Following the first year of the implementation of the 1% rent cut, the sector has come under increasing pressure to deliver more efficiency and more growth in increasingly challenging economic and political circumstances. So, what can analysis of the Global Accounts for 2017 tell us about the relative health and risks in the sector? This year’s HCA report reveals some interesting findings:
An overall picture of increasing investment and growth:
A resilient sector has increased investment in new and existing housing by 15% and continues to deliver new growth:
- Investment in new and existing housing has increased to £11.6 bn; representing more than twice the level of surplus generated in the same period.
- £6.3bn of this is in new rental supply (13% increase since 2016) – with the sector creating 41,000 new homes for rent, or part-rent (a slight decrease since 2016)
- £3.2bn was invested in properties developed for outright sale and market rent
- After sales and demolitions are taken into account, the total number of social homes in management has increased overall by 28,000 to 2,761,000
- Total number of non-social housing units in management by the sector is 229,000
- Current assets across the sector now total £15.6bn – representing a 9% growth since last year; fixed assets total £148.8 bn – a 3.9% growth since 2016
Overall financial health has not been affected by the rent cut:
Turnover levels have been maintained, though surpluses are improved:
- With rent from social housing lettings accounting for more than 65% of turnover generated by the sector, it is perhaps surprising that at £20bn, turnover has stayed the same as last year.
- Although well down on previous year’s increases, net rental income is slightly up from last year at £14.4bn. Overall, rent cut impacts have been offset by increased rental income from affordable rent re-lets and a net increase in new rental supply, as well as other properties being exempt from the rent cut impacts
- Net surpluses have increased to more than £4bn for the first time; adjusting for fair value gains attributable to merger activities, the underlying surplus for the sector is £3.5bn – a 6% increase since 2016.
- Total debt now represents 20 times the underlying surplus, and interest and financing costs have increased by 14% across the sector; much of this increase is attributable to a loan breakage by one provider
- Prudent financing remains a critical focus as providers’ investment in new and existing homes is being primarily financed by internal reserves and borrowing, reflecting the decreasing reliance on grant
Providers are driving down costs to protect and improve margins:
The sector is not standing still - alongside increasing investment in new homes supply, an efficiency drive can be seen to be taking hold to ensure sustainable financial futures:
- Overall, there has been a 7% reduction in the social housing cost per unit (now at £3698 per unit) and overall operating margins improving from 28% to 30%
- This is reflected in significant decreases in management costs per unit of 9% being reported.
- However, at £2.1bn, there has also been a significant reduction in capitalised and major repairs expenditure – representing a 14% decrease since 2016 across the sector. Potentially a troubling statistic, some of the greatest decreases can be explained by more recent stock transfer organisations completing their initial ‘catch up’ major investment programmes. It is clear though, that the majority of providers have reduced their major repairs expenditure, since 2016
- The regulator has commented that it is relatively unconcerned by the reduction in major repairs expenditure, attributing this to a predictable one-off business adjustment in light of the rent cut. Instead it is focusing on forecasts that suggest major repairs investment will increase over the next three years.
- Despite this conclusion, this is not a time for complacency - a transparent and robustly evidenced level of investment in existing homes will be of increasing importance to the HCA, residents and other stakeholders, especially in light of Grenfell and the new VFM standard expectations.
Consolidation of the sector continues
The sector continues to consolidate, with an increased number of mergers and group structures in evidence.
- The sector now comprises 319 providers with over 1,000 units. (This is down from 366 in 2011).
- The emergence of a small number of very large organisations brings a new dynamic as the relative performance of one of these organisations can, and has, affected overall sector performance; for instance, more than half the increase in debt for the sector is attributable to one large provider.
Increasing exposure to market risk
As new development activity has increased across the sector, management of risk is a key area of focus:
- A total surplus on property sales of £1.4bn was reported for 2017, a decrease of 0.1bn since last year.
- Turnover on from sales has decreased by more than 6% compared with last year
- Margins on properties for sale have also decreased by 6% since 2016
- There is a strong pipeline of new development – with a £1.2bn increase in properties held for sale (the vast majority of which is land and properties under construction, rather than standing stock)
- The majority of development across the sector is concentrated in a small number of providers – 15 providers account for more than 75% of turnover from properties developed for sale, and 11 providers each had £100m of properties held for sale (representing 63% of the sector total).
- These developing providers are potentially exposed to more risk – and this is monitored closely by the regulator and is in line with the recent V2 reclassifications announced recently.
- However, the overall assessment is that underlying strong financial performance places the sector in a good position to weather an increasingly challenging economic climate and deliver more growth.
- The 2017 Global Accounts demonstrate a sector that is overall robust, though risks are increasing as development programmes increase.
- At a sector level, it is considered sufficiently strong to fare well over the next 3 years and expectations from Government and the regulator are for continued improved performance and greater outputs
- However, there is significant variation within the aggregated data, and individual providers will need to robustly balance their investment, efficiency and risk plans in an increasingly demanding environment.
- The new Value for Money Standard and post-Grenfell challenges for investment in existing housing will attract greater scrutiny and need for transparency in how providers are delivering on their efficiency and investment objectives.
For the HCA Global Accounts Data with HouseMark ratios, click here.
For the full HCA report, click here.