Recommendation 32

HM Government Acknowledged

5. As noted by the committee, the sector continues to retain many sources of financial strength and resilience, including a strong liquidity position, secure income streams backed by government benefit payments and relatively low gearing. 6. However, the sector also faces significant financial pressures, as the committee notes in its report. These include necessary expenditure on existing stock to ensure this meets safety, quality and energy efficiency expectations and the increasing cost of capital as a result of higher interest rates which impacts the sector’s ability to build new homes for future tenants. London and other urban areas, where large numbers of flats need building safety works, are seeing the strongest financial pressures. 7. This pressure has resulted in a continued trend since 2018 of reducing financial performance in the sector. This has intensified recently resulting in the cost of servicing debt exceeding net earnings in 2023/24, for the first time since 2009. In aggregate terms, forecast sector interest cover over the next five years is just 111%.1 Higher than expected interest rates, building and fire safety remediation costs, the increased volume and cost of repairs, and the impact of the rent cap mean that previously projected recovery in interest cover in landlords’ business plans has consistently failed to materialise. 8. Registered providers are taking action to manage viability risks, including deferring uncommitted development and renegotiating covenants. However, reduced financial headroom reduces the capacity to manage downside risk and increases the risk that a governance failure leads to financial distress. We will continue to engage closely with providers where our analysis suggests that financial performance is weak and reflect this in regulatory judgements. Where a provider identifies a potential problem with, or threat to, its viability we expect it to give us early warning.