Brexit – issues for finance teams to consider

Our Finance Policy Advisory Group sets out some of the key considerations for housing association finance teams that may arise from the UK leaving the EU.

16 October 2018

The Federation’s Finance Policy Advisory Group (FPAG) meets every quarter to discuss important issues facing the sector.

At its most recent meeting the group discussed the key risks it believes finance teams should be considering in light of the uncertainty around the process for the UK exiting EU over the coming months and years.

The National Housing Federation worked with members to map the possible impact of Brexit on housing associations last year, and the overarching issues remain the same. Until there is more clarity over the long-term outcomes and any opportunities or threats they may bring, managing uncertainty remains the biggest issue for members.

Issues raised in the discussion include:

• Liquidity and funding: The importance of ensuring you have funding arrangements in place to meet your business plan requirements over the next 18 months to two years. Brexit could have implications on currency and interest rates which would impact the bond and housing markets. Careful consideration should therefore be taken to fully understand liquidity needs and interest rate exposure to minimise any risks. As well as the stress testing which all housing associations will be undertaking, finance teams should consider decisions that may reduce the impact of any market fluctuations. For example, this may include shifting treasury policy to have more cash available than usual, or to avoid the need to raise any funds in the 12-18 months after Brexit. Mitigating risk would also involve a clear understanding of your organisation’s contractual obligations and understanding what spend is committed but not yet contracted for. An understanding of what spend could be classified as discretionary may be helpful, which as a last resort could be slowed down or suspended if necessary.
• Development costs and revenue: Ongoing uncertainty or a no-deal Brexit could significantly exacerbate inflation in materials and labour costs, potentially accompanied by a significant fall in house prices. This combination will put pressure on development programmes, which would need to be mitigated quickly. Housing associations are already modelling development risk scenarios, and combining multiple risks will be necessary. However, you may want to give particular thought to any action you could take, and early warning signs, which might alert you to upcoming issues such as delays in development completions, higher cost of sales, or reduced sales rates or values.
• Care and support staff shortages: Significant and rapid curbs on immigration from the EU, accompanied by a more hostile environment for workers already in the country, could see a significant shortage of care and support staff in particular, or of services provided by other third parties to our customers. Even where housing associations do not employ large numbers of EU workers, their private sector competitors might well do. This could put rapid pressure on wages as we compete for workers with the same skills.
• Significant political and fiscal policy changes: An unplanned, sudden exit from the EU could have a significant impact on the Government’s fiscal position. In what would be a climate of considerable political uncertainty, we would be making the case for Government investment in housing but could equally expect fiscal retrenchment, for example cuts to rents, grant, or welfare with impacts for housing association incomes.
• Impact on tenants: An economic downturn will have a significant impact on tenants’ employment and incomes. This could feed through to housing associations both in the need to provide more support for tenants struggling with sudden changes in circumstances (including the receipt of support services), as well the risk of potential increases in voids, arrears and bad debts.

• We also know that EU funding is an important source of income for some of our members, via European Structural Funds. As you will know, the Government has confirmed it will meet any current commitments under these programmes until the end of the funding round, including in the event of a no-deal exit from the EU. So although there are likely to be administrative issues, we do not believe this should pose a threat to the income itself.

We also understand that existing borrowing from the European Investment Bank would be unaffected by a no-deal Brexit. However, the longer term future of both the European Social Fund and European Investment Bank lending remains uncertain, and the Federation continues to lobby Government on this, most recently in its budget submission.