Eline Lofgren

As we embark on this new year, nearly 10 years after my original article, many things have changed since 2016, but for housing associations, quite a lot has not.

We have an increasingly urgent housing problem in Britain, and housing associations currently find themselves between the proverbial rock and a hard place. These large and influential organisations face difficulties in securing the very means needed to fulfil their charitable missions and, paradoxically, also increased expectations for housing development and maintenance.

Making matters even worse, the Scottish Housing Regulator confirmed in a recent report at the end of 2024, that Scottish housing providers’ financial headroom has diminished with “significantly reduced” cash reserves due to rising costs and constrained rent increases.

How might these giants of both social enterprise and housing adapt to conquer omnipresent funding challenges and the crippling effects of inflation – while also aspire to help plug this country’s housing shortfall? The answers are complex, but for housing associations that are also classified as charities a small piece of the puzzle may lie in an often-overlooked part of the balance sheet – free reserves.

First, some background information. In the UK, housing associations are independent, non-profit organisations set up to provide low-cost housing for people in need of a home. They exist in the gap between the private and public sector in the hope that they can combine the best elements of both.

Today, most housing associations are also registered charities, a status that bestows tax benefits and has cemented the independent nature of the overall sector. In Scotland, this means that housing associations need to adhere to regulations from two distinct bodies: the Scottish Housing Regulator (SHR) and the Office of the Scottish Charity Regulator (OSCR). Each regulator has a specific focus and set of responsibilities which can overlap, but also requires distinct compliance strategies.

Both Scottish charities and housing associations are required to hold free reserves, but the function of free reserves is different in several important ways. Charities are encouraged to focus on efficiency when managing free reserves, to demonstrate that they are using all resources to advance their stated charitable purpose. The Scottish Housing Regulator (SHR) on the other hand, puts a primary focus on ensuring that housing associations remain financially sustainable due to the fact that housing associations often carry substantial debt. Free reserves often play a critical role in securing loans for capital projects like building and renovating properties, which means that liquidity trumps efficiency – as far as housing association free reserves are concerned.

In 2025, housing associations and charities alike are facing threats to funding on multiple fronts. Some of these are obvious, such as threats to normal routes of funding be it donations from a financially strained public or the government grants which many housing associations depend on. Here, I want to focus on a less visible but perhaps even greater threat – inflation.

Charities have long since come to terms with the fact that the long-term, often perpetual nature of their reserves disqualifies cash as a responsible way to store large reserves during periods of meaningful inflation. Consequently, most charities with sizeable reserves will invest their reserves in assets that give them the greatest chance of keeping up with inflation over time, including equities.

Housing associations have a similar predicament, but the situation is complicated by the fact that their lenders prefer reserves to remain as liquid as possible to lower risk of failure to service debts. As a result, most housing associations limit their treasury management to making the most of various interest-paying savings accounts.

There are at least two potential issues with this approach. Firstly, the size of many housing associations’ reserves makes it near impossible in a practical sense to diversify reserves between banking institutions in a manner that allows reserves to be protected from an unlikely, but perfectly possible, institutional default. We need only look back to the crisis in 2008 for examples of this.

Secondly, when interest rates on savings accounts and inflation diverge, limiting reserves to cash creates a scenario where focus on liquidity no longer serves to protect financial sustainability. Instead, it guarantees a steady reduction of purchasing power over time. This is particularly detrimental for housing associations who are often unable to pass on increasing costs via corresponding increases in rent.

When inflation was close to central bank targets, this gradual erosion of purchasing power was slow enough to justify liquidity as the sole priority. But today – during a period of much higher inflation – meaningful erosion of purchasing power is taking place over much shorter time periods.

Which begs the question, what can housing associations that find themselves in this tricky situation do?

Making Reserves Work Harder

The topic of reserves and policies on the management of reserves have remained low profile for housing associations, even as the number of housing associations registered as charities has steadily increased.

For housing associations, the best place to start is to identify underlying reasons for holding free reserves in the first place. This may seem obvious, but the business case for reserves often go far beyond the traditional “rainy day” scenario.

As mentioned above, the primary reason for holding large levels of reserves is often to satisfy requirements set out by various lenders, but as charities there are several other very important reasons to consider, including: 

    • Generating income
    • Ensuring continuity of income
    • Specific future projects and liabilities
    • Emergency spending in the future
    • Bridging cash flow

In the Scottish Housing Regulator’s “Analysis of Registered Social Landlord Audited Financial Statements – 2022/23 (published in March 2024) several factors were revealed to have impacted the performance of Scottish housing associations. Among them inflation featured prominently – focussing on the difficult position housing associations find themselves in with government-imposed restrictions on rent increases severely limiting the entire sector’s ability to deal with substantially higher costs brought on by inflation. 

In the report, the Regulator wrote that “it remains important that RSLs continue to adjust their business plans in response to changing circumstances to manage their resources effectively to ensure their financial well-being, while maintaining rents at a level that tenants can afford to pay.”

This classic position “between a rock and a hard place” does not leave Scottish housing associations with many options, but reviewing the management of free reserves is a fairly easy win that should feature near the top of the list.  

So, how exactly can more efficient management of free reserves help housing associations insulate themselves from inflation, while also remaining liquid to meet various lending requirements? The answer is surprisingly simple.

Most lending institutions view short-term UK gilts and AA-rated money management funds as being on par with cash for liquidity purposes. The reason for this is that both pose very little credit risk, with gilts widely considered to be low risk due to being backed by the full force of the UK government.

As we move forward in 2025, official inflation measurements are coming down and UK gilts yields are increasing meaning that right now – yields on short-term gilts are attractive relative to inflation. This is of course subject to change, but even under different scenarios, short-term gilts tend to outperform interest paid in savings accounts which means that housing associations taking advantage of this will benefit.

From a practical point of view, the challenge faced by housing associations is akin to that of charities. While financial directors are often perfectly happy to responsibly allocate cash in various bank accounts, the purchase and monitoring of gilts and money market funds may not be within their expertise. Many are perfectly comfortable with this, but for those who are not - the most cost-effective way to proceed is to appoint external, discretionary investment managers.

Traditionally, investment managers excel in managing portfolios with higher risk profiles than most housing associations would be comfortable with, but some are beginning to offer specialised low-risk and low-cost investment services that are well suited for the needs of risk-averse housing associations.

At Evelyn Partners we have called this service our Cash & Cautious Bond Portfolio Service and this could be a great alternative for housing associations that have £500,000 or more in free reserves and that would like to improve upon the return currently available from savings accounts. But remember, all investments carry some risk so the value could go down.

Managing cash deposits can be a complex affair for charities in general and housing associations in particular. Our Cash & Cautious Bond Portfolio is a cost-efficient alternative that allows housing associations more time to deal with the core challenge in 2025 and beyond -  continuing to provide quality, affordable housing for those in need.