An asset liability management model for housing associations
| Date | 01 December 2001 |
| Published date | 01 December 2001 |
| Pages | 453-471 |
| DOI | https://doi.org/10.1108/EUM0000000006186 |
| Author | Bert Kramer,Ton van Welie |
| Subject Matter | Property management & built environment |
Academic papers:
ALM model
453
Journal of Property Investment &
Finance, Vol. 19 No. 6, 2001,
pp. 453-471. #MCB University
Press, 1463-578X
ACADEMIC PAPERS
An asset liability management
model for housing associations
Bert Kramer and Ton van Welie
ORTEC Consultants BV, Rotterdam, The Netherlands
Keywords Assets, Liability, Monte Carlo simulation, Housing
Abstract With asset liability management (ALM), all the relevant asset and liability classes are
managed in an integrated fashion. We describe an ALM model for housing associations. This
model uses simulation to show the development of a housing association, usually measured as
solvency and profitability, dependent on both internal (strategy) and external (economy) factors.
In order to assess the associations' risk and return profile, we generate a large number of
economic scenarios. Furthermore, we will show the pitfalls of just using one or a few scenarios.
Finally, we will show how this model can be used to obtain insight into the influence and
effectiveness of specific instruments.
Introduction
With asset liability management (ALM), all the relevant asset and liability
classes are managed in an integrated fashion. The values of the assets and the
liabilities are influenced by, amongst others, management strategy and
economic circumstances. Management cannot influence the latter. ALM models
can be used to show the expected development of an organisation, usually
measured as solvency and profitability, dependent on both internal (strategy)
and external (economy) factors. Traditional ALM models often only facilitate
the use of one or a few possible economic scenarios[1]. These traditional models
can be used to obtain a general picture of the expected development of solvency
and profitability. However, these models do not take into account the
uncertainty that is involved in predicting long-term economic developments.
Therefore, it is impossible to get a reliable estimate of, for instance, the
insolvency risk. In order to take this uncertainty into account a large number of
economic scenarios have to be analysed. These scenarios should reflect both
the uncertainty of the individual economic variables (i.e. variance) and the
correlations between the separate variables. In this paper we describe a model
which can be used to assess both the risk and the return characteristics of
housing associations. Furthermore, we will show the pitfalls of just using one
or a few scenarios. Finally, we will show how this model can be used to obtain
insight into the influence and effectiveness of specific instruments.
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This paper was presented at the European Real Estate Society (ERES) meeting, Bordeaux, June
2000. Winner of the MCB/ERES 2000 award.
JPIF
19,6
454
ALM for housing associations
In many West European countries, the government has retreated from the
housing market. This has usually implied a reduction in financial support for
the social rented sector. The operating risks are increasingly passed on to the
social housing associations, which therefore have to adopt a more market-
oriented approach. One example is The Netherlands, where social housing
represents the largest share (40 per cent) of the housing market in Western
Europe (Boelhouwer, 1997).
As the operating risks are now borne by the housing associations themselves,
they are experiencing an increasing field of tension between guaranteeing the
financial continuity of the organisation and its social objectives. For social
managers it is important to what degree the housing of the target group can be
combined with a greater financial risk. In order to be able to obtain insight into the
financial risk connected to specific social and financing strategies, it is essential to
analyse these factors together. This is called (integrated) ALM. With ALM it is
possible to take into account all the cross-correlations between the instruments.
Table I shows a typical, simplified profit and loss account (part A) and
balance sheet (part B) for a Dutch housing association. The asset side of the
balance sheet of a housing association consists almost entirely of the dwellings
owned. The liability side is dominated by long-term debt. Virtually the only
incoming cash flow is rent income. The main outgoing cash flow is interest
payments followed by maintenance.
Housing associations have a number of instruments that can be used to
influence the value and the composition of the assets and the liabilities. One can
think of the treasury strategy for debt, and the rental strategy, maintenance
strategy, investment strategy (i.e. structural improvement, new construction,
sale, acquisition, or demolition of dwellings) and target group strategy for the
dwellings. The management can use these instruments in order to pursue a
number of financial and social objectives. A financial objective could be to
remain solvent; a social objective could be to keep a specific percentage of all
the houses under a specific rent level.
How an association scores on its financial and social objectives is influenced
by the strategies that have been implemented. However, the actual scores are
also influenced by uncertain developments external to the association. Examples
Table I.
Key figures of Dutch
housing associations
A. Typical profit and loss account (per cent)
Rent income 78 -/- Interest payments 46
Other income 22 -/- Maintenance costs 20
-/- Other costs 34
B. Typical balance sheet (per cent)
Dwellings 85 Equity capital 9
Other assets 15 Debt 83
Other liabilities 8
Source: Aedes (2000)
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