It was a long time coming, but the Withdrawal Agreement Bill completed its passage through both houses in time to allow the UK to exit from the European Union at the end of January 2020. We highlight some of the key issues facing registered providers of social housing (RPs) and the wider housing sector following Brexit.
The effect of Brexit on the construction industry, particularly in relation to supply chains and workers, is expected to be significant due to its reliance on foreign labour for skilled and non-skilled roles. A recent article by Inside Housing suggests that 7-8 per cent of construction workers in the UK are from the EU with the number increasing to 25 per cent in London.
Post-Brexit, with immigration being limited and many unskilled workers unable to meet the minimum requirements for qualifications, it is likely that the cost of construction projects will rise where labour demand is higher than the supply. Obviously, this will have an impact on the capacity of housing associations and other developers to meet their housing quotas and may serve to further deepen the housing crisis if not managed appropriately. A shortage of workers is also anticipated, in addition to pressure for increased wages further exacerbated by economic uncertainty and increased indirect costs associated with immigration such as visa applications. The same can be said for the employment of EU care and support staff, which housing associations and the private sector rely on heavily.
As above for labour, the construction industry also relies on the EU for importing materials. The Inside Housing article referenced suggests that 60 per cent of construction materials manufactured and used in the UK come from the EU. It is anticipated that materials will now become less available, in addition to becoming more expensive due to tariffs on certain products that did not exist before. In addition, the administrative costs associated with bringing in certain materials will almost certainly increase due to tax requirements.
It was originally anticipated that Brexit would be the main impact on the UK’s economy in 2020/21 due to the exposure to interest rate and currency fluctuations and many housing providers carried out stress testing against the risks of Brexit from an early stage. The scenarios for Brexit were primarily in relation to increasing interest rates against a weakening pound and the effect on mortgage defaults and borrowing. It has subsequently become necessary to build on those scenarios to incorporate the ongoing effects of the pandemic.
Many providers foresee that disruption caused, in part, by Brexit will see an increase in both rent arrears and voids due to the sudden changes in many tenants’ financial circumstances (due to furlough and unemployment) and have also considered the impact of a housing market downturn following the end of the stamp duty holiday. This could, in turn, impact shared ownership and open market sales, which are used by many providers to cross-subsidise the development of social and affordable housing.
Rising construction costs due to the inflation of both labour and materials combined with a housing market downturn is also likely to have an impact on many providers’ development programmes, in addition to those of private developers. The most recent sector risk profile (SRP) states that RPs need to closely manage development risks, especially around sales programmes. The SRP also makes it clear that boards will need to take a more strategic view of how changes in the market could affect their wider development funding model and the implications for the business as a whole.
Boards will need to ensure they are managing risks in relation to labour and material shortages, liquidity and financial covenants. This will require them to fully understand the implications of each risk, carry out full stress testing and put appropriate mitigation strategies in place. We’re aware that, for many organisations, Brexit has been high on risk registers for a while.
The National Housing Federation (NHF) prepared a briefing in September 2019 in order to help housing providers prepare for the possibility of a “no deal Brexit”. Many of the key issues and mitigation mechanisms remain relevant following Brexit early this year.
Early communication with tenants is key, especially where there may be disruption to the services they receive or if their own personal circumstances should change. Having appropriate channels in place between providers and tenants will ensure that both parties are able to manage any significant changes and RPs are able to support their tenants where there is sudden unemployment or new immigration requirements that need to be adhered to. RPs should have also built in strategies to cope with an increase in voids, arrears and bad debts.
In terms of materials, RPs should have already liaised with their contractors and suppliers about their plans to source materials that originate in the EU and have plans in place to mitigate any potential shortfalls. An RP should have also formulated a plan as to how it will communicate with its tenants if there is any disruption to services.
The impact of Brexit, particularly in relation to development, may crystallise the need for some providers to consider opportunities for collaboration. Cross sector challenges such as facing finite resources are often better faced as a group, as it is often difficult and expensive to try to tackle these challenges alone. Identifying and mitigating risk as a group alongside sharing experiences and knowledge can ensure RPs collectively understand risks, issues, and pitfalls and can de-risk a project and avoid issues from the start. In addition, aggregated demand for a resource will often have the effect of demanding a better market response.
As housing providers continue to navigate the choppy waters of 2021 we will all be keeping our eyes on the resulting impact of Brexit.