With increased pressure on councils, focus is back on the Housing Revenue Account

Council capacity

 

Using a standard set of metrics and measures applied to generate investment capacity estimates in HRAs, we have estimated the capability to borrow up to a further £10bn to £15bn.

 

This is variously distributed between councils, some with proportionally lower or higher capacity compared to their stock.

 

At the same time, we have measured the extent to which authorities are depreciating their stock to finance capital investment in asset management and maintenance (life cycle and other major repairs).

 

From this, we note that most have retained these allocations close to the levels of major repairs allowance that were utilised to feed into the self-financing debt calculation.

 

Stock investment

 

More recently, we have reported for the Local Government Association (LGA) and others on estimates for the costs of the type of wide-ranging stock improvements that are now being delivered.

 

For instance, fire and building safety, and energy efficiency to minimum Energy Performance Certificate Band C. We’ve noted that the figures are potentially enormous – perhaps up to £7.5bn for the former and a further £3bn to £4bn for the latter.

 

The government has already recognised this through the availability of various grant programmes – and this is before we get on to preparing for decarbonisation.

 

The prime minister’s recent speech on removing or amending some more immediate net zero carbon targets (such as the ban on installing carbon-fuel boilers after 2035), did not remove the 2050 net zero target with its prospective bill of more than £20bn for council landlords.

 

Weaker economy

 

Since we began our series of HRA articles in 2018, economic conditions have worsened:

 

• Revenue cost inflation has been outpacing income inflation, even before rent increases were capped at seven per cent last year
• Construction and repairs cost inflation has been running well above 10 per cent for some time
• Interest rates for borrowing from the Public Works Loan Board (PWLB) have risen from less than two per cent to more than five per cent in just over a year

 

 

Staffing challenges

 

Recruitment and staff retention remains challenging across council landlord services, particularly for technical and development staff.

 

Also, a combination of increased regulatory scrutiny through the Building Safety Act and the Social Housing (Regulation) Act promises to add further administrative as well as cost pressures.

 

In addition, whether decent homes failures or damp and mould claims, many councils face pressures to meet current standards, let alone potentially higher standards to be brought in by the refresh of the Decent Homes Standard. A consultation on this is expected this autumn.

Drop the pressure

 

Everywhere you turn, there is additional pressure. The prospects for the budget and business planning round for 2024-25 might be for a significant reset of priorities compared to the past few years.

 

So, with all these pressures, should we be revising our usual upbeat commentary on the state of HRA finances?

 

On the one hand… yes. 

 

It flies in the face of experience on the ground to continue to say that all HRAs are in good nick with plenty of headroom.

 

There is no doubt that the restriction on the rent increase last year damaged underlying HRA financial strength and those authorities with low reserves will have needed to have made real-terms cost savings.

 

As capital programmes are re-engineered to focus on the existing stock, inevitably that must move resources and investment away from new build and acquisition programmes, even if there is enough resource for the existing stock.

 

Housing association experience

 

And yet, do we see any material divergence from experiences in the housing association sector?

 

Actually, the challenges are the same: a focus on asset management as housing association stock grows older, the need to fix fire and building safety issues, higher interest rates…

 

These are leading to pressures on housing association finances – in many cases requiring a ‘carve-out’ of some of the largest tranches of short-term investment from banking covenants to prevent breaches.

 

Interest cover in the sector fell to a ratio of 1:1.4 (for every unit of interest there are 1.4 units of cash flow to cover this) in 2021-22 and is expected to be lower when the Regulator of Social Housing reports on 2022-23 at the end of the year. 

 

The need to recapitalise balance sheets is leading many to consider large portfolio disposals and there have been high-profile announcements of development programmes being cut.

 

Councils on the same page

 

For HRAs, the equivalent level of interest cover is also falling, but it is not materially different to the housing association sector.

 

Experiences are in parallel: many authorities are pushing back their development and acquisition programmes, not abandoning them completely.

 

In the past six to 12 months, at Savills we have experienced a significant uptick in enquiries around the financial health of HRAs.

 

For many authorities, the HRA has tootled along quite nicely since 2012, while the focus has been on the general fund and impact of austerity.

 

Now, with increased regulatory scrutiny, the focus is back on the HRA: can we finance the existing housing stock while still doing some new build?

 

How do we compare to others? Are the recharges from the general fund too high?

 

New narrative

 

So, yes, the narrative may be changing. Capacity is already being used for the existing stock.

 

New build figures are likely to decline, or at least stretch out further into the future, and the full costs of enhanced regulatory scrutiny are yet to be fully felt.

 

It all feels rather uncertain, and the need for certainty on standards and a long-term rent settlement is universally recognised as essential to provide confidence that the current choppy waters can be navigated.

 

But on the other hand, an HRA does not exhaust its capacity overnight. And with asset strategies based on robust stock data, business plans can be based on a clear strategy to do everything that needs to be done.

 

It’s undoubtedly harder, but there should still be the opportunity to generate investment in both the existing and new stock into the longer term.

 

Steve Partridge and Abigail Davies, directors, Savills Affordable Housing Consultancy