Posted 01.08.15
This Reflections article has been submitted by Jo Savage of Croftons - Jo.savage@croftons.co.uk
RPs are still reflecting on the recent budget announcements and asking themselves 'where do we trim our business plans to make up for the rental income we are about to lose' but there is still uncertainty about what this means in terms other than business planning and financials.
Value for Money (VfM)
As we know, the HCA has stated that VfM is here to stay. VfM was not only about making savings, and evidencing those savings, but also social value, getting a better return on assets and driving value through service delivery and performance.
However, regardless of complying with the VfM standard, these actions will now have to be undertaken for very different reasons, namely to fill the gap left by the rent cuts announced in the recent budget.
The question then is, where does this leave VfM? Can RPs be expected to evidence VfM as well find the savings to bridge the inevitable rent gap? If so, this would potentially represent a significant challenge if RPs are forced by dint of the budget to make savings, but are also still expected to evidence VfM across the business.
The question is whether the regulator will see the necessary savings to be made to bridge the gap as VfM out of necessity or will still have the current, separate, set of expectations, making the position doubly difficult for RPs as it will be tough to find the areas where savings can be made to bridge the gaps, which could potentially be in the millions, without also having to evidence VfM elsewhere.
Of course, there is also the necessity of ensuring that changes to business plans do not breach the regulatory standards, not just in relation to VfM.
Money in the Bank
The big question facing RPs is the position of lenders. Will they now expect to review business plans as a result of the announcement? Will they regard the gap left by the rent cuts as a cashflow matter rather than a reduction in asset value and take a view providing loan repayments can still be met? How will the rent cuts affect the value of RPs' portfolios? Will a change in business plans trigger a re-negotiation or re-price?
RPs will undoubtedly be reviewing business plans right now and checking loan covenants to ascertain whether there are any potential breaches caused by the rent reductions and credit committees of funders to the sector will no doubt be meeting to discuss the implications.
No doubt the sector will approach the change in landscape with its usual gusto, whilst wondering what this means for the shape of the sector in the future.
We can't say we have the answers, and eagerly await the content of the letter the HCA proposes to send to RPs. Whilst it is important to avoid knee jerk reactions to the news, it is perhaps a good time to reflect on business plans and the changes that will need to be made to accommodate the cuts and check loan covenants to see what impact this may have on compliance.
