working are needed which the few are letting the housing sector down. Its why he was with the firm for 19 years until Sarah Robertson (Demi Moore) got him out. In my view governance employees need to have modelling experience and be able to speak up and present what they calculate (if they can).

There are many other housing providers that are doing very well in having Dale at the forefront of their strategic and operational decision making.

They definitely have the right modelling in place!!

Here is the recent regulatory judgment about a landlord called A2Dominion which identifies at present shortfalls in risks, data and planning. There has been a tremendous amount of news articles created by them between September 23 and December 23 which have outlined the various changes they have been making under its new leadership such as more focus on core services. My own personal calculation of their interest cover for 22/23 financial year shows as 0.53.