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These are challenging times for housing associations. Traditionally they have held their own in housing downturns. However, the new generation of businesslike social landlords are far more exposed to the vagaries of the market than their predecessors and the supply of cheap credit that has sustained the sector in the past is drying up.

In January London-based housing association Ujima was saved from collapse only by the last-minute intervention of the Housing Corporation, which forced a sale to London & Quadrant. Ujima鈥檚 difficulties 鈥� the first association in 40 years to breach loan covenants 鈥� sent a chill through the social housing sector and raised fears that other cash-strapped associations could go to the wall. With the private housebuilders the associations rely on for new-build units also facing serious difficulties, the government鈥檚 ambition to deliver 180,000 affordable homes over the next three years is looking increasingly unlikely.

What鈥檚 the problem?

Housing associations own plenty of property against which to secure loans, and about 60% of their income is effectively Treasury backed, in the form of housing benefit. Consequently banks they have generally been seen as a secure investment and have been able to secure finance at favourable rates. Last summer there were half a dozen or so lenders willing to offer housing associations deals of 0.3% above the London inter-bank offered rate (LIBOR).

A year on, the credit crunch has changed the situation completely. Most banks have raised their rates substantially. David Mairs, a director at Tribal Treasury Services, says a recent high of 1.25% above LIBOR has been seen. 鈥淎ll of the banks are desperate to hang on to cash. Lloyds is now the only game in town and it is pulling deals and re-pricing. Any housing association with an upcoming need for major funding really has some difficult issues,鈥� he says.

Peter Marsh, deputy chief executive of the Housing Corporation, says there is no need to panic. He claims that 拢10bn of the 拢12bn that housing associations need to meet their delivery targets for 2011 is already in place. 鈥淭hat said, I am telling housing associations not to be complacent. They must be doubly careful to meet all their loan conditions or risk being forced to re-finance at higher rates,鈥� he says.

Aren鈥檛 associations immune to downturns?

Admittedly, social housing providers in the past have coped well in market falls. Associations can continue to collect a steady rental income and lower land prices mean they can compete more effectively for sites. However, the growing importance of surpluses generated by shared ownership and outright sales means that a fall in demand poses an increasing problem. It damages their finances and deprives them of the capital they would normally use to develop more houses. 鈥淭hose surpluses have been cross-subsidising Housing Corporation grants,鈥� says Brendan Sarsfield, chief executive of the Family Mosaic housing association. 鈥淚f sale prices drop, then more government grant funding will be needed to build social rented housing.鈥�

Can鈥檛 government grants be increased?

Not without reducing the number of houses built, says Marsh: 鈥淏efore we go down the route of increased grant rates, we must ask what use unsold properties can be put to so that the cross-subsidy can be matched.鈥� He suggests homes that housing associations originally intended for private sale could be converted to rental properties, and the income used as security for further borrowing.

The government also announced in May that a warchest of 拢200m would be made available to housing associations to fund the purchase of unsold homes from private housebuilders. There are difficulties with this approach, however. Some homes built for private sale may fail to match public sector quality and sustainability standards. Moreover, Terry Fuller, chairman of the Home Builders Federation鈥檚 affordable housing group, says an attempt to convert private housing into social rented accommodation may fall foul of the Property Misdescriptions Act 1991, which requires developers to reveal the location of social housing at a scheme before making a sale.

Don鈥檛 private housebuilders build most of the affordable homes now anyway?

That鈥檚 exactly the problem 鈥� they鈥檝e stopped building. Figures from the communities department suggest that 62% of social housing delivery is carried out by the private sector as part of section 106 agreements with planning authorities. In some of the more expensive London boroughs, such as Kensington & Chelsea, all affordable housing is delivered in this way. This means the slowdown in development from big housebuilders such as Persimmon, Taylor Wimpey and Crest Nicholson in the face of bleak market conditions also threatens affordable housing.

A big reduction in the supply of properties for sale does not necessarily mean a proportional reduction in affordable housing, however. Fuller says that in some schemes where the housing can be built out in large chunks, it still makes economic sense to construct the affordable element alone.

While some housing associations are highly dependent on developer contributions, others are less so, particularly in the north of England: 鈥淥nly 5-10% of our pipeline is through section 106, so we expect to deliver all of our targets,鈥� says Matthew Harrison, chief executive of Manchester-based Great Places.

Will the government will miss its targets?

Quite possibly. The Housing Corporation comfortably exceeded its targets for 2007/08 by delivering more than 69,000 affordable homes. But the coming years may be much tougher, particularly if the credit squeeze continues into 2009.

鈥淸The 2011 target] must now be pretty doubtful 鈥� it may be that there will be a kink in the graph for the next two or three years if we are to meet the target for 2020,鈥� says Clive Betts MP, chair of the all-party urban development group.

Richard Capie, director of policy and practice at the Chartered Institute of Housing, describes the targets outlined in last year鈥檚 housing green paper as ambitious. 鈥淭hey are probably now very unlikely. There will be no easy credit for two to three years, so there鈥檚 a risk of impact on the targets.鈥�

Marsh remains doggedly optimistic, however: 鈥淭he short term is tricky, but it鈥檚 too early to say the 2011 target is undeliverable,鈥� he says.

Could housing associations go bust?

鈥淟ook for a housing association with a couple of hundred unsold shared ownership properties, a large landbank falling in value, a dependence on sales and a loan facility that needs renewing 鈥� that鈥檚 your next Ujima,鈥� predicts a senior consultant who wished to remain anonymous.

Piers Williamson, chief executive of The Housing Finance Corporation (THFC), which lends to housing associations, takes a more optimistic view: 鈥淚n terms of liquidity, most associations have a significant buffer, particularly if they stop developing,鈥� he says.

Sarsfield warns that some associations may be at risk of breaching their loan conditions if there is a prolonged downturn. When this happened to Ujima, its lenders 鈥� which included THFC 鈥� called in their loans. Williamson points out that no money was lost following Ujima鈥檚 takeover by London & Quadrant.

The Housing Corporation acts as a regulator for housing associations and Marsh accepts that the risks facing them have increased. 鈥淟enders are becoming more robust in their monitoring and we鈥檙e pushing associations to go back and look closely at their loan agreements to make sure that they are not breached,鈥� he says. However, he denies that there is a long list of associations in a similar position to Ujima.

The corporation will undoubtedly be keeping a close eye on any association that shows signs of financial weakness. It will try to pre-empt further collapses by arranging for smaller associations with shallower reserves and less access to credit to be absorbed by their bigger rivals.

鈥淭here are a significant number of associations which have a keen appetite to expand their business through mergers and acquisitions,鈥� says Marsh. Nevertheless with the tough market and lending conditions not expected to improve in the short term the corporation will need to be particularly vigilant if another Ujima is to be avoided.