L&Q cuts surplus forecast amid post-referendum delays and drop in prime London demand

Housing completions are down from a budgeted 1,159 homes to 878 for the financial year to-date, L&Q said, compared with 1,214 at the same time last year.

The delays in development handovers and the drop in demand for high-end properties have in turn led to slower than expected sales rates, resulting in the London G15 association revising its 2016/17 surplus from £281m to £270m.

L&Q’s revised position was set out to the financial markets in a 2016/17 half-year update today (2/11/16), and came as Standard & Poor’s downgraded the 79,000-home association in relation to its level of sales exposure.

It also came as volume housebuilder Persimmon - whose position is typically seen as the ‘bellwether’ for the housebuilder market - said customer activity at the start of the autumn selling season strengthened in line with the traditional seasonality of the market. But it said ongoing uncertainty around the economic impacts of the referendum means it remains ‘cautious with respect to new land investment’.

L&Q reported that it has continued year-on-year growth in operating surplus, with an operating margin on lettings at 52 per cent compared with 46 per cent a year earlier. Homes in management have already grown from 71,111 to 79,646, while turnover is up 6 per cent to £416m.

The operating margin on sales activities is down from 29 per cent to 21 per cent. Surplus for the period is £122m, marking a 4 per cent year-on-year decrease from £127m.

Of the 878 housing completions, which include joint ventures, 363 are for sub-market tenures - social housing and shared ownership - compared with 715 in 2015. Another 515 housing completions are for market tenures - outright sale and market rent - up from 498 a year earlier. L&Q is expected to handover 2,568 units for the the full-year ending 31 March 2017.

Its has approved an additional 2,800 units bringing total units in the development pipeline to 41,700.

Waqar Ahmed, group finance director, said delays in development handovers were ‘due to construction delays on key sites that, combined with a dampening of demand for ‘high end’ outright sales units located within London’s prime markets and constructed within joint ventures’.

He said this has resulted in a slower than expected sales rate.

‘In recognition of these factors, L&Q has adjusted its guidance on surplus for the FY ending 31st March 2017 to £270m from £281m,’ said Mr Ahmed.

‘L&Q has limited exposure in the context of its capital commitments and development pipeline to London’s prime markets and continues to closely monitor economic trends and local market conditions.

‘We believe that L&Q’s robust approach to risk management, governance and performance management provides L&Q with the confidence to adapt to any potential challenges that we may face.’

Mr Ahmed had alluded to the impact of the referendum on prime property sales when speaking to Social Housing in July 2016. He said at the time that they are  ‘taking a very cautious look at its high-end sales products’, at more than £600 per square foot for example, which make up fewer than 1,000 units of its 40,000-home pipeline.

Net debt - excluding derivative financial liabilities - in the financial year to-date increased by 18 per cent to £2,491m, from £2,109m at 2016 year-end. It said this reflects new approvals and the timing of committed obligations. Available liquidity, which is cash and cash equivalents plus fully secured and committed revolving credit facilities, stands at £269m, down from £370m at 2015/16 year-end.

On the S&P decision to downgrade the group, L&Q said the agency’s view is that the ‘uncertainty introduced by ‘Brexit’ has exacerbated the risk associated with social housing associations market tenures’.

In a trading update, Persimmon said customer activity at the start of the autumn selling season strengthened in line with the traditional seasonality of the market. However, it added that the uncertainty surrounding the potential impact of the EU Referendum result on the UK economy means it remains ‘cautious with respect to new land investment’, albeit progressing ‘attractive opportunities on a selective basis’.

It said the reduction in the bank base rate in August has resulted in ‘more attractive mortgage products further supporting affordability’.