1. Successful places with homes and jobs A NATIONAL AGENCY WORKING LOCALLY The regulator’s view of the sector Matthew Bailes Director of Regulation, HCA

2. Overview  The Regulator’s overall view of sector finances  Sector-wide risks  What we mean by diversification – what’s different?  When things go wrong  Changes to the Regulatory Framework and how we regulate  What do we want to see?

3. Sector finances are healthy…  Healthy balance sheet  Assets worth £118bn, largely valued at cost  Growing surpluses - £1.8bn in 2012  Access to funding at competitive rates, increasingly through the capital markets  Available security, albeit not evenly distributed  Position will be pretty stable in next global accounts

4. .. but thanks in part to unusually benign conditions  Very low variable interest rates (1% on variable rate debt is worth c.£200m/annum)  Healthy profits from sales in a more buoyant market (profits from sales account for about 1/3 of the sector’s surplus)  RPI (rents) rising faster than wages

5. Historical perspective (base rates)

6. Historical perspective (house prices: earnings)

7. Put another way…  The sector is in good shape  But we can’t bank on current good weather forever

8. Sector risks  Second sector risk profile published September 2013  Welfare reform –Under-occupation –Benefit cap –Direct payment –Net effect of welfare changes – how will tenants behave? –What’s round the corner?  Historic debt and gearing covenants, in a world in which lenders are losing money on pre-credit crunch deals  Sales and development risks  IFRS, pensions and, for some, loss of rent convergence

9. Diversification  Exists already, but now driven by end of “vanilla” option  Diversification of activities and funding  Risk profile of activities varies considerably, e.g: –High turnover, low margin, limited liabilities –long-term liabilities that rely on non-social housing revenues –Exposure on sales receipts  Our interest lies in the potential recourse to social housing assets

10. When things go wrong  Weak internal controls – including on basics  Lack of understanding of risk in aggregate  Treasury management, including putting in place security  Understanding of charity law, including pricing of risk  Non-recourse activity that isn’t really non-recourse  Poor judgement / inadequate advice  Complacency and the case for Board renewal

11. Likely Regulatory Framework changes  Stress-testing of businesses – e.g. higher interest rate / sales risk scenario  Forensic grip of assets and liabilities, including recourse to social housing assets  Appropriate pricing of risk, in line with charitable vires/investment powers where appropriate  Skills and capability that measure up to market exposures  Specific provisions for new for-profit providers

12. What do we want to see?  Underlying premise – Boards as custodians of assets for long- term provision of community benefits, accountable for meeting our standards  Prudent risk taking to meet your objectives, including on new supply  Strategic choices grounded in commercial and financial realities  Iron grip on risks, and strategy for dealing with a more difficult market  Value for money to enable you to continue to meet your objectives. Absolutely not an add on / nice to have  Don’t lose sight of the basics – e.g. gas servicing

13. Or as George would say… “Fix the roof when the sun is shining.....”