How to Sustain Productivity During an Economic Downturn

“When written in Chinese, the word crisis is composed of two characters – one represents danger, and the other represents opportunity.”

John F Kennedy

“Opportunity is missed by most people because it is dressed in overalls and looks like work.”

Thomas Edison

The UK economy shrank 0.3% in the three months to November 2022 (Office for National Statistics) and the independent Office for Budget Responsibility has warned the UK is in recession and will remain in one for the whole of 2023.

Factors facing the affordable housing development sector are compounding into challenging obstacles:

• CPI inflation has rapidly moved from 2 to 10%
• Households are facing increasing energy and food costs
• Rent ceiling has been placed on Social Rent at 7% (existing tenants)
• Local Housing Allowance has been frozen since March 2020
• The construction sector has had above inflation rises in material costs and lack of supply
• The construction sector has increased labour costs from a reducing source since Brexit
• Mortgage rises and uncertainty have slowed in the associated ‘for sale’ housing market

The general house building sector is interwoven with the affordable housing sector and when commercial housebuilders face challenging times they often turn to the RP/HA sector for continuity of business. Affordable housing providers have reflected the following to SDS:

• Significant increase in Developers offering contracts to RP/HAs
• Significant opportunity for ‘Additionality’ on s106 sites and re-phasing
• Some Housebuilders only actively contracting with RP/HAs and ‘slowing/stalling’ their own commercial sites in certain geographies
• Some Housebuilders (Inc ‘For Profit’ RPs) “taking a break” from purchasing new commercial sites
• Large scale MMC providers focusing on Local Authorities (Numbers)
• Pressures on RP/HA & Loc Auth budgets due to alternative agendas (Decarbonisation, Cladding, Stock Condition etc)
• Some construction company collapses
• Lack of skilled RP/HA development staff and consultants to meet demand/challenges
• Sales success from getting closer to your customer (Mortgage accessibility, employment insurance, equity guarantee, mortgage rescue/tenure turning)
• Active ‘Re-granting’ of opportunities with Homes England
• Continued lack of supply of RP/HA & Local Authority homes

An increase in affordable opportunities caused by a slowdown in commercial housebuilding can challenge resources, both of skilled staff to evaluate schemes in a timely manner and to have the financial resources to take up new commitments. It may be necessary to review and remodel your development programme.

Programme

• Review your development programme, tenures and timings into ‘Must’, ‘Should’, ‘Could’ projects.
• Be alert to financial capacity changes – for replacements/new opportunities.
• In the current climate “delivery means deals”, be prepared to negotiate ‘Re-grant’ with Homes England.
• Remember the value of effective Board support and reporting.

Existing projects

Get closer to your existing contracts and Contractors, refresh the conversation and review contract timing – including an informal risk assessment of the Contract and Contractor. Engage each Contractor on a conversation of the outcomes of:

• Re-phasing
• Re-tenuring (Additionality)
• Re-granting
• Potential for Joint Ventures

Shared Ownership and Outright Sale

Get closer to your existing Purchasers – what are their concerns? Include an informal risk assessment, which may include:

• Mortgage accessibility (Could you support this better?)
• Employment insurance (Is this part of a ‘Purchaser Package’ you could offer?)
• Equity guarantee (“Nil negative equity on initial purchase at end of 6 years” etc subject to independent RICS valuation)
• Mortgage rescue/Reverse staircasing/Tenure adaptability (Could you save the day?)

People scale

• Good information and prompt communication is key.
• Hold onto skilled Staff and efficient Consultants who can adapt with you.
• Just in case, revisit your Contractor insolvency processes (day 1 issues: site security, insurance, photographs and certification records).

The challenges of economic recession increase the drivers for affordable housing and often increase the opportunities from commercial Housebuilders for timely development deals on new terms. To react effectively to opportunities in changing times requires the ability for affordable housing providers to review, remodel and reprogramme.

Good information, effective evaluation, clear communication and prompt action are all key to adjusting to changing times and committing to new opportunities.

This article was written in conjunction with a webinar held by SDS on 25th January 2023. You can watch a video of the session, or visit our webinars web page for more information.

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