UK: Mitigating The Impact Of The Credit Crunch

Last Updated: 5 November 2008
Article by Adrian Wild

Adrian Wild discusses how the credit crunch and the wider economic slowdown might affect RPs, and suggests possible actions to limit the impact.

Over the last decade or so RPs have operated in a relatively benign economic environment. The sector – with borrowings of over £31bn – has benefited from historically low interest rates and ready availability of credit. These have fed through to the housing market, allowing RPs to generate significant returns from property sales, and providing a steady stream of funding from Section 106 levies. The strength of the economy has also resulted in historically low unemployment, with inflation being mitigated by the influx of migrant workers.

However, the picture is now very different. RPs will be feeling the effects of the credit crunch due to falling asset values, scarcity of credit, increasing tenant arrears and difficulties with suppliers. The housing market has slowed significantly due to this reduced availability of credit and the unwillingness of people to buy in a falling market, while the price of essentials – particularly food and fuel – has increased.

How long the slowdown will last is a matter of debate and speculation. The extent of personal debt, which was £1.4 trillion at the end of 2007, is different to previous recessions. Families are now vulnerable to even small reductions in household income, and the need to reduce their borrowings indicates a sustained period of belt tightening.

We look at some of the questions facing RPs, their boards and senior management teams.

  • How might the credit crunch affect us?
  • How can we mitigate and manage the risks we face?

Increased risk of fraud

People commit fraud for a number of reasons, but some individuals facing financial pressure may be more likely to commit opportunistic fraud. Greater vigilance is required to ensure your controls for preventing and detecting fraud are being properly implemented and monitored. Risks may arise from:

  • frontline staff with access to rent receipts or tenant monies
  • staff expense claims
  • suppliers submitting inflated or fraudulent invoices or claims
  • collusion between staff and suppliers to inflate the costs of supplies or services.

Not only can the loss from fraud be financially significant, but the impact on your reputation, particularly with regulators, could be substantial.


  • Review your risk map to ensure it reflects the current economic environment.
  • Consider whether the work of internal audit in key areas is adequate and whether it is being performed on a sufficiently regular basis.
  • Ensure that whistle-blowing policies are widely understood and embraced within the organisation.
  • Investigate warning signs or reports of fraud promptly and professionally.
  • Don't forget that RPs have a duty to maintain a fraud register and to make reports to the regulator.

Impact on your staff

Lower-paid workers will be disproportionately affected and have limited discretionary expenditure. However, even higher-paid employees may be financially stretched – for example, by large mortgage payments.

This will create financial stress, which can lead to emotional stress. As the economic environment worsens we can expect to see staff:

  • taking more time off through stress and illnesses
  • working less effectively due to money worries – a phone call from a credit card company demanding payment during the working day could leave an employee distracted and prone to making errors.


  • Ensure that your HR procedures are robust by:
  • monitoring individuals' absences, recording days lost and causes

  • undertaking return to work interviews and, where absences reach a trigger level, involving a more senior staff member

  • confirming that appraisal systems – which capture staff performance data through the year and identify potential issues as soon as possible are in place.
  • Make sure that you have a suitable support structure in place – even if it is as simple as being able to refer staff to a Citizens Advice Bureau.

Impact on tenants

Tenants in financial hardship may divert their rent money to purchase food and other essentials. Those with personal debt will come under pressure to meet their obligations. They may be tempted to make a small payment to a credit card company, as that might potentially allow them to access further credit – alleviating their immediate problems.

Employed tenants also face the risk of redundancy. This recession may be the first experience people have of unemployment; they may not know which benefits they are entitled to, or how to access them. Housing benefit departments will also become increasingly busy, which will lead to more delays in processing and paying benefits.

Rent arrears are likely to rise, leading to increased financing costs for the sector and increasing losses from bad debts.


Offer help to the newly unemployed so they receive financial support.

Consider whether your systems will identify tenants facing problems as soon as possible – for example, if a tenant who has previously paid on time misses a payment, it may indicate that he/she has a problem, even though the level of rent arrears is low.

Key suppliers

Most RPs are highly dependent on key suppliers to undertake development work and repairs. The building industry is suffering substantially – some forecasts suggest that over 100,000 jobs will be lost across the sector. Business failures are expected, size being no protection against a lack of projects. You may find work ceases on your developments part way through and you have no-one to undertake urgent repairs.

Most contracts include standard terms which offer significant protection for an association in the event of a contractor becoming insolvent. However, the reality is that this protection may be illusionary as an insolvent building company will be unable to fulfil contractual obligations.

There is a limit to what you can do once you are committed to a building contractor; if it fails it is likely to be expensive and can cause significant delay. The impact of failure can be dramatic.

  • You will need to appoint a new contractor to complete the work, who will need to ensure that any work to date has met the design standards. For instance, the contractor may need to strip out partially complete work and recomplete it with obvious cost and timescale implications.
  • You may end up paying for subcontractors' work twice, if the main contractor did not pass on the money.
  • Subcontractors may demand additional 'ransom' payments to complete their work or provide the necessary certificates.
  • The schedule of work will be disrupted and the partially complete building may be abandoned for some time – acting as a magnet for vandals and thieves, and creating a risk of weather damage.
  • Subcontractors may not be able to reschedule their work to meet your revised requirements.

However, with plenty of capacity in the industry it should be possible to appoint new contractors and competitive pressure may lead to reduced pricing. If you have a performance bond in place, you will be able to call on the bond to recover any excess costs incurred – although this will only offer relief after the event.

Therefore, concentrate on reducing the impact of any failure of your suppliers, and also on monitoring your suppliers so that you have some warning of failure.

Actions to mitigate

  • Consider spreading your work amongst a number of suppliers to minimise your dependence on any one supplier.
  • Prepare contingency plans, for example, have a plan ready for securing any active development sites in the event of failure.
  • Before entering into any contract you should:
  • review the proposed contractual terms to ensure that they offer you as much protection as possible performance bonds are helpful

  • ask for up to date financial information (e.g. management accounts, including balance sheet information) rather than relying on out of date statutory accounts.
  • Where your repair work has been outsourced, make sure that any data collected by your agent is secure and accessible in the event of a failure (so that at least you know what repairs have been done and which remain to be done).

Actions to monitor

  • Identify which suppliers are critical to your activities.
  • Visit your development sites regularly – is progress in line with your expectations?
  • Closely monitor development work for signs of possible financial weakness, including:
  • subcontractors quitting the site, indicating they have not been paid
  • delays in undertaking the work due to unavailability of materials/ subcontractors
  • Use real-time monitoring tools so that you can be advised of County Court Judgements against your suppliers and other trigger events.
  • Talk to other RPs who use the supplier - are they experiencing problems?
  • Closely monitor payment applications - are they in line with work done or are they being inflated?
  • But most importantly, get to know your contractor - meet regularly and form a professional relationship.


The demise of Ujima Housing Association demonstrates the absolute need for robust governance, effective management, regular and accurate internal reporting and realistic business planning. In troubled economic times this is even more important because:

  • plans which might have previously appeared prudent may become unachievable
  • the risks may escalate, as adverse events in one part of the economy impact on other areas
  • the speed of change may be accelerated – there may be less time to take remedial action than there had been previously
  • additional costs may be incurred through increased rent arrears, more temporary staff being required to cover staff sickness, possible problems with developments and increased financing costs
  • not only may proceeds from property disposals be substantially less than forecast but they may also be delayed for prolonged periods.


  • Review your business plan sensitivities – flex key assumptions downwards and ensure that your plan is still viable.
  • Ensure that your management reporting is timely and clearly shows trends (e.g. by using graphical analysis).
  • Identify key performance indicators which could warn of a worsening economic environment and monitor these closely.
  • Take necessary action sooner rather than later.
  • Don't be afraid to take difficult decisions – for example, might it be better to defer a new development, even if that means not meeting Housing Corporation targets?

Most RPs are financially robust and wellmanaged and will weather this economic storm. Awareness of the wide ranging impact of the credit crunch will help them to manage their activities in these difficult times.

It is not all bad news for the sector. Economic hardship could drive down certain costs and could also present significant opportunities for those with the ability and willingness to take on additional commitments: for example, one large developer recently reportedly offered 43% discounts to buyers of six or more flats.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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