Tough decisions: juggling strategic choices

2020 was a tough year for everyone. Adapting to a new way of life involving periodic lockdowns and ever-changing policies and guidance while trying to carry on ‘as normal’ has impacted everybody, in some shape or form.

The social housing sector has seen its fair share of challenges to adapt to, including an initial freeze on the housing market, halting construction works, a backlog of repairs, the effects of furlough, the eviction ban and mortgage holidays. These challenges are accompanied by several key developments in the sector, including:

• the Social Housing White Paper (the White Paper);
• the National Housing Federation Code of Governance 2020;
• the Sector Risk Profile (SRP);
• the new Sustainability Reporting Standard;
• Fire Safety and Building Safety Bills;
• the Consumer Regulation Review; and
• proposals relating to decarbonisation.

While it has been acknowledged that the sector’s operational response to the pandemic was agile, these challenges, alongside economic uncertainty and Brexit, have resulted or will result in many Boards of registered providers of social housing (RPs) and other housing providers having to make some tough strategic decisions moving forward. This article sets out to address how an RP or Board can approach these strategic decisions in light of the developments listed above, focusing on four key areas.

To illustrate how RPs and Boards must feel at the moment, a tweet I once read that went viral about a famous author springs to mind. She was asked how she balances all of life’s commitments and likened it to juggling a set of balls that represent different categories such as work, family and social life. The trick is, she said, to recognise that some of the balls are made of plastic and others of glass. If you drop a plastic ball, it bounces, you catch it and continue juggling. If a glass ball drops, it smashes, which is why it is imperative that you prioritise catching the glass balls.

For RPs and Boards, all matters appear, at first glance, to be of vital importance but it isn’t possible to deliver them all immediately or to give them all equal significance. Organisations must decide – which items are plastic and which are glass?

The most recent SRP, published on 26 November 2020, placed ‘strategic choices’ as its first key risk for the sector. How each organisation makes these tough strategic choices will differ and will be based on a variety of factors including geographical location, stock-make up and quality, communities, strategic plans and the organisation’s purpose, values and goal.

This article cannot be and is not a definitive guide for how the sector can most effectively plan for and prioritise the breadth of matters on its plate. However, it is intended to facilitate discussion around key decisions that need to be made at Board and executive level and to assist in identifying which matters are the ’glass balls’ and which are the ’plastic balls’.

The context surrounding decision making

The most recent Coronavirus Operational Response Survey (CORS) released by the Regulator of Social Housing (the Regulator) in November 2020 showed that the delivery of services remained stable throughout October, using data based on information supplied before the second national lockdown. Most providers reported that they were confident the appropriate systems and processes were in place to manage the second lockdown. The Regulator’s quarterly survey for Q2 shows that the sector has remained financially strong with access to sufficient finance.

However, the impact of lockdown can be clearly seen in relation to the dip in sales receipts for both affordable and market sale units, margins, income collection, the increase in rent arrears and the higher volumes of unsold units in both Q1 and Q2. One contributing factor was the unclear guidance at the outset of lockdown in March 2020, which caused many RPs and builders to close down sites for construction and remediation. The result was a decrease in the number of home starts for Q1 and, whilst the Q2 results show some improvements, the challenges arising from the pandemic are still clear. Some larger landlords have reported a decrease in surplus, mainly due to the impact of the pandemic on lower sale volumes, waived rents and the development pipeline. Others have made the decision to cut costs in areas that have been particularly hit, not just by the pandemic, but also by the predicted impact of Brexit.

Forecasts for the coming year suggest that the sector will increase its development and housing market exposure and its investment in existing stock, with performance and plans beginning to return to levels seen before the pandemic. Despite this positive outlook, there is still uncertainty around the future impact of both the pandemic and Brexit on the economy. The Regulator has identified several sector risks moving forward, including:

• Covid infection spikes and continuing disruption, such as backlogs in repairs and planned works;
• continued risks associated with furlough, care and support costs and voids;
• the potential for further shocks; and
• general uncertainty surrounding the housing market and development plans.

RPs’ considerations regarding how they utilise their existing pool of assets may often be at odds, even more so given the above risks. For example, balancing the need to provide more affordable housing in response to the current housing crisis against the need to diversify and ensure optimal benefit is derived from assets while also ensuring the needs of tenants are appropriately met and that existing homes are compliant with the most up-to-date standards.  

The White Paper has stressed the importance of promoting “a culture change whereby landlords are more open with tenants”. Identified risks must therefore be balanced against tenant and other stakeholder expectations. At the same time, Boards must be transparent about the organisation’s strategic objectives, articulating priorities and any potential trade-offs when making important decisions moving forward.

These ’important decisions’ and priorities will be different for each organisation, but several recent issues within the sector tie into this decision-making. Here we will outline four of them.

1. Building and fire safety

The most recent SRP has once again highlighted health and safety as a key risk to the sector. Upcoming legislative changes designed to address shortcomings identified after the 2017 Grenfell tragedy, including proposals contained within the Fire Safety and Building Safety Bills, will require significant investment. The £1 billion earmarked under the Building Safety Fund to assist with the remediation of unsafe cladding systems on buildings over 18 metres will only cover a third of the estimated 1,700 towers that require remediation.

Fourteen of the largest landlords in the UK have recently revealed that they were anticipating spending approximately £1.19 billion over the next five years on building safety. This expenditure is in addition to the millions already spent in the years since Grenfell and will likely go up once the measures introduced by the Building Safety Bill are finalised and come into force.

It is widely acknowledged within the sector that fire and building safety (and health and safety generally) is a ‘glass ball’, as the safety of tenants is a clear-cut priority – it cannot be compromised. The implications of ‘dropping the glass ball’ here, as we have seen, can be catastrophic. Rightly, health and safety is one of the top risks on many landlords’ risk registers and is a priority for expenditure moving forward.

2. Stock quality and decarbonisation

As predicted, the White Paper proposed a review of the Decent Homes Standard including a focus on supporting the decarbonisation and energy efficiency of social homes and improving communal and green spaces. The first stage review is to be completed by autumn 2021 to “ensure it is delivering what is needed for safety and decency now”. .

The introduction of the UK’s legally binding target to produce zero net greenhouse gas emissions by 2050 (the 2050 Target) is without doubt a driver behind the review. The 2020 Financial Forecast Return data indicates that the average cost per social housing unit is expected to increase by 7% in the next four to five years. It has also been reported that the cost of retrofitting all social housing in the UK to meet the required standard is approximately £104 billion. Some landlords are factoring in other planned works (including those to meet the requirements of the upcoming Fire and Building Safety Bills) and others are calculating the figure purely on decarbonisation costs. Of course, some planned works are required by upcoming legislation, possibly necessitating their immediate categorisation as a ’glass ball‘, while decarbonisation costs, for some organisations, could potentially be pushed a bit further (but not too far) down the list of priorities.

The SRP also identified stock quality as a main risk within the sector and noted that housing “is a long-term asset, and failure to understand stock and invest appropriately in it presents a substantial risk to providers and tenants”. The SRP mentions that, while RPs have had reduced expenditure on major repairs this year due to the pandemic, a sustained increase in expenditure is forecast over the next five years.

The SRP notes that failure to invest in stock at the appropriate time can lead to deterioration and subsequent increased costs further down the line, potentially compromising the likelihood of the success of other objectives and the financial viability of the RP. There is an emphasis on the pivotal role that up-to-date and sufficiently robust data plays in providing assurance to the Board. Without this, Boards will not be able to form a view as to investment requirements to achieve the current and future standard of what is meant by a ‘decent home’. In addition, Boards should be ensuring that there are cost-effective repairs and maintenance services available for homes and communal areas.

3. Digital Investment

The need for building and fire safety works on dwellings has required landlords to explore new ways to correspond with their tenants in an efficient and secure way, especially where works are required to their homes. Resident engagement was one of the main themes in the White Paper, which specifically mentioned the use of “apps” to make information more accessible to residents, providing a clear breakdown of how RP income is being spent.

The pandemic has only accelerated the need for increased communication with all stakeholders, especially where there have been long periods of lockdown requiring remote interactions. The fact that most of us are now reliant on technology in our day-to-day lives means that the recent trend towards digital investment in the sector makes sense and is arguably overdue.

The increased need for flexible communication is compounded by the fact that housing associations are under pressure to achieve efficiencies and cost savings within their business. Digital investment goes beyond digital communication with residents (consumer facing tools) and encompasses a range of digital tools to help landlords streamline and improve their business.

For example, there are tools that can manage repairs and property improvements, equip a remote workforce, deliver training or manage internal communications. There are also ways to ensure that customer data and records are managed in a more secure way, using data analytics that are capable of being scrutinised and evaluated effectively. Many housing associations are choosing to invest in technology to take advantage of the efficiencies they afford further down the line. However, this of course comes at a cost.

As an example, several G15 landlords have recently trialled a new technology platform for a repairs and maintenance service that provides a purchasing system and cloud-based digital marketplace. The approach is OJEU-compliant and unlocks repairs and maintenance contracts for local businesses. It aims to drive operational efficiency and reduce repair costs, while enabling housing associations to further analyse performance and value for money (VFM) information. There could also be scope for including features linked to resident complaints due to repairs and maintenance issues, in line with the learning required under the new Housing Ombudsman’s Complaint Handling Code.

Digital investment is unavoidable for the sector and delaying investment in a digital strategy could mean that potential opportunities and efficiencies are lost in the interim. Boards should weigh up the initial costs of investment against the potential long-term benefits and the potential of digital tools to help meet other identified priorities (i.e. using data analytics in terms of stock quality and health and safety or in achieving better communication with residents). Where investment could assist with addressing other ’glass ball’ issues, digital investment could move up the priority list for RPs. However, with a new lockdown just announced, greater use of remote working and increased technological advances, this may well turn into a higher priority for providers more quickly than anticipated.

4. Internal frameworks and systems

The new NHF Code of Governance 2020 (the Code) was published in November and introduced several changes, including an increased focus on collaboration, organisational culture, sustainability, diversity and accountability to stakeholders. We also saw the introduction of the Housing Ombudsman’s new Scheme and accompanying Complaint Handling Code (the Scheme), with a much stronger focus on how providers deal expeditiously with complaints and learn from them.

Organisations adopting the Code will need to reflect on and re-examine existing frameworks, policies and procedures to ensure compliance. For example, the new Code requires organisations to demonstrate a clear and active commitment to achieving equality of opportunity, diversity and inclusion in all activities, as well as in Board composition. To ensure this aim is met, organisations will need to underpin policies and statements with demonstrable, meaningful practices and procedures. This is likely to take significant investment and resource, although full compliance statements will only be required for inclusion within 2021-22 annual reports.

Under the Scheme (and accompanying Complaint Handling Code), landlords must review their complaints procedure to ensure compliance. This includes a suggested two-stage approach, minimum timescales to adhere to and an individual or team to take responsibility of complaint handling within the organisation. As with the changes included in the Code, landlords will need to properly consider existing systems and practices to ensure that they meet the new requirements. 

Alongside learning from complaints, providers should be considering how they engage with their residents. The Regulator has stressed that where this is an identified weakness for a provider, this should be addressed.

What should Boards be thinking about?

Having considered some of the most recent developments within the sector alongside existing obligations, it is easy to see why some providers may be feeling overwhelmed by the sheer number of things on their to-do lists. The Regulator, at several conferences in the latter part of 2020, highlighted a number of several specific questions that Boards, in particular, should be asking themselves to ensure they are in the best possible starting position to make decisions moving forward.

Before addressing these questions, however, it would be remiss not to consider the stance of housing associations themselves in assessing priorities as part of their wider social purpose and key role within the communities they serve. Leann Hearne, Group Chief Executive at Livv Housing Group (Livv) states that Livv is “prioritising on the basis of risk, outcome, impact and alignment to our strategic and financial plans” with the needs of Livv’s communities, a full stock condition review and the organisation’s purpose all playing “a significant role in helping us to decide what we do and when. We had already set out a new 3 year Corporate Plan launched in April, which addressed all of those elements, so we were pretty confident that a review in the light of Covid wouldn’t fundamentally change our focus. Instead, we sought to invest more than we had planned in year one and re-defined the order in which we prioritised community projects.”

There are of course fundamental decisions for Boards to consider, including balancing priorities of investing in existing homes versus development of new homes, rationalising areas of operation and activities and focusing more closely on the provision of housing and housing-related services versus the provision of wider community services. The impact of the pandemic has shown the important role that RPs can play as community anchors, but such decisions need to be linked to the organisation’s strategic aims and purpose and must not impede the delivery of safe and good quality homes and services to existing residents.

Turning to the specific questions, Boards need to consider how resilient their organisation is in light of the pandemic. The ‘health check’ should include considerations of how staff are coping, how systems, policies and procedures are holding up against the demands of lockdown and whether contingency plans have been put in place to address risks that have already been identified moving forward (continuing disruptions, repairs backlogs, furlough etc.).  

In terms of financial viability and resilience, it is crucial for Boards to understand the funding model of the organisation coupled with the balance of risk and reward and covenants contained within its funding agreements. Alongside this, the Board needs to oversee an asset management and investment strategy, ensure that these strategies are delivering what they set out to deliver and link back to VFM indicators. Ideally, Board oversight should be aligned with the materiality, risk and complexity of issues.

A key element to this is for Boards to consider whether governance arrangements are sufficiently flexible while remaining robust and providing appropriate assurance and controls. The Code introduces several new changes that eventually need to be reflected in the wider governance documentation, which Boards need to be aware of now. A key part of this will be how residents are meaningfully engaged in service design, delivery and scrutiny.

In relation to health and safety, the Board needs to be fully aware of how obligations are currently being met and how they will continue to be met following the introduction of the new fire and building safety regimes. Good quality stock condition data is vital to enable Boards to make decisions and balance priorities effectively, particularly as new legislative requirements on health and safety come into force. For proposals around decarbonisation, Boards should understand their organisation’s financial capacity and constraints and should carry out appropriate multi-variate stress testing scenarios.

By asking these wider questions, Boards should be able to reassure themselves that they have an understanding of the organisation, its strengths and weaknesses and its wider operating environment. This understanding will determine how the organisation should respond appropriately to competing changes and demands.

Take a breath

In the wise words of Billy Joel, “you got so much to do and only so many hours in a day.”

I haven’t even delved into the detail of re-evaluating your development programmes, further investment in staff and/or assessing your appetite for collaboration with both the public and/or private sectors. It goes without saying that providing safe homes and good quality services linked to that is part of the bread and butter of many organisations’ operations and will continue to be.

There are clearly some issues that cannot be dropped or pushed aside to be dealt with later. Top of the list is the safety of residents. There is consensus among providers and the Regulator that this is a priority, a glass ball that cannot be dropped. As funding from the government for other proposals is currently limited, such as meeting the 2050 Target, there are clear priorities around expenditure if there is a choice between the health and safety of tenants as opposed to retrofitting existing properties to make them more energy efficient.

No one said that these would be easy choices. Choosing whether to invest in a new digital strategy as opposed to retro-fitting is difficult and organisations will have to weigh up their options and priorities alongside legal obligations. While it is for organisations themselves to make these choices based on their own strategy and objectives, it is important that they be made transparently and articulated to stakeholders clearly. These decisions will need revisiting regularly as the sector braces itself for whatever 2021 has in store.

About the Author

Ellen Damlica is a Housing Corporate and Governance Associate at Penningtons Manches Cooper.

She primarily advises housing associations on a wide range of corporate and governance matters within both the housing and wider third sector. These matters vary from inception and registration of registered providers of social housing to advice on collaborative working.

As well as supporting clients on their day to day governance and company secretarial needs, Ellen provides regulatory and legal compliance training and guidance to both boards and wider management teams on a variety of topics. Her work includes advising on strategic governance arrangements, the set-up of new group entities, wider partnership working, co-operative and community benefit society law, general company law and charity law alongside drafting governance documentation.

Ellen has a range of experience across housing association group restructures and mergers and acquisitions, covering due diligence projects, joint ventures and collaboration agreements, charitable and corporate conversions, and the statutory merger processes including amalgamations and transfers of engagements. She qualified as a solicitor in 2017 and joined Penningtons Manches Cooper in 2020 from another leading law firm in the UK housing sector.