Eastern Leaders Masterclass 4 – Strategic Finance with Richard Blakey

In the fourth of our five-session series focused on the ever-changing housing landscape, we were joined by Richard Blakey, Executive Director of Finance and Resources at Settle Group, who talked through the role of Strategic Finance within a Housing Association.

The masterclass looked at key financial challenges facing housing associations such as sustainability, the impact of Covid, Brexit, talent acquisition and customer engagement and set out how to stress test the business plan, as well as some dos and don’ts, and how to ensure support for investment proposals.

The role of Finance within a Housing Association

Strategy is key; however, colleagues expect a finance department to be able to perform the operational side as well, and if a finance team cannot do it well, it is very difficult to influence the strategic forward look. Finance departments are here to ensure that the business does well and operates within a framework, largely put in place by lenders, with board and exec teams adding additional covenants. They have to report regularly to lenders and other stakeholders on how they are performing against the rules they are bound by, and in which they  operate.

The traditional Housing Association business model

Most associations’ primary income stream is charging rent on their housing stock. This needs to be sufficient to cover the costs of the day-to-day landlord function, capital investment plans and interest payments on the debt incurred on existing stock and new stock being developed.

Historically, rent was often set at inflation plus levels. For those customers on housing benefits, the benefit came directly to housing associations, from the government. The government grant regime also incentivised producing these homes at a sub-market level.

Drivers that have evolved the business model since then

Changes to government funding models – governments have continuously shifted the goal posts for housing providers, and housing associations have had to remain resilient through all these changes to ensure they survive and thrive.

The housing crisis in Britain has not gone away –  This makes the purpose of housing associations increasingly more important, even though the environment in which we operate becomes increasingly more complex and inconsistent.

There have been rapid changes in technology and customer demand with the rise of customer communication technology, which has changed the way in which our customers want to engage with us. From a finance point of view it has become important to invest in new systems, new skill sets, and to be able to keep up with customers’ expectations. The recent White Paper only emphasises how important it has become to engage with our tenants in a meaningful way and to meet high consumer standards.

How have housing associations responded?

They have resolved to stand by their commitment to solve the housing crisis, reinforcing their commitment to build as many social homes as possible at market rent level, recognising that it’s not just homes we need to build but communities where people not only want to live, but can afford to. In order to do this, there has been an increase in risk appetite, and an open mind towards how to deliver in such restrictive circumstances. A wider range of property types are being made available to try to accommodate the varying needs of different people. More sources of long-term funding are coming in, such as housing associations entering the bond market, bringing with it financial institutions that hadn’t historically taken an interest in lending to housing associations.

We are investing more in IT solutions, and are understanding data better and making better use of it, and investing in new skill sets to create better insight and analysis.

Ambition, risk and long-term financial planning

Increased ambition and a higher risk appetite requires strong financial planning. Whilst housing associations had always done long term financial plans with reviews, a greater expectation has been emphasised that those plans are stress tested and that boards really understand what it takes to break peoples’ businesses. All housing associations are expected to have a business plan in place, which runs over a 30-year period, where costs will be projected. As organisations become more ambitious and change their objectives and investment strategy, it is important to factor these into the business plan and see how they will affect the existing covenants.

Stress testing

The regulator expects housing associations to stress test their business at least on an annual basis. The aim is to identify a whole array of circumstances, working out what needs to happen for your business to break.

  • Significant increase in arrears
  • Increase in voids
  • Lack of demand for development units leading to lower sales prices and longer to sell a unit
  • Significant inflation
  • Increase in costs of funds/availability of funds
  • One-off fines
  • Fundamental changes to rent levels (e.g. another period of rent reduction?)
  • Policy changes around sustainability and decent homes targets
  • Stress test on a univariant and multi variant approach

Do you know what it takes to break your business plan? If you don’t, you should!

Mitigation and financial risk appetite

The regulator wants to see that an organisation has really thought about how it will recuperate if any of the above situations occur. There has been an increasing pressure from the regulator to ensure board and leadership teams are involved in these decisions. You should be asking what the early triggers points to look out for are and what golden rules you will put in place that will mitigate these. Spotting these before the business breaks gives you more time to make more reasonable adjustments. Build a ‘gate’ (your golden rules). When you get to that gate, it’s time to act. Give yourself time and space to respond accordingly, and get approval from board and the leadership team.

What does a Financial Director look for in a business case, and why does the FD need to know this?

What is the problem you are looking to solve? Is it linked to organisational objectives? What outcomes are you looking to achieve ( not just financial)? How much will this cost (one off and ongoing)? When will outcomes be achieved? You won’t be held to this forever, but there does need to be a demonstration and a degree of thinking behind it. It will often be competing with other departments’ objectives and costs. Remember that the Finance team want to say yes! Your case needs to be compelling so they can do this.

The strategic role – are we investing in our strategic priorities?

The fiduciary duty (our relationships and responsibilities to other stakeholders and trustees) – are we looking to invest within our rules and regulations?

The financial planning aspect – you will need to effectively plan for the timings of investment and the expectation of when any financial benefits will materialise. There will be more than one big project going on at any one time.

Dos and don’ts

Do:

  • Engage with finance early – the challenge will improve the business case
  • Provide clarity but be clear where you don’t have the answers yet
  • Try and avoid optimism bias
  • Think about how investment need can be linked to project gateway decisions
  • Think about measurable ways in which you could monitor expected outcomes

Don’t:

  • Present a final paper that hasn’t been seen by Finance in advance
  • Include absolute figures that can’t be substantiated
  • Feel as though you have to know about every penny. Use a broad brush, and be honest when you don’t know, but ensure you tell the Financial Team when you do know.

The importance of benefits realisation

There should be a continual oversight on the delivery of key projects, not just in terms of spending more and generating savings. This enables a holistic view of effectiveness of the programme of transformational projects on the strategic priorities of the business. It also enables quick amendments to financial planning where expected savings seem to be greater or smaller than first expected, which allows a level of agility, and it enables the business to understand the level of change load across the business at any one time, especially as we grow into more complex organisations.

Future challenges facing the sector

Sustainability – We have legislation that we must adhere to, in order to ensure all our properties have an EPC rating of C by 2025, and that we are zero carbon by 2050. We need to look at the strength of our data to effectively understand what these challenges look like.

Strategic management of our assets – For instance how do you make a heritage asset zero carbon in an affordable way? Will this include disposing of stock that will never get to zero carbon status and an EPC rating of C? How will this affect the community?

The impact of Covid/Brexit on financial plans – Will these trigger significant challenges that we will have to respond to accordingly? What happens when the furlough scheme ends? How will the transition to working from home affect how we build homes in future?

The fight for talent –Desired skill sets are changing. We now need more data analysts, those with strong technology skills, regeneration and development skills, business transformation skills, and these will be in high demand, especially from sectors that are able to pay more. How do we effectively fight for this talent?

Customer engagement and the impact of the recent white paper – What does this look like? How are we going to respond? What does resident engagement look like? there be a bigger focus on residents being involved in financial decisions?

What is our role in 2021? Has it changed over the last 12 months? – How much do we need to support other front-line services that are increasingly overstretched? How does this change our relationships with our customers? How do we then plan for our business and spend our money accordingly?

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