RC15 final [Compatibility Mode]
Supporting Older People Conference
RC15: The new environment and models for delivering affordable housing S:\Dept\Conferences\2010Speakers: Rob Mallett 11\Finance Housing Sector Analyst 2011\Marketing\Handbook Mazars LLP Steve Danby Senior Manager Mazars LLP
Chair:
Lucy Thornycroft Policy Leader National Housing Federation
Rob Mallett & Steve Danby
AFFORDABLE RENTS Certain RPs to be “licensed” to charge new level rents • • • • •
On new properties being completed On new properties yet to be built On new voids With increases at RPI+ 0.5% pa enabling grant rates to come down
NHF Finance Conference
AFFORDABLE RENTS Are we back to 1990? • • • • • •
The Housing Act 1988? Introduction of Private Finance More risk borne by RPs Assured Rents set by RP Boards Lower grant rates Yet keeping Fair Rents still
NHF Finance Conference
AFFORDABLE RENTS 1990 Outcomes • Successful dealing with increased risk • Successful dealing with Private Finance • Higher rents on most new voids and developments BUT • Disparity in rents – LA, Fair Rents, RP1, RP2 (tackled by Rent Restructuring) • HB bill soars; Govt alarmed!!
NHF Finance Conference
AFFORDABLE RENTS So what will 2011 outcomes be? • • • • • •
Higher rents on (most; many; some?) new voids Higher rents on new developments including in progress ones (NAHP 2008-11) Disparity in rents – LA, RP1, RP2 HB bill soars A “BS” in “Rent Restructuring 2” ??!
NHF Finance Conference
WHAT ABOUT NEW RISKS? 1. Challenges to Governance Are all Stakeholders comfortable with Affordable Rents? • Charity Commission? A BS? • Your Board? • All your LAs?
NHF Finance Conference
WHAT ABOUT NEW RISKS? 2. Faltering Economy NEVER HAD IT SO BAD!! Low/no growth High inflation Commodity prices; oil Rising unemployment especially for young Public spending cut backs VAT at 20%
NHF Finance Conference
WHAT ABOUT NEW RISKS? 3. Tighter Benefits v Rising Rents Government is attempting to: • • • • •
Cut fraud Cut eligibility Cut overall cost Yet allow social rents to rise Introduce Universal Benefits
NHF Finance Conference
WHAT ABOUT NEW RISKS? 4. Negative reaction from tenants Significant higher rent but same product? Valued product now devalued? More voids? More repairs demanded? More arrears? More evictions; more flitting?
NHF Finance Conference
WHAT ABOUT NEW RISKS? 5. Market Valuations can fluctuate Reaction from private landlords? Have we got a potential BS here? Is this a new market? New standards? New development competitors? Viability of existing contractors?
NHF Finance Conference
WHAT ABOUT NEW RISKS? 6. New modelling risks Eligible Void identification? Eligible void turnover? Double booking of s106 units? Cross subsidy dependency? VFM fruit? Land values? Contingency factor?
NHF Finance Conference
Affordable Rents and Market Value • For Existing social rented portfolios – no sudden jump • Regulatory change does not directly affect MV • • Increase only on tenancies converting • Higher rents at day 1 • Faster turnover means more potential for void sales
NHF Finance Conference
Affordable Rents and Market Value
• New Affordable Rent schemes give higher values • But higher values (new and existing) dampened by… • Security of income – shorter term tenancies/higher turnover • Rent losses from voids and bad debts • Higher management costs? • Rate of discount
NHF Finance Conference
Asset Cover • Reduced /nil SHG for new build = increased borrowings • Affordable Rent ‘product’ will provide more income and… • Will have a higher security value AND • Ability to convert units to new rent also increases capacity BUT • Asset cover will be stretched, particularly in short term • Hence more existing stock to cross subsidise new units • Higher asset cover requirement?
NHF Finance Conference
Private Finance • Bond market currently attractive • Banks have reduced lending capacity – both in amount and length of loan • For RPs short term finance carries lack of certainty + extra costs • Significant refinancing coming up hence • Increased competition for funding
NHF Finance Conference
Private Finance - Funders need to weigh up and hence price: Good news • Increased rents • Flexible asset management
• • • • •
Bad news More risk Higher rent arrears etc HB concerns More development funding Covenants will become stretched
NHF Finance Conference
Steve Danby
PREDICTIONS
GENERAL • HB “attacked” • Affordable rents challenging • SP increasingly “costly” • Pressure on costs • More bonds / fewer long bank loans
GROUPS • Stock rationalisation • Collapsing group structures • Smaller HA’s into larger Groups • Joint ventures
CONSEQUENCES • Diversification • Profit Making Registered Providers • Shared services • Board members skills • Movement to sector to ….. ?
FINANCIAL • More closure of DB pensions • Re-pricing “when” not “if” • Any “white knights” for failures ? • Potential for Black Swans increased
NHF Finance Conference
A FEW THOUGHTS …. BBC y/e 31 March 2010
£m
Profit before pension change
178.2
Pension past service income
334.1
Profit before tax
512.3
A “public benefit entity”
Changes to pension terms / conditions
“I did not put the final nail in the coffin (of defined benefit pensions plans) – I just measured it” Sir David Tweedie
NHF Finance Conference
“I've some extremely distressing news We just ran out of wine”
NHF Finance Conference
BLACK SWAN THEORY • The PC • The rise of the Internet / texting / i-everything ! • 9 / 11 • • • • •
Shared ownership not selling Cheap funding ending Availability of funding scarce No capital grants Affordable rents
• • • •
Things happen We’re surprised We then act as though they were explicable We then use those explanations to pretend we can control the future NHF Finance Conference
BLACK SWAN THEORY The PC "There is no reason anyone would want a computer in their home." Ken Olson, founder, chairman & president of DEC, 1977 The rise of the Internet "640k ought to be enough for anybody." Bill Gates, 1981 A small number of Black Swans explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives NHF Finance Conference
A BLACK SWAN-PROOF WORLD ? 1. What is fragile should break early while it is still small. Too big to fail ? Help them to fail ! 2. People driving a school bus blindfolded (and crashed) should never be given a new bus Regulators / central bankers / government - legitimacy / trust following failure of system ? 3. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks Would they cut corners to show “profits” ? 4. Do not give children sticks of dynamite, even if they come with a warning Use complex derivatives (e.g.) cautiously 5. Do not give an addict more drugs if he has withdrawal pains Using leverage to cure too much leverage is denial. Debt / equity / sharing ?
NHF Finance Conference
FUNDING - THEN ECONOMIC GROWTH STRONG BANKS REGULATION CAPITAL GRANTS HOUSING BENEFIT + competition = low margins + almost inexhaustible supply of funds with long maturities and no concerns over refinancing BORING, PREDICTABLE, SAFE ?
NHF Finance Conference
FUNDING - NOW ECONOMIC GROWTH – uncertain STRONG BANKS – some way off = competition limited + banks under pressure = shortage of funds / increased margins + lend short term + lend less = repricing by Basel clauses / Accounting changes (component accounting or IFRS) / Demand for funds for development programme / Covenant breaches (gearing under affordable rents or component accounting or…) REGULATION – less stringent ? Riskier ventures / SP funding cut / Affordable rents riskier CAPITAL GRANTS - fading HOUSING BENEFIT – doubts ? SCARY, RISKY, EXCITING ?
NHF Finance Conference
“JOHNNIE” JOHNSON HOUSING TRUST
• “disagreement over the compliance with covenants” • “lender was seeking to reprice loans” • Restrictions so settled loan in full • Cost of redemption or loss of facilities – which is the worst aspect ?
NHF Finance Conference
SWINGOMETER OF PRUDENCE
NHF Finance Conference
CIRCLE ANGLIA Y/E 31/3/10 MORE OF THIS ? £m Surplus before items below 0.7 Loan breakage costs Property sales Net reversal of impairments Impairment of JV’s Negative goodwill
(4.7) 6.0 1.5 (8.9) 18.3
Surplus before tax
12.9
“I’ve always likened the bottom line to a haggis. If you knew what was in it, you wouldn’t touch it with a barge pole !” Sir David Tweedie NHF Finance Conference
SEMI - BLACK SWAN PENSIONS Obligation
Type of change is a …
Represents …
To pay benefit increases based on RPI
Change in benefit
Past service I&E a/c cost
In which any necessary consultations have been concluded or employees valid expectations have been changed
Not to pay benefit increases based on RPI
Change in assumption
Actuarial gain or loss
In which the government announcement was made
Recognised Effective when ? in .. AP …
STRSD
NHF Finance Conference
PENSIONS …. Kier Group y/e 30 June 2010
£m
Profit before pension change
41.7
Pension past service credit
16.0
Profit before tax
57.7
Change in benefit – P&L a/c
NHF Finance Conference
FRAUD COMES IN FUNNY SHAPES & SIZES
NHF Finance Conference
FASHIONABLE FRAUDS BEWARE BLACK SWANS • BACS systems – Super user access – Changing bank details • Fraud between contractor and sub-contractor – Overcharging by sub-contractor passed on to contractor and then to HA – ‘Back-handers’ for allocation of work • Bogus change of bank details from supplier • Theft of customer data NHF Finance Conference
TYPICAL GROUP STRUCTURE Non-Asset Owning Registered Provider
Committees
Registered Provider
Trading Company
Registered Provider
Registered Provider
NHF Finance Conference
FUTURE GROUP Parent RP
Trading Company
Academy
RP
Care and Support Charity
Social Enterprise
NHF Finance Conference
GROUP ACCOUNTING UNDER IFRS • Changing group structures – Goodwill on consolidation .v. purchased – Pensions – multi employer across group – Funding – JV’s, JANE’s etc • IFRS – Positive goodwill treatment – More intangibles – Mergers allowed ?
NHF Finance Conference
FRSME – WHAT WOULD IT MEAN ? Issues to consider
Implications
Capitalisation of interest
FRSME says no ! IFRS says yes !
Valuations
FRSME says no ! IFRS says optional !
Changes in accounting
Grants ? (If there are any !)
New assets / liabilities
e.g. financial instruments – interest rate swaps BBC £161m decrease in equity on reclassification of op leases as finance leases on adoption of IFRS
Future changes
Leases, financial instruments ?
“High-quality, principle-based accounting standards are designed to provide a range of answers that are roughly right, rather than a single answer that is precisely wrong” Sir David Tweedie
NHF Finance Conference
PLACES FOR PEOPLE; Y/E 31/3/10 £m Surplus before items below
11.3
Fair value adjustment on acquisition
36.3
Provision for impairment of land value
(25.1)
Surplus before tax
22.5
incl £27m reval surplus
NHF Finance Conference
Comments to ASB by 30 April 2011 FRED’s are not final !
NHF Finance Conference
“Politics is not a bad profession. If you succeed, there are many rewards; if you disgrace yourself, you can always write a book”
Ronald Reagan
Supporting Older People Conference
RC15: The new environment and models for delivering affordable housing S:\Dept\Conferences\2010Speakers: Rob Mallett 11\Finance Housing Sector Analyst 2011\Marketing\Handbook Mazars LLP Steve Danby Senior Manager Mazars LLP
Chair:
Lucy Thornycroft Policy Leader National Housing Federation
RC15: The new environment and models for delivering affordable housing S:\Dept\Conferences\2010Speakers: Rob Mallett 11\Finance Housing Sector Analyst 2011\Marketing\Handbook Mazars LLP Steve Danby Senior Manager Mazars LLP
Chair:
Lucy Thornycroft Policy Leader National Housing Federation
Rob Mallett & Steve Danby
AFFORDABLE RENTS Certain RPs to be “licensed” to charge new level rents • • • • •
On new properties being completed On new properties yet to be built On new voids With increases at RPI+ 0.5% pa enabling grant rates to come down
NHF Finance Conference
AFFORDABLE RENTS Are we back to 1990? • • • • • •
The Housing Act 1988? Introduction of Private Finance More risk borne by RPs Assured Rents set by RP Boards Lower grant rates Yet keeping Fair Rents still
NHF Finance Conference
AFFORDABLE RENTS 1990 Outcomes • Successful dealing with increased risk • Successful dealing with Private Finance • Higher rents on most new voids and developments BUT • Disparity in rents – LA, Fair Rents, RP1, RP2 (tackled by Rent Restructuring) • HB bill soars; Govt alarmed!!
NHF Finance Conference
AFFORDABLE RENTS So what will 2011 outcomes be? • • • • • •
Higher rents on (most; many; some?) new voids Higher rents on new developments including in progress ones (NAHP 2008-11) Disparity in rents – LA, RP1, RP2 HB bill soars A “BS” in “Rent Restructuring 2” ??!
NHF Finance Conference
WHAT ABOUT NEW RISKS? 1. Challenges to Governance Are all Stakeholders comfortable with Affordable Rents? • Charity Commission? A BS? • Your Board? • All your LAs?
NHF Finance Conference
WHAT ABOUT NEW RISKS? 2. Faltering Economy NEVER HAD IT SO BAD!! Low/no growth High inflation Commodity prices; oil Rising unemployment especially for young Public spending cut backs VAT at 20%
NHF Finance Conference
WHAT ABOUT NEW RISKS? 3. Tighter Benefits v Rising Rents Government is attempting to: • • • • •
Cut fraud Cut eligibility Cut overall cost Yet allow social rents to rise Introduce Universal Benefits
NHF Finance Conference
WHAT ABOUT NEW RISKS? 4. Negative reaction from tenants Significant higher rent but same product? Valued product now devalued? More voids? More repairs demanded? More arrears? More evictions; more flitting?
NHF Finance Conference
WHAT ABOUT NEW RISKS? 5. Market Valuations can fluctuate Reaction from private landlords? Have we got a potential BS here? Is this a new market? New standards? New development competitors? Viability of existing contractors?
NHF Finance Conference
WHAT ABOUT NEW RISKS? 6. New modelling risks Eligible Void identification? Eligible void turnover? Double booking of s106 units? Cross subsidy dependency? VFM fruit? Land values? Contingency factor?
NHF Finance Conference
Affordable Rents and Market Value • For Existing social rented portfolios – no sudden jump • Regulatory change does not directly affect MV • • Increase only on tenancies converting • Higher rents at day 1 • Faster turnover means more potential for void sales
NHF Finance Conference
Affordable Rents and Market Value
• New Affordable Rent schemes give higher values • But higher values (new and existing) dampened by… • Security of income – shorter term tenancies/higher turnover • Rent losses from voids and bad debts • Higher management costs? • Rate of discount
NHF Finance Conference
Asset Cover • Reduced /nil SHG for new build = increased borrowings • Affordable Rent ‘product’ will provide more income and… • Will have a higher security value AND • Ability to convert units to new rent also increases capacity BUT • Asset cover will be stretched, particularly in short term • Hence more existing stock to cross subsidise new units • Higher asset cover requirement?
NHF Finance Conference
Private Finance • Bond market currently attractive • Banks have reduced lending capacity – both in amount and length of loan • For RPs short term finance carries lack of certainty + extra costs • Significant refinancing coming up hence • Increased competition for funding
NHF Finance Conference
Private Finance - Funders need to weigh up and hence price: Good news • Increased rents • Flexible asset management
• • • • •
Bad news More risk Higher rent arrears etc HB concerns More development funding Covenants will become stretched
NHF Finance Conference
Steve Danby
PREDICTIONS
GENERAL • HB “attacked” • Affordable rents challenging • SP increasingly “costly” • Pressure on costs • More bonds / fewer long bank loans
GROUPS • Stock rationalisation • Collapsing group structures • Smaller HA’s into larger Groups • Joint ventures
CONSEQUENCES • Diversification • Profit Making Registered Providers • Shared services • Board members skills • Movement to sector to ….. ?
FINANCIAL • More closure of DB pensions • Re-pricing “when” not “if” • Any “white knights” for failures ? • Potential for Black Swans increased
NHF Finance Conference
A FEW THOUGHTS …. BBC y/e 31 March 2010
£m
Profit before pension change
178.2
Pension past service income
334.1
Profit before tax
512.3
A “public benefit entity”
Changes to pension terms / conditions
“I did not put the final nail in the coffin (of defined benefit pensions plans) – I just measured it” Sir David Tweedie
NHF Finance Conference
“I've some extremely distressing news We just ran out of wine”
NHF Finance Conference
BLACK SWAN THEORY • The PC • The rise of the Internet / texting / i-everything ! • 9 / 11 • • • • •
Shared ownership not selling Cheap funding ending Availability of funding scarce No capital grants Affordable rents
• • • •
Things happen We’re surprised We then act as though they were explicable We then use those explanations to pretend we can control the future NHF Finance Conference
BLACK SWAN THEORY The PC "There is no reason anyone would want a computer in their home." Ken Olson, founder, chairman & president of DEC, 1977 The rise of the Internet "640k ought to be enough for anybody." Bill Gates, 1981 A small number of Black Swans explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives NHF Finance Conference
A BLACK SWAN-PROOF WORLD ? 1. What is fragile should break early while it is still small. Too big to fail ? Help them to fail ! 2. People driving a school bus blindfolded (and crashed) should never be given a new bus Regulators / central bankers / government - legitimacy / trust following failure of system ? 3. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks Would they cut corners to show “profits” ? 4. Do not give children sticks of dynamite, even if they come with a warning Use complex derivatives (e.g.) cautiously 5. Do not give an addict more drugs if he has withdrawal pains Using leverage to cure too much leverage is denial. Debt / equity / sharing ?
NHF Finance Conference
FUNDING - THEN ECONOMIC GROWTH STRONG BANKS REGULATION CAPITAL GRANTS HOUSING BENEFIT + competition = low margins + almost inexhaustible supply of funds with long maturities and no concerns over refinancing BORING, PREDICTABLE, SAFE ?
NHF Finance Conference
FUNDING - NOW ECONOMIC GROWTH – uncertain STRONG BANKS – some way off = competition limited + banks under pressure = shortage of funds / increased margins + lend short term + lend less = repricing by Basel clauses / Accounting changes (component accounting or IFRS) / Demand for funds for development programme / Covenant breaches (gearing under affordable rents or component accounting or…) REGULATION – less stringent ? Riskier ventures / SP funding cut / Affordable rents riskier CAPITAL GRANTS - fading HOUSING BENEFIT – doubts ? SCARY, RISKY, EXCITING ?
NHF Finance Conference
“JOHNNIE” JOHNSON HOUSING TRUST
• “disagreement over the compliance with covenants” • “lender was seeking to reprice loans” • Restrictions so settled loan in full • Cost of redemption or loss of facilities – which is the worst aspect ?
NHF Finance Conference
SWINGOMETER OF PRUDENCE
NHF Finance Conference
CIRCLE ANGLIA Y/E 31/3/10 MORE OF THIS ? £m Surplus before items below 0.7 Loan breakage costs Property sales Net reversal of impairments Impairment of JV’s Negative goodwill
(4.7) 6.0 1.5 (8.9) 18.3
Surplus before tax
12.9
“I’ve always likened the bottom line to a haggis. If you knew what was in it, you wouldn’t touch it with a barge pole !” Sir David Tweedie NHF Finance Conference
SEMI - BLACK SWAN PENSIONS Obligation
Type of change is a …
Represents …
To pay benefit increases based on RPI
Change in benefit
Past service I&E a/c cost
In which any necessary consultations have been concluded or employees valid expectations have been changed
Not to pay benefit increases based on RPI
Change in assumption
Actuarial gain or loss
In which the government announcement was made
Recognised Effective when ? in .. AP …
STRSD
NHF Finance Conference
PENSIONS …. Kier Group y/e 30 June 2010
£m
Profit before pension change
41.7
Pension past service credit
16.0
Profit before tax
57.7
Change in benefit – P&L a/c
NHF Finance Conference
FRAUD COMES IN FUNNY SHAPES & SIZES
NHF Finance Conference
FASHIONABLE FRAUDS BEWARE BLACK SWANS • BACS systems – Super user access – Changing bank details • Fraud between contractor and sub-contractor – Overcharging by sub-contractor passed on to contractor and then to HA – ‘Back-handers’ for allocation of work • Bogus change of bank details from supplier • Theft of customer data NHF Finance Conference
TYPICAL GROUP STRUCTURE Non-Asset Owning Registered Provider
Committees
Registered Provider
Trading Company
Registered Provider
Registered Provider
NHF Finance Conference
FUTURE GROUP Parent RP
Trading Company
Academy
RP
Care and Support Charity
Social Enterprise
NHF Finance Conference
GROUP ACCOUNTING UNDER IFRS • Changing group structures – Goodwill on consolidation .v. purchased – Pensions – multi employer across group – Funding – JV’s, JANE’s etc • IFRS – Positive goodwill treatment – More intangibles – Mergers allowed ?
NHF Finance Conference
FRSME – WHAT WOULD IT MEAN ? Issues to consider
Implications
Capitalisation of interest
FRSME says no ! IFRS says yes !
Valuations
FRSME says no ! IFRS says optional !
Changes in accounting
Grants ? (If there are any !)
New assets / liabilities
e.g. financial instruments – interest rate swaps BBC £161m decrease in equity on reclassification of op leases as finance leases on adoption of IFRS
Future changes
Leases, financial instruments ?
“High-quality, principle-based accounting standards are designed to provide a range of answers that are roughly right, rather than a single answer that is precisely wrong” Sir David Tweedie
NHF Finance Conference
PLACES FOR PEOPLE; Y/E 31/3/10 £m Surplus before items below
11.3
Fair value adjustment on acquisition
36.3
Provision for impairment of land value
(25.1)
Surplus before tax
22.5
incl £27m reval surplus
NHF Finance Conference
Comments to ASB by 30 April 2011 FRED’s are not final !
NHF Finance Conference
“Politics is not a bad profession. If you succeed, there are many rewards; if you disgrace yourself, you can always write a book”
Ronald Reagan
Supporting Older People Conference
RC15: The new environment and models for delivering affordable housing S:\Dept\Conferences\2010Speakers: Rob Mallett 11\Finance Housing Sector Analyst 2011\Marketing\Handbook Mazars LLP Steve Danby Senior Manager Mazars LLP
Chair:
Lucy Thornycroft Policy Leader National Housing Federation
