Accounts digest 2023: operating surplus falls 14%

Operating costs and margins

Operating costs rose 10.8 per cent across the UK to £20.5bn. The cost increase ranged from 0.7 per cent at Scottish LSVTs to nearly 12 per cent at English traditional associations. Most associations – 147 of 176 – saw a rise in operating costs.

Increases in utility costs played a part in pushing up operating costs for many and some organisations experienced an increase in build costs due to contractor failures and price rises.

Several associations took advantage of local government pension schemes having a net asset position – rather than liability, as has been the case for many years – to exit schemes.

Lee Cartwright, partner at Beever and Struthers, says: “Where a scheme is in an asset position, there may be no cessation payment to leave the scheme, and leaving might even result in a receipt.”

Your Housing Group, for example, left Staffordshire County Council’s scheme and booked a surplus of £4.4m to comprehensive income. There are others whose exit will appear in their 2024 accounts.

Mr Cartwright adds that several associations have bucked the trend for increased cost but not in sustainable ways. “Some RPs have not been able to fill staffing vacancies or deliver their planned maintenance programmes because they could not find contractors or in-house staff. So some have seen their surplus increase on the prior year, but for the wrong reasons where service delivery is being adversely impacted.”

The rise in operating costs had an impact on margins, with 128 of 176 associations seeing a drop in operating margins.

Michael Tourville, partner at Beever and Struthers, says that costs related to service charges have risen for many organisations because of rises in utility bills, but this cannot be recharged to tenants in the year with fixed service charges.

Fixed asset sales

More than 100 organisations had a rise in surplus on sale of fixed assets. For some, those sales were propping up their surpluses.

Mr Cartwright says: “Some surpluses are propped up by sales of voids. We are seeing a lot of that. The sale of properties becoming void where it is not economic to bring them up to Energy Performance Certificate Band C standard by 2030 can generate huge surpluses. These asset sales are arguably being made for the right reasons, but you can only sell a property once and you lose the rental income of that stock for the entire length of the business plan, and that long-term loss of income can be significant over the life of the plan.”

Sales

The picture for sales was mixed. First tranche sales income rose by 18 per cent and open market income increased nine per cent across the UK. A total of 119 out of 176 organisations saw a rise in first tranche income and 143 had a rise in open market sale income.

Mr Cartwright says: “Sales have definitely been more difficult in 2022-23. That trend started in the 2021-22 accounts and has been more noticeable in 2022-23.”

He adds that the full extent of the downturn in outright sales in the 2023-24 accounts has been masked by conversions of unsold units to shared ownership.

“Shared ownership seems a strong product, maybe more so now with interest rates high and still increasing. It is an attractive proposition to only have to borrow, say, 40 per cent of the property’s full value and then purchase further tranches of the property in the future when interest rates have fallen back to more affordable levels,” he says.

Mr Tourville adds that some joint ventures between developers and housing associations are coming to an end because developers cannot sell enough of the outright sale homes. But the end of the partnership means housing associations no longer receive social housing through the deal.

Pre-tax surplus and margin

Pre-tax surplus was up 5.7 per cent to £4.4bn. The pre-tax margin for the UK was unchanged at 18 per cent because turnover rose by a greater percentage than surplus.

A total of 101 out of 176 organisations saw their pre-tax surplus fall, and margins dropped at 111 landlords. Peabody, which merged with Catalyst, had the highest pre-tax surplus at £1.9bn.

Cairn in Scotland had the highest percentage rise from £352,014 to £14.3m, which mostly consisted of a £12.4m gain on acquisition when it took over Pentland Housing Association on 1 April 2022.

Mr Cartwright says that some organisations were having to renegotiate their lending covenants with their banks because of thin margins. Additionally, some are looking for mergers in 2024 because their long-term financial business model no longer stacks up.

Repairs

Repairs spend has been in the spotlight for several years. Landlords continue to repair and replace cladding and other safety defects in their buildings that were highlighted following the Grenfell Tower fire in 2017. There was greater public attention to damp and mould this year following the inquest into the death of Awaab Ishak.

On top of that, associations are making improvements to bring homes up to Energy Performance Certificate Band C by 2030. Repairs spending rose about 21 per cent to more than £4bn in 2023 and could well rise in a few years’ time as repairs put off in the short term are completed in the longer term.

Impairment

Impairments rose nearly threefold. Contractor insolvencies, cost rises on re-tendering, and falls in land and sales values were behind many of these increases.

Wales

Turnover and operating costs rose by more than seven per cent, pre-tax surplus grew by three per cent and operating margins fell. Wales & West had the highest pre-tax surplus at £22.7m. Pobl had the highest turnover at £169.8m.

Scotland

Wheatley had the highest turnover in Scotland at £423.6m, followed by Link Group. The highest pre-tax surplus was at Places for People Scotland (formerly Castle Rock Edinvar) at £22.9m.

In Scotland, turnover was up 3.6 per cent, operating costs rose just under five per cent and pre-tax surplus was down just over nine per cent. Operating and pre-tax margins were also down from 13 per cent and 12.8 per cent to 12 per cent and 11 per cent respectively.

Northern Ireland

Northern Ireland had the highest percentage increases in pre-tax surplus because of a 41 per cent rise at Choice Housing for several reasons, including a doubling in surplus on disposal of fixed assets.

Future

Another financial trend not observable through the accounts is a perceived rise in fraud. Mr Tourville says he saw “more internal frauds in the last six months than in the previous three years”.

He adds: “We have seen a steep uptick in employee-related fraud, which might be related to the cost of living crisis and poor controls being exploited,” he says. “If margins drop, do associations have the money to invest in better controls?”

Notes and definitions for tables

Total turnover = income from all activities, excluding joint ventures

Operating surplus/turnover = operating costs (operating costs plus costs of sales) as a percentage of turnover

Pre-tax surplus/turnover = pre-tax surplus as a percentage of turnover

Total assets = fixed assets plus current assets

Debt per unit = total loans, bonds, finance leases and intercompany debt divided by units

In England, EBITDA MRI interest cover and gearing are taken from the RSH's value for money metrics in each HA's accounts. They have been calculated for those in England that did not state a figure and for HAs in Wales, Scotland and Northern Ireland as follows:

gearing = debt/net book value of housing

HAs with LSVT-type finance will usually have planned high levels of debt relative to assets, including mixed groups with a significant LSVT presence

EBITDA MRI interest cover = (operating surplus - surplus on sales of fixed assets - amortised government grants - government grants taken to income) + interest receivable + total depreciation charge for period - capitalised major repairs and improvements/capitalised interest + interest payable

Housing associations carrying properties at valuation will not have any amortised grant

*Sanctuary was the only association to adopt EU IFRS rather than FRS102. In England its gearing and EBITDA MRI interest cover figures are taken from its accounts. We have not calculated them for Sanctuary Scotland because it uses EU IFRS rather than FRS102

Source of data: audited accounts for year ended March 2023, except Orwell, Sage, Bournville, West Kent, Wales & West, and Hendre = December 2022

Click on the button below to download the data tables for ‘Special report: accounts digest 2023’*.

*This feature is only available to Social Housing subscribers

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