Managing risk in a volatile market

The housing crisis sees no end in sight particularly in London where homes built are less than half of the 77,000 commentators say is needed.

Properties remain unaffordable for the majority of potential homebuyers.

As housing associations relying on sales subsidy put the brakes on approving new development schemes to reduce their sales exposure; improve liquidity; and tackle the increased asset management costs associated with fire safety, there is an urgency for the sector to secure financial certainty, ideally in the form of government grant and flexibility on rent.

I joined L&Q in 2008 as Group Financial Controller in the midst of the global financial crisis, the worst in many living memories, triggered by the collapse of the US subprime mortgage market.

The lessons from the financial crisis were painful and profound, but one thing we can be sure of – the next crisis won’t look like the last one.

For one thing, the pace of change has increased exponentially in this faster-moving world – Pokemon Go took only 19 days compared to Facebook’s three years to reach 50 million users.

In response to fast evolving trends, and constant change in the consumer market, organisations have to be nimble and agile with an ability to constantly adapt strategies.

Being profitable cannot ensure financial survival as margins can disappear overnight.

Hazards are multifactorial, linked and impossible to isolate through diversification.

Senior management and the Board must work together to develop and establish a consensus on risk and return objectives including what types and levels are acceptable given the organisation’s strategic and financial objectives.

Even more critical is to successfully link top-of-the-house risk appetite and underlying risk tolerances and limits throughout the business, thereby helping risk owners to effectively control risk within the stated appetite.

This involves ensuring effective processes for risk monitoring and breach protocols to facilitate timely actions to remedy inappropriate risk levels.

However, let’s not forget that opportunity lies on the other side of risk.

The UK housing market halt experienced in the build up to Brexit could be seized as an opportunity to write a new chapter in addressing the housing crisis through influencing government policy and being more creative within set appetite levels.

At L&Q, back in 2008, rather than pulling the plug on development and sales, we took a measured approach to continue building much needed homes.

We completed a number of acquisitions in an unwavering resolve to strengthen our balance sheet and ready ourselves for the next big opportunity.

From this came the Barking Riverside Regeneration scheme to build 11,000 homes jointly with the Greater London Authority.

Partnerships through joint ventures with others remain an effective way of sharing risks as long as the partners’ values and objectives are aligned and not merely vehicles for off balance sheet financing.

At times of heightened volatility, organisations may look for simple solutions such as the dreaded cost cutting exercises and adopt more of a command and control attitude.

This can work in chaotic circumstances to re-establish a new baseline but beware of this becoming a default position which stifles innovation and is ultimately unsustainable.

Terrance Wong, Director of Financial Services, L&Q