ROHAN'S STORY

Swan Housing’s Head of Treasury delivers value by maintaining a firm grip on risk management – and by constantly honing his skills

Since moving to the UK from Sri Lanka in summer 2006, Rohan Gunatillake has worked for organisations with a confirmed social purpose. From 2007 to 2015, he held a variety of financial management roles within NHS trusts, moving to the UK when his wife, a consultant radiologist, secured a post at Oxford University Hospitals.

More recently, and partly thanks to the AMCT that he studied for and passed in 2008, he has changed direction. He became head of treasury and business planning at Watford Community Housing Trust (WCHT) in 2015, and then took up post as head of treasury at Swan Housing, which manages housing in Essex and east London, at the beginning of this year.

In a sense, housing associations represent a return to earlier interests and experiences for Gunatillake. His first employer was John Keells Stock Brokers, a subsidiary of the largest quoted company on the Colombo Stock Exchange, where he was an investment adviser. From there, he moved to First Capital Group, a market leader in fixed-income markets.

So, the funding issues that underpin the housing association sector reflect his interest in financial and capital markets, both equity and debt. “I have always been interested in financial markets and have considerable experience in both debt and equity,” he says.

When Gunatillake applied for his role at WCHT, most candidates in the running had housing association experience, but no treasury qualification. Gunatillake made it very clear in the application process that his position was the opposite. “I had very little knowledge of the housing sector. For me, the biggest challenge was understanding the business, but I wasted no time doing that,” he says.

“I had already seen how some people in finance roles in the NHS sit at their desk generating reports. I tended to go out with the service directors. If you put yourself out there, then you will understand the business. I applied that principle to this job as well.”

The move from accountancy to treasury came about when Gunatillake learned that his Chartered Institute of Management Accountants qualification made him eligible for a fast-tracked ACT qualification because of a degree of overlap. But he soon found that treasury had given him a broader perspective.

“You can make a real difference to the success of the organisation,” he says. “The decisions you make will have a direct impact on performance and profitability.”

SLEEPING GIANTS

As well as engaging with other professionals within the business, particularly the development team, Gunatillake is someone who likes to understand the significance of his organisation to its customers. Housing associations are, he says, sleeping giants and play an underappreciated role.

One in 10 people in the UK live in a housing association home. The sector generates around £12bn in rental income from around 2.5 million properties. Last year, housing associations built a third of all the new homes in England, adding an estimated £13.9bn to the economy and supporting 37,000 full-time jobs.

The fact that these organisations are partially funded by grants and regulated by the government makes them vulnerable to policy shifts, however. So when former chancellor George Osborne announced that social housing tenants would see their rent reduced by 1% a year for four years from April 2016 in his 2015 Budget, he reversed an upward trend in social housing rental income.

Associations had previously worked on the assumption that they would be able to increase rents by 1% above inflation (consumer price index) for the next 10 years from April 2015, in line with a formula that the coalition government had set out in 2013.

OUT OF THE BLUE

It was an unexpected move and one that has introduced significant disruption and risk. Suddenly, WCHT’s finances were adrift by some £10m over four years. At the time of the announcement, there was an added personal complication.

Gunatillake was on the eve of his holiday, when he was informed that the trust’s business plan was based on assumptions that could no longer be counted on and would have to be redrawn along with a raft of other board papers.

Moreover, one week earlier, the trust had applied for a new funding programme loan, in the hope of securing cheaper funding fixed for over 25 years. Gunatillake was tasked not just with revising the trust’s business plan, but resubmitting the loan application.

All this against a backdrop of diminishing government grants coming into the sector and continued uncertainty on rent caps.

“To this day,” he says, “there is uncertainty around what is going to happen to rental income after 2020. As housing associations, we don’t know what to incorporate into our business plans. There’s no clarity at the moment, so that’s a huge challenge.”

To start bridging this funding gap, WCHT needed to look at its plans and tenure mix. For housing associations, there is the possibility of generating open-market sales at the end of a build programme so that profits can be reinvested.

Gunatillake believes that the business plan is more robust and appropriate for the new conditions. That action is not risk free, however. “For traditional housing association work – sub-market affordable rents – the private sector cannot compete with you.

“There is a solid income stream and it’s anti-cyclical. But if you are building for sale, you have to compete with the private sector, and if there is an economic downturn, there is a risk that you build, but you can’t sell.”

In the wake of the Budget announcement, WCHT learned that the housing regulator, the Homes and Communities Agency, was to undertake an in-depth assessment of its financial viability and governance. Gunatillake was part of the project team established when the trust was informed the regulator would be carrying out an assessment.

But the process proved worthwhile when it awarded the trust an improved score on financial viability, moving it from a V2 rating to V1 for the first time in the trust’s history.

RISK PROFILE

Interest rate risk is another significant area where treasury skills come into play. Housing associations are long-term borrowers and use financial derivatives, such as interest rate swaps, to hedge interest rate risk and provide much-needed market certainty.

The fall in interest rates following the EU referendum vote, however, has added to the market pressures, with investors seeking the safe haven of government bonds, further depressing yields.

“Because market rates are down,” Gunatillake points out, “the interest costs go down, but with a fixed-rate product, there is an adverse impact on my mark-to-market exposure. That is another challenge and potentially a requirement to come with more security with a lender. But that, in turn, means I will be left with fewer assets with which to secure lending going forward,” he says.

Rating agencies can prove uncomfortable with the changes in the risk profile brought about by shifts towards more open-market and shared-ownership sales.

For example, in October last year, Standard & Poor’s downgraded Swan Housing’s rating from A+ to A and gave it a negative outlook, because its increased reliance on market sales made its income profile more volatile.

Across Essex and east London, Swan Housing has 11,000 units, owned and managed. A further 1,500 units are due to come on stream over the next three to four years, 65% of which are currently destined for open-market sales and another 20% for shared ownership.

“So, only 15% goes into traditional housing association rental stock,” Gunatillake explains. “The rating agency considers this to be a risk, because if there is a downturn, we will be competing with the private market.

“We are monitoring the situation closely. Swan has a strong financial process and ‘significant mitigating plans’ in case of a market downturn, such as pausing or rescheduling development schemes, converting tenures from private sales to social rent, and a concerted effort on pre-selling. In addition, regeneration development generally comes with local authority support and is carried out in small phases, of about 150-200 units at a time.”

Housing association treasurers additionally have challenges around managing surpluses, with a need to invest wisely and secure a return within the accepted parameters of the treasury policy. The interplay of these core areas – managing liquidity, counterparty risk and interest rate risk – is what makes treasury professionals so central to the viability of these organisations.

Given housing associations’ funding mix – for every £1 of public investment, they leverage another £6 in private or capital market funding – those three areas represent a dynamic and complex set-up. “Treasury is a very important function in this high-priority area,” Gunatillake says.

THE FUTURE

While some may have considered a dual qualification in accountancy and treasury sufficient for their needs, Gunatillake is now squaring up to the final level of the Chartered Financial Analyst (CFA) qualification and is looking further forward at the MCT.

He’s not necessarily a fan of taking more exams; however, he finds the focus of the CFA interesting and believes further study to be a good way of broadening horizons and demonstrating his commitment to his career.

“I’m a strong believer that learning should never stop,” he says. “In treasury, you have to be a value creator. I can’t lay a brick to save my life, but I’m sure I can help the organisation achieve its corporate objectives by providing solutions to the risk management issues. Doing that, it’s only right that I am up to date with my skills and knowledge.”