How can housing associations try to reduce risk and beat inflation?

We have an urgent housing shortage problem in Britain, and housing associations currently find themselves caught between a rock and a hard place. In the UK, housing associations are independent, mostly 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 worlds.  
These large and influential organisations face difficulties in securing the finances   needed to fulfil their charitable missions and meet the increased expectations for housing development and maintenance. Besides funding challenges, they also battle with inflation and need to address Britain’s housing crisis.

Making matters even worse, the Regulator of Social Housing found in a 2024 report¹ that ‘constrained financial headroom reduces the capacity for the sector to manage downside risk and increases the risk that governance failings will lead to financial distress’. 

So, how might these giants of social enterprise and housing address these challenges? The answers are complex, but a solution may lie in an often-overlooked part of the balance sheet – free reserves. 
If a housing association has charitable status, it means that they need to adhere to regulations from two bodies in England: the Regulator of Social Housing and the Charity Commission. Each regulator has a specific focus and set of responsibilities, which can overlap but they also require certain levels of compliance. 

Charities and housing associations are required by the regulator and the Charity Commission to hold free reserves, and these funds are used in various 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 Regulator of Social Housing, on the other hand, puts a primary focus on ensuring that housing associations remain financially sustainable because they can often carry substantial debt. Free reserves play a critical role in securing loans for capital projects like building and renovating properties, which means it’s important that they are liquid.  

In 2025, housing associations and charities alike are facing threats to funding on multiple fronts. Some of these are obvious, such as donations from a financially strained public drying up or reductions in government grants. However, a less visible but perhaps even greater threat is inflation. 

Most charities know that holding cash is not the most responsible way to store large reserves during periods of high inflation. Consequently, most charities with sizeable reserves will invest them in various assets that give them the greatest chance of keeping up with or potentially beating inflation over time, including equities. 

Housing associations have a similar view, but the situation is complicated by the fact that their lenders prefer reserves to remain as liquid as possible to lower the 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 spread the money between banks in a manner that allows them to be protected from an unlikely, but possible, institutional default. We need only look back to the Global Financial Crisis in 2008 for examples of companies that collapsed and defaulted on their obligations. 

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 rising costs by increasing rent. 

When inflation was close to the Bank of England’s (BoEs) target of 2%, 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.
 
So, what can housing associations do about it? 

As mentioned above, the primary reason for holding large levels of reserves is often to satisfy requirements set out by various lenders, but as many housing associations are now registered 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 Regulator of Social Housing’s Annual Report and Accounts 2022-2023², several factors were revealed to have impacted the performance of housing associations. 

In the report, the regulator wrote that challenges included ‘rapid and increasingly prolonged inflation, a tight labour market, and continuing supply chain disruption’. All these factors have resulted in increased costs for the sector. Coupled with this we have seen higher borrowing costs, from increased interest rates and widening spreads on debt.’ These challenges led the regulator to reinforce the need for housing providers to make the best use of their resources.

Regulatory obligations coupled with the burden of increasing inflation leaves housing associations with fewer options. However, reviewing the management of free reserves is an easy win. 
How exactly can housing associations insulate themselves from inflation, while also remaining liquid to meet various lending requirements? The answer is surprisingly simple: investing outside of basic cash accounts. 

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

As we move forward in 2025, official inflation measurements are coming down and UK gilt yields are increasing meaning that right now – yields on short term gilts are attractive relative to inflation. This could change, but usually short-term gilts tend to outperform interest paid in savings accounts, which means that housing associations’ reserves stand a better chance of growth if they are exposed to these assets instead of just cash accounts. 

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. For those who are not comfortable in managing exposure to these assets, the most cost-effective way to proceed is to appoint external, discretionary investment managers. 

Traditionally, investment managers offer 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 more suitable to these clients.

At Evelyn Partners we have called this our Cash & Cautious Bond Portfolio service. This could be an 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 to deal with the challenges brought on by inflation and the need to access funds quickly to continue to provide quality, affordable housing.

To find out more about our Cash & Cautious Bond Portfolio and how it could help charities to beat inflation and grow their reserves contact Matthew Wells by emailing matthew.wells@evelyn.com or calling 0113 224 5575

1. Gov.uk, Sector risk profile 2024, October 2024
2. Gov.uk, Annual Report and Accounts 2022-23, December 2024