Social housing: Horizon scanning to the rescue in a shifting marketplace
Bob Hide, director at risk management consultancy, Equib, discusses how horizon scanning can help housing associations weather the financial storm…
Recent funding cuts have left many housing associations reeling as they explore ways to transform their business model. But how should they go about this when the future holds so many challenges and uncertainties and could greater focus on horizon scanning help?
The reduction of government grants for social housing, combined with planned welfare reforms and issues surrounding rent affordability, have created a very challenging operating environment for registered providers. Some have responded by trialling alternative means of generating revenue or stepping up their investment in social housing development activity, whilst demonstrating a willingness to take on greater commercial risk.
The uncertainty surrounding Brexit has introduced further economic and political variables; making it even more difficult for registered providers to plan ahead.
During times of significant economic and/or political change, it is especially important for businesses to put in place scenario-based plans and be prepared to implement them accordingly. However, decision-makers can be put off from doing so, precisely because the future is so uncertain. Failing to do so however, could lead them to lose ground; leaving them unable to compete and unprepared to react to opportunities that might arise further down the line.
Before making any key structural decisions or deciding to invest in activities that could increase the risk profile of the organisation, the Boards of registered providers should map out their strategic plan with care. This should involve scenario planning for the near, medium and long term, using tried-and-tested horizon-scanning techniques.
Horizon scanning typically involves considering what the future might look like in five, 10, 15, or 20 years’ time. This may involve taking an extreme, and yet plausible, view of how things might change in the future. For example, if it is possible to imagine a world where subsidised social housing provision is no longer available, then registered providers should plan with this scenario in mind. Alternatively, a change of government could see a return to centralised funding for social housing, but would registered providers be ready to compete and adapt their business models accordingly?
Business leaders may think that scenario planning based on some relatively extreme potential outcomes, is a waste of time. However, history shows how major changes, taking place in the relatively recent past, can create a paradigm shift for entire industries. For example, thirty years ago, the Housing Act 1988 brought significant and lasting disruption for the social housing sector when it allowed registered providers to seek private sector funding for the first time. Since then, the sector’s reliance on private sector funding has increased exponentially and it is no longer unusual to find registered providers seeking funding via the bond markets.
When horizon scanning, organisations should start from the furthest point away and plan backwards. This usually involves considering what the future might look like in 20 years’ time. For the social housing sector, there are likely to be a number of potential scenarios, some involving incremental changes to the funding or the political landscape and others involving a much greater degree of disruption. Taking a ‘future backwards’ approach, organisations can then begin to map the way forward – identifying potential indicators and any strategic steps that might need to be taken. With so much near-term risk surrounding Brexit, this should also be considered as part of the process. This will ensure the organisation is ready to act, regardless of what happens on 29th March 2019 or thereafter.
Going forward, one of the main challenges for registered providers is likely to remain raising finance. Reduced access to grant funding and tighter lending criteria has forced many in the industry to reconsider their finance options. For those with the right scale and asset-backed structure, it has been possible to raise the funding needed to further their strategic plans by going to the bond market. To take advantage of this finance opportunity, some smaller organisations have considered merging with others to increase their scale and de-risk their proposition.
Dynamic risk-modelling techniques, such as horizon scanning, can help registered providers to adapt their business models in a shifting environment; ensuring they are well placed to take advantage of any opportunities that might arise in the future.