Stress-testing: mapping a route to financial resilience amid coronavirus

 Sue Harvey, Partner at Campbell Tickell, considers the exceptional scenarios housing associations are needing to stress-test amid the ongoing pandemic. 

Stress-testing has come of age in the housing sector – and not because the Regulator of Social Housing (RSH) willed it to be so. Despite the RSH pushing back by several months the date by which it wants to see registered providers’ stress-testing, there’s been no let-off for the financial modellers. If anything, there’s more of it about than usual.


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In ordinary times (when did we last see those?) the business planning team would carefully craft a budget for board approval by February, take that as year one and build the long-term financial plan over the following weeks, agree a 30-year base case scenario and then stress-test that to destruction. All in time to submit the Financial Forecast Return by the end of June.

This year we have budgets and cash flow forecasts being frequently recast as the costs of the temporary operating models become clearer, COVID-permissible repairs expenditure is clarified, sales expectations (or lack thereof) are adjusted, options for tenure switching are explored and rent arrears trends emerge.

These adjustments are significant and with each adjusted budget, the long-term financial plan needs resetting and the stress tests re-run.

In addition to recalibrating their 2020-21 budgets, associations are undertaking extensive ‘what if’ analysis to provide assurance of financial resilience in the face of extreme uncertainty.

Exceptional scenarios

They are of course testing the usual changes to interest rates, differential inflation rates, voids and house prices. But they are also exploring some exceptional scenarios. These include:

  • Very significant increases in rent arrears, as the lockdown hits low-income residents in the hospitality and non-food retail sectors, accompanied by increasing costs of income collection and financial advice.
  • The hit to sales volumes and values being by extended by a significant and prolonged dent to home buyers’ economic confidence, resulting in an increase in financial risk aversion, higher desired levels of savings and an unwillingness to borrow as much as pre-coronavirus.
  • Explicit modelling of the impact on for-profit subsidiaries of the COVID-19 perfect storm, including the domino effects on on-lending and impairment.
  • Increasing costs of delivering the inevitable backlog of repairs due to bottlenecks and competition for surviving contractor capacity.
  • Dramatic shifts in the economics of care and support, with the costs of delivering safe services rising and occupancy rates falling.
  • Income from student accommodation being hit by shutdowns extending into the final term, and the next educational year seeing a collapse in the numbers of overseas students as most choose the safety of studying within driving distance of mum and dad.

These radical but plausible scenarios may see the golden rules (those expressions of the board’s financial risk appetite) buckle and recovery plans in need of significant bolstering.

Furthermore, early warning indicators will almost certainly require new measures (for example -cancellations of rent direct debits) and higher frequency monitoring. It may even be that stress-testing sees the board requiring a more cautious budget, and so another iteration begins.

It wasn’t that long ago that we were all shaping plan-breaking scenarios around the potential for a disorderly Brexit.

And while that particular storm may have abated for the moment, the mitigations shaped to deliver a recovery from it have stood the sector in very good stead, increasing cash holdings and creating the additional liquidity that is now delivering valuable headroom and time to adjust operating models to the COVID-19 environment.

The sector is building on five years of stress-testing experience. As auditors mutter about ‘emphasis of matter’ and lenders request evidence of coronavirus robustness, well-executed stress-testing is key element of associations’ defence arsenals, delivering assurance of financial resilience to boards and stakeholders alike. It’s certainly keeping the financial modellers busy.

This article was first published in Social Housing Magazine

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Campbell Tickell is an established multi-disciplinary management and recruitment consultancy, operating across the UK and Ireland, focusing on the housing, social care, local government, sport, leisure, charity and voluntary sectors.

We are a values-based business and firmly place the positioning of our support and challenge on helping organisations to attain change that is well thought through, planned and sustainable. At CT, we want to help organisations create the landscape within which we ourselves would like to exist: fair, inclusive, diverse, engaged and transparent. We build from our values in how we approach all our work as a practice.

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Stress-testing: mapping a route to financial resilience amid coronavirus

Sue Harvey, Partner at Campbell Tickell, considers the exceptional scenarios housing associations are needing to stress-test amid the ongoing pandemic. 

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