Special report: latest council HRAs show sector is ripe for investment

Insight07 Nov 2019Steve Partridge

How do councils compare in their 2018/19 Housing Revenue Account positions? Steve Partridge of Savills takes an in-depth look

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Special report by @Savills: the latest council HRA account data shows the sector is ripe for investment #ukhousing #socialhousingfinance

How do councils compare in their 2018/19 Housing Revenue Account positions? In our latest special report, Steve Partridge of @Savills takes an in-depth look, complete with detailed sortable data tables #ukhousing #socialhousingfinance

Our latest special report is out now! Use our tables to compare HRA account data for 163 local authorities #ukhousing #socialhousingfinance

Back in the May edition of Social Housing, we presented our first detailed look at the Housing Revenue Account (HRA), analysing the financing of 163 local authorities that run council housing. Following the abolition of the restriction of HRA borrowing (the so-called debt cap) in October 2018, many authorities are looking ahead to a positive future in which they will develop more housing.

Do the numbers support the ambition?

In our first article we compared the position on the HRA nationally, and for individual authorities, with housing associations in 2017/18. We identified that if we transpose conventional measures around fundability and viability to the HRA from the experience of housing associations, measures such as interest cover ratio and loan to value, there is likely to be substantial funding capacity for extensive and long-term investment in new council housing.

Now that the March 2019 accounts are all but fully closed, we have updated and supplemented the analysis to include the 2018/19 financial year. This allows us to update our view on the capacity available for investment, but also to compare year on year for the first time.

At the same time, here at Savills we have been working with many authorities locally to develop funding and investment frameworks to set the basis for future decisions around new supply and regeneration on a coherent and longer-term basis. This has highlighted the opportunity to analyse additional measures that can work for local authorities.

This analysis therefore focuses on the position of the national HRA for 2018/19, highlights how different authorities compare, and shows how things have moved on from last year. We have again excluded Oldham and Salford where the HRA comprises private finance initiative stock only following the transfer of the remainder of the HRA stock.

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The year 2020 is likely to prove a pivotal one – the current financial year is the last year of the one per cent rent cut policy and 2020 the first year of a return to inflation plus rent increases.

And 2020/21 promises to be the year that authorities put meaningful shape on their ambitions to build as next year is the first year following the abolition of the debt cap that authorities will have had a full budgeting and business planning lead-in to set out their plans.

For example, research by Social Housing’s sister publication, Inside Housing, found that councils had ambitions to build 78,651 homes by 2024/25.

There are inevitably some headwinds, given political uncertainties, rising prices in the construction industry and pressures on existing stock driven by higher building standards and the need to make existing homes more environmentally sustainable.

The hike in Public Works Loan Board (PWLB) rates will also affect new borrowing, although the impact is likely to be initially marginal as most historical debt is at fixed rates and in any case PWLB rates remain lower than the actual average interest rates in business plans – a consolidated national average of 3.9 per cent in 2018/19.

The national position – and how it has moved on

The national position continues to offer opportunities for investment.

Turnover was £8.13bn with operating costs £6.15bn, delivering a healthy £1.98bn of operating surpluses. Operating margins for 2018/19 were therefore 24.4 per cent – which takes into account expenditure on major repairs and stock improvements through major repairs reserves.

As would be expected, while healthy, operating margins tightened in 2018/19, reducing from 27 per cent in 2017/18. Unit turnover reduced from £5,211 per unit in 2017/18 to £5,151 per unit – driven by the one per cent rent cut. Unit operating costs rose 3.7 per cent from £3,769 per unit in 2017/18 to £3,896 per unit – driven by inflationary pressures but undoubtedly also influenced by reducing stock numbers.

Stock reduced a net 0.52 per cent between the years, largely through ongoing Right to Buy sales.

It will be interesting to see whether the new developments being planned and delivered by authorities reverse the long-term decline in stock numbers, giving authorities the opportunity to lower future unit costs through growth.

The overall debt position was largely stable, rising from £26bn to £26.2bn, just 0.53 per cent. This reverses a position of net debt reduction across the national HRA where debt had reduced marginally year on year from 2015 as authorities became more cautious – caution driven by the rent cut and the previously planned policies towards high-value asset sales.

That authorities increased debt in 2018/19 may demonstrate that plans are already being put in place to deliver investment programmes at scale. Debt per unit remains relatively low (certainly compared to the housing association sector) at £16,567 per unit.

Debt levels compared to turnover is a widely accepted measure of sustainability – for HRAs in 2018/19, closing debt was 3.2x annual turnover. This is lower than for housing associations (circa 4.0 from 2018’s global accounts). It is also only marginally increased on 2017/18 (3.1), suggesting that the first year post-debt cap has been characterised by continued initial caution while plans are put in place.

Interest cover ratio distribution (excluding three outliers)

Interest cover

The interest cover ratio (ICR) – measured as turnover less operating costs divided by interest costs – is fast becoming an accepted measure of capacity for HRAs. While PWLB borrowing is not dependent on achieving a minimum ICR as operates in private bank funding, this metric does offer a straightforward way of ensuring that members understand the sustainability of their debt and interest costs.

Operating surpluses of £1.98bn compared to interest costs of £1.03bn – an ICR of 1.93 for 2018/19, a decrease from the 2.23 recorded in 2017/18. This is as expected given reductions in rents, increases in operating costs and with a similar interest cost base. On the one hand, this might suggest that capacity for investment has tightened. On the other, this level of cover remains very comfortable, and well above any level that might cause authorities in general to review their plans.

Even at increased PWLB rates, 50-year loans remain at just over three per cent (at 24 October 2019), suggesting scope for additional borrowing of up to £10bn assuming a minimum ICR of 1.50, or up to £18bn if setting a minimum of 1.25. At the lower level, and with grant funding, there remains the scope for investment in new homes up to around £15bn within the national HRA.

Local authorities with HRAs (as at March 2018)

Local authority	Region	No of units	Total assets (£000)	Debt (£000)	Debt per unit (£000)	Interest per unit (£)	Turnover (£)	Operating cost (£000)	Operating surplus (£000)	Operating margin	Interest cover ratio	Debt to turnover
Total		1,578,448	94,588,252	26,150,643	16,567	650	8,130,311	6,149,843	1,980,468	24.36%	1.93	3.2

Oadby & Wigston	EM	1,207	62,839	20,027	16,592	457	5,031	4,100	931	18.51%	1.69	4.0
Richmondshire	YH	1,507	67,795	19,247	12,772	307	6,433	4,864	1,569	24.39%	3.39	3.0
Castle Point	East	1,511	125,337	36,418	24,102	719	7,676	5,439	2,237	29.14%	2.06	4.7
Melton	EM	1,811	96,438	31,484	17,385	645	8,013	5,184	2,829	35.31%	2.42	3.9
City of London	Lon	1,926	271,400	0	0	0	16,200	17,800	-1,600	-9.88%	0.00	0.0
Fareham	SE	2,394	126,987	51,141	21,362	750	12,629	8,943	3,686	29.19%	2.05	4.0
Brentwood	East	2,475	263,623	59,166	23,905	779	13,150	8,053	5,097	38.76%	2.64	4.5
Adur	SE	2,552	194,011	60,103	23,551	879	13,285	10,143	3,142	23.65%	1.40	4.5
Barrow-in-Furness	NW	2,587	74,614	18,838	7,282	355	11,577	8,582	2,995	25.87%	3.26	1.6
Tandridge	SE	2,606	344,501	64,525	24,760	617	14,939	12,855	2,084	13.95%	1.30	4.3
Wokingham	SE	2,644	205,344	90,322	34,161	1,045	15,191	10,232	4,959	32.64%	1.80	5.9
North Warwickshire	WM	2,658	150,355	49,889	18,769	590	12,214	7,820	4,394	35.98%	2.80	4.1
Uttlesford	East	2,808	338,475	86,622	30,848	939	15,322	10,980	4,342	28.34%	1.65	5.7
Runnymede	SE	2,876	303,593	101,956	35,451	1,156	17,329	8,801	8,528	49.21%	2.57	5.9
Wealden	SE	2,940	214,996	69,613	23,678	638	15,102	11,011	4,091	27.09%	2.18	4.6
South Derbyshire	EM	2,971	126,252	61,584	20,728	536	13,559	9,081	4,478	33.03%	2.81	4.5
Mid Devon	SW	3,003	157,446	41,637	13,865	388	13,195	8,289	4,906	37.18%	4.21	3.2
Medway	SE	3,005	171,174	41,328	13,753	687	14,362	11,077	3,285	22.87%	1.59	2.9
Thanet	SE	3,033	157,753	20,787	6,854	267	13,833	11,113	2,720	19.66%	3.36	1.5
Selby	YH	3,036	157,697	53,559	17,641	795	12,347	6,622	5,725	46.37%	2.37	4.3
Gosport	SE	3,117	147,289	61,903	19,860	611	14,794	12,389	2,405	16.26%	1.26	4.2
Tendring	East	3,136	125,828	43,434	13,850	460	13,760	9,630	4,130	30.01%	2.87	3.2
Lewes	SE	3,179	244,843	64,180	20,189	587	16,458	13,393	3,065	18.62%	1.64	3.9
Mid Suffolk	East	3,248	232,089	87,370	26,900	829	15,132	10,817	4,315	28.52%	1.60	5.8
Hinckley & Bosworth	EM	3,290	177,196	71,915	21,859	635	13,628	9,631	3,997	29.33%	1.91	5.3
Woking	SE	3,336	300,626	132,786	39,804	1,452	18,625	13,963	4,662	25.03%	0.96	7.1
Arun	SE	3,359	221,710	55,400	16,493	475	16,651	10,121	6,530	39.22%	4.09	3.3
Shepway	SE	3,381	172,259	47,417	14,025	472	15,985	9,831	6,154	38.50%	3.85	3.0
Eastbourne	SE	3,405	198,451	42,649	12,525	563	16,226	13,626	2,600	16.02%	1.36	2.6
Babergh	East	3,420	225,647	85,753	25,074	828	16,658	10,506	6,152	36.93%	2.17	5.1
Kettering	EM	3,651	185,601	63,754	17,462	514	15,148	10,602	4,546	30.01%	2.42	4.2
Lancaster	NW	3,702	131,529	40,394	10,911	507	15,310	11,694	3,616	23.62%	1.93	2.6
South Holland	EM	3,778	152,567	68,609	18,160	621	16,149	10,131	6,018	37.27%	2.56	4.2
Rugby	WM	3,786	193,118	61,632	16,279	347	17,507	12,565	4,942	28.23%	3.76	3.5
North Kesteven	EM	3,830	161,576	67,724	17,683	536	15,402	9,077	6,325	41.07%	3.08	4.4
Harrogate	YH	3,869	246,900	60,756	15,703	425	17,392	11,065	6,327	36.38%	3.85	3.5
High Peak	EM	3,943	174,296	55,859	14,167	496	15,066	10,023	5,043	33.47%	2.58	3.7
Sedgemoor	SW	4,039	143,900	56,478	13,983	383	18,043	13,910	4,133	22.91%	2.67	3.1
Shropshire	WM	4,071	198,795	84,595	20,780	735	18,322	13,300	5,022	27.41%	1.68	4.6
East Devon	SW	4,190	240,111	80,601	19,237	601	18,400	11,803	6,597	35.85%	2.62	4.4
North West Leicestershire	EM	4,218	232,112	73,993	17,542	538	17,809	10,493	7,316	41.08%	3.22	4.2
Tamworth	WM	4,224	189,311	68,041	16,108	641	20,699	15,703	4,996	24.14%	1.84	3.3
Dartford	SE	4,234	310,903	60,294	14,240	340	21,497	11,367	10,130	47.12%	7.04	2.8
Dover	SE	4,298	201,101	71,911	16,731	613	19,585	9,539	10,046	51.29%	3.81	3.7
Broxtowe	EM	4,422	178,620	81,330	18,392	548	16,180	12,263	3,917	24.21%	1.62	5.0
Waveney	East	4,446	219,608	77,377	17,404	517	20,732	12,974	7,758	37.42%	3.37	3.7
Redbridge	Lon	4,457	288,071	67,658	15,180	582	28,612	18,944	9,668	33.79%	3.73	2.4
Cheltenham	SW	4,478	224,126	44,777	9,999	379	20,333	16,300	4,033	19.83%	2.38	2.2
Poole	SW	4,508	284,414	86,455	19,178	685	21,470	14,590	6,880	32.04%	2.23	4.0
Kingston upon Thames	Lon	4,602	389,589	131,411	28,555	1,002	35,264	26,001	9,263	26.27%	2.01	3.7
Corby	EM	4,686	249,086	78,587	16,771	522	19,391	15,602	3,789	19.54%	1.55	4.1
Harrow	Lon	4,762	431,712	150,652	31,636	1,706	31,595	25,792	5,803	18.37%	0.71	4.8
Blackpool	NW	4,801	117,887	4,849	1,010	83	18,769	14,694	4,075	21.71%	10.24	0.3
Waverley	SE	4,830	429,557	188,700	39,068	1,189	30,184	18,861	11,323	37.51%	1.97	6.3
Exeter	SW	4,891	267,806	57,882	11,834	376	20,260	14,809	5,451	26.91%	2.96	2.9
St Albans	East	4,898	564,536	173,416	35,405	1,013	28,318	14,413	13,905	49.10%	2.80	6.1
Ashford	SE	5,007	285,800	118,473	23,661	747	25,294	18,592	6,702	26.50%	1.79	4.7
Stroud	SW	5,015	268,166	95,742	19,091	682	23,072	17,946	5,126	22.22%	1.50	4.1
New Forest	SE	5,054	372,052	142,039	28,104	873	27,817	18,760	9,057	32.56%	2.05	5.1
Bournemouth	SW	5,086	330,964	57,033	11,214	488	24,020	19,617	4,403	18.33%	1.77	2.4
Canterbury	SE	5,093	324,898	79,732	15,655	438	25,342	16,951	8,391	33.11%	3.76	3.1
Winchester	SE	5,100	422,064	164,022	32,161	1,013	28,806	21,701	7,105	24.67%	1.37	5.7
Bolsover	EM	5,104	198,405	107,482	21,058	741	22,032	16,938	5,094	23.12%	1.35	4.9
Cannock Chase	WM	5,146	190,706	81,039	15,748	628	20,009	13,021	6,988	34.92%	2.16	4.1
Guildford	SE	5,207	519,633	197,024	37,838	991	32,447	17,282	15,165	46.74%	2.94	6.1
South Cambridgeshire	East	5,245	486,269	204,429	38,976	1,371	31,014	17,267	13,747	44.33%	1.91	6.6
Central Bedfordshire	East	5,266	456,308	164,895	31,313	779	30,207	21,325	8,882	29.40%	2.17	5.5
Wiltshire	SW	5,309	304,831	123,297	23,224	692	26,422	21,917	4,505	17.05%	1.23	4.7
Darlington	NE	5,313	153,022	69,596	13,099	476	24,555	12,542	12,013	48.92%	4.75	2.8
Newark & Sherwood	EM	5,447	289,577	99,445	18,257	700	23,151	15,185	7,966	34.41%	2.09	4.3
Cheshire West and Chester	NW	5,469	193,807	99,455	18,185	439	22,154	13,142	9,012	40.68%	3.75	4.5
Warwick	WM	5,483	396,128	135,787	24,765	869	27,747	19,285	8,462	30.50%	1.78	4.9
Charnwood	EM	5,571	277,271	81,552	14,639	492	22,216	15,010	7,206	32.44%	2.63	3.7
Gravesham	SE	5,685	326,527	88,665	15,596	432	28,355	20,999	7,356	25.94%	3.00	3.1
Redditch	WM	5,716	285,180	122,158	21,371	730	24,497	21,042	3,455	14.10%	0.83	5.0
Nuneaton & Bedworth	WM	5,717	216,304	77,518	13,559	368	25,412	21,476	3,936	15.49%	1.87	3.1
Taunton Deane	SW	5,725	297,378	103,029	17,996	468	26,773	24,508	2,265	8.46%	0.84	3.8
Great Yarmouth	East	5,783	239,126	82,778	14,314	474	23,184	17,256	5,928	25.57%	2.16	3.6
Colchester	East	5,900	371,392	127,933	21,684	955	30,047	18,632	11,415	37.99%	2.03	4.3
Sutton	Lon	5,915	416,087	185,057	31,286	1,060	36,347	23,624	12,723	35.00%	2.03	5.1
West Lancashire	NW	5,928	173,525	81,901	13,816	516	25,577	16,064	9,513	37.19%	3.11	3.2
Southend-on-Sea	East	6,009	376,876	98,740	16,432	581	28,532	19,402	9,130	32.00%	2.62	3.5
South Kesteven	EM	6,017	236,025	106,070	17,628	468	26,017	17,544	8,473	32.57%	3.01	4.1
Slough	SE	6,084	574,432	158,077	25,982	902	36,027	27,431	8,596	23.86%	1.57	4.4
Epping Forest	East	6,376	708,563	146,749	23,016	874	33,995	26,514	7,481	22.01%	1.34	4.3
Mansfield	EM	6,501	216,964	81,437	12,527	430	28,430	20,164	8,266	29.07%	2.96	2.9
Kensington & Chelsea	Lon	6,701	821,417	210,617	31,431	1,406	54,335	51,779	2,556	4.70%	0.27	3.9
Bassetlaw	EM	6,708	331,898	92,357	13,768	542	28,015	18,041	9,974	35.60%	2.74	3.3
Reading	SE	6,710	474,695	189,341	28,218	1,565	39,024	32,558	6,466	16.57%	0.62	4.9
Ashfield	EM	6,712	233,095	80,081	11,931	528	24,166	15,684	8,482	35.10%	2.39	3.3
Cambridge	East	7,146	667,470	214,321	29,992	1,049	43,483	28,233	15,250	35.07%	2.03	4.9
York	YH	7,598	477,458	139,034	18,299	595	33,753	23,560	10,193	30.20%	2.26	4.1
Oxford	SE	7,696	704,981	202,708	26,339	1,001	45,004	29,406	15,598	34.66%	2.02	4.5
Luton	East	7,714	488,413	132,133	17,129	714	39,617	32,419	7,198	18.17%	1.31	3.3
Brent	Lon	7,751	617,200	159,874	20,626	839	55,000	36,700	18,300	33.27%	2.82	2.9
Lincoln	EM	7,783	271,144	58,503	7,517	302	28,483	22,326	6,157	21.62%	2.62	2.1
North East Derbyshire	EM	7,793	352,440	174,409	22,380	675	32,127	21,005	11,122	34.62%	2.11	5.4
Ipswich	East	7,871	446,961	118,855	15,100	467	35,795	21,267	14,528	40.59%	3.96	3.3
Bury	NW	7,939	236,228	118,784	14,962	564	30,459	23,635	6,824	22.40%	1.52	3.9
Crawley	SE	7,956	613,244	260,325	32,721	1,044	47,117	25,576	21,541	45.72%	2.59	5.5
Stevenage	East	7,965	622,817	207,817	26,091	869	43,452	31,926	11,526	26.53%	1.67	4.8
Northumberland	YH	8,512	319,190	105,145	12,353	460	32,012	25,006	7,006	21.89%	1.79	3.3
Welwyn Hatfield	East	8,952	1,017,242	257,002	28,709	678	51,719	36,682	15,037	29.07%	2.48	5.0
Chesterfield	EM	9,089	353,399	132,344	14,561	535	37,326	24,239	13,087	35.06%	2.69	3.5
Harlow	East	9,180	741,549	187,370	20,411	729	49,568	32,182	17,386	35.08%	2.60	3.8
Havering	Lon	9,267	580,931	174,669	18,848	632	56,412	39,431	16,981	30.10%	2.90	3.1
Barnet	Lon	9,780	832,059	201,614	20,615	760	59,058	54,921	4,137	7.00%	0.56	3.4
Thurrock	East	9,855	763,566	187,260	19,002	574	54,763	47,442	7,321	13.37%	1.29	3.4
Solihull	WM	9,902	445,267	174,737	17,647	738	44,154	32,089	12,065	27.32%	1.65	4.0
Hillingdon	Lon	10,078	761,155	181,514	18,011	713	61,138	38,235	22,903	37.46%	3.19	3.0
Waltham Forest	Lon	10,080	874,359	200,631	19,904	957	62,491	46,632	15,859	25.38%	1.64	3.2
Dacorum	East	10,128	1,025,657	344,104	33,976	1,145	56,336	38,481	17,855	31.69%	1.54	6.1
Enfield	Lon	10,160	738,800	178,805	17,599	807	70,700	44,600	26,100	36.92%	3.18	2.5
Cornwall	SW	10,243	520,047	110,457	10,784	303	39,973	33,030	6,943	17.37%	2.24	2.8
Swindon	SW	10,300	475,567	114,016	11,070	367	49,568	35,027	14,541	29.34%	3.84	2.3
Basildon	East	10,804	823,147	205,028	18,977	723	52,411	40,963	11,448	21.84%	1.47	3.9
Stockport	NW	11,193	456,775	138,512	12,375	534	54,218	46,629	7,589	14.00%	1.27	2.6
East Riding of Yorkshire	YH	11,314	453,181	229,511	20,286	684	49,283	29,366	19,917	40.41%	2.58	4.7
Tower Hamlets	Lon	11,476	1,134,908	85,352	7,437	313	93,096	79,489	13,607	14.62%	3.79	0.9
Northampton	EM	11,488	586,286	189,698	16,513	536	53,010	43,774	9,236	17.42%	1.50	3.6
Brighton & Hove	SE	11,551	873,227	124,589	10,786	879	60,579	40,594	19,985	32.99%	1.97	2.1
Ealing	Lon	11,743	891,049	163,584	13,930	583	66,590	55,792	10,798	16.22%	1.58	2.5
Westminster	Lon	11,840	1,468,136	261,283	22,068	930	112,971	97,818	15,153	13.41%	1.38	2.3
Milton Keynes	SE	12,108	653,341	229,571	18,960	664	55,721	35,725	19,996	35.89%	2.49	4.1
Hammersmith & Fulham	Lon	12,218	1,323,670	214,361	17,545	272	93,640	77,424	16,216	17.32%	4.88	2.3
Derby	EM	12,809	519,749	231,373	18,063	859	58,788	47,618	11,170	19.00%	1.02	3.9
Hounslow	Lon	12,873	1,005,900	230,956	17,941	800	87,800	65,300	22,500	25.63%	2.18	2.6
Croydon	Lon	13,475	970,034	322,497	23,933	897	91,265	70,744	20,521	22.49%	1.70	3.5
Lewisham	Lon	13,957	1,329,594	57,543	4,123	442	98,141	86,377	11,764	11.99%	1.91	0.6
Portsmouth	SE	14,591	681,744	171,580	11,759	409	83,083	78,760	4,323	5.20%	0.72	2.1
North Tyneside	NE	14,656	663,155	339,341	23,154	1,036	63,473	39,429	24,044	37.88%	1.58	5.3
Norwich	East	14,729	809,006	205,717	13,967	566	67,965	47,932	20,033	29.48%	2.40	3.0
Haringey	Lon	15,104	1,341,699	227,444	15,059	700	111,801	84,513	27,288	24.41%	2.58	2.0
Manchester	NW	15,845	612,670	269,245	16,992	743	86,432	59,332	27,100	31.35%	2.30	3.1
Newham	Lon	15,970	1,397,349	197,953	12,395	1,037	103,238	83,522	19,716	19.10%	1.19	1.9
Southampton	SE	16,018	688,296	168,237	10,503	333	78,849	63,916	14,933	18.94%	2.80	2.1
South Tyneside	NE	16,664	588,316	287,503	17,253	674	66,741	55,791	10,950	16.41%	0.97	4.3
Wandsworth	Lon	17,119	1,477,427	319,950	18,690	262	149,670	102,784	46,886	31.33%	10.44	2.1
Barking & Dagenham	Lon	17,622	1,101,446	279,072	15,837	550	107,398	79,427	27,971	26.04%	2.89	2.6
Stoke-on-Trent	WM	17,944	534,588	156,641	8,729	360	66,962	58,268	8,694	12.98%	1.34	2.3
Barnsley	YH	18,400	590,426	271,734	14,768	552	72,033	48,953	23,080	32.04%	2.27	3.8
Gateshead	NE	19,078	710,663	345,505	18,110	729	79,194	57,758	21,436	27.07%	1.54	4.4
Doncaster	YH	20,125	663,147	267,069	13,271	588	75,297	52,623	22,674	30.11%	1.92	3.5
Rotherham	YH	20,296	685,213	304,125	14,984	658	83,270	62,155	21,115	25.36%	1.58	3.7
Leicester	EM	20,366	973,714	214,052	10,510	434	82,832	67,140	15,692	18.94%	1.78	2.6
Greenwich	Lon	21,278	1,560,636	334,630	15,727	711	116,973	102,689	14,284	12.21%	0.94	2.9
Dudley	WM	21,734	921,791	470,300	21,639	807	87,913	70,738	17,175	19.54%	0.98	5.3
Wigan	NW	21,736	589,570	308,030	14,171	649	87,972	72,309	15,663	17.80%	1.11	3.5
Hackney	Lon	21,806	2,552,090	110,219	5,055	88	141,839	139,790	2,049	1.44%	1.06	0.8
Wolverhampton	WM	22,009	763,300	273,156	12,411	468	95,500	64,100	31,400	32.88%	3.05	2.9
Kirklees	YH	22,395	632,752	237,740	10,616	390	82,709	68,086	14,623	17.68%	1.68	2.9
Camden	Lon	23,446	2,556,851	471,556	20,112	671	180,347	162,905	17,442	9.67%	1.11	2.6
Kingston upon Hull	YH	23,890	474,275	242,441	10,148	447	94,698	72,338	22,360	23.61%	2.09	2.6
Lambeth	Lon	23,955	2,342,093	396,695	16,560	1,091	179,616	148,040	31,576	17.58%	1.21	2.2
Newcastle upon Tyne	NE	25,263	874,868	369,205	14,614	657	110,787	91,170	19,617	17.71%	1.18	3.3
Islington	Lon	25,274	3,117,604	445,275	17,618	990	215,682	169,201	46,481	21.55%	1.86	2.1
Nottingham	EM	25,535	1,048,166	294,703	11,541	532	107,946	79,186	28,760	26.64%	2.12	2.7
Bristol	SW	26,937	1,730,307	244,568	9,079	425	120,499	93,250	27,249	22.61%	2.38	2.0
Sandwell	WM	28,607	1,123,971	441,637	15,438	701	121,399	79,410	41,989	34.59%	2.09	3.6
Southwark	Lon	37,312	3,388,106	429,166	11,502	614	260,094	224,100	35,994	13.84%	1.57	1.7
Sheffield	YH	39,260	1,418,888	345,969	8,812	334	152,262	116,156	36,106	23.71%	2.75	2.3
Leeds	YH	55,924	2,203,299	816,405	14,598	695	221,637	167,899	53,738	24.25%	1.38	3.7
Birmingham	WM	60,836	2,501,900	1,091,153	17,936	828	285,400	193,900	91,500	32.06%	1.82	3.8

Loan to value

An interesting area for analysis is the loan to value (LTV) ratio.

Dwelling assets in the HRA are valued at EUV-SH. Loans at 31 March 2019 were just 28 per cent of the total stock value of £94.6bn (an average of £60,000 per unit).

Ratios at this level are much lower than equivalents in the housing association sector. Banking covenants for associations can be up to 65 to 70 per cent. This might suggest considerably more scope for increased leverage.

However, HRA borrowing is not secured against stock and to an extent the LTV is of academic consideration. This is also emphasised when looking at the basis for EUV-SH in the HRA: it is not a cash flow net present value-based valuation as for housing associations, but is based on a discount to open market value, using discounts set by Ministry of Housing, Communities and Local Government officials that apply at a regional level, periodically updated en masse by government.

This unusual approach leads to an EUV-SH that is above a sustainable level that might be implied by the net cash flows generated by the assets. Put another way, if LTV were to be a meaningful measure against which to test borrowing capacity, we would need to set the maximum level a lot lower than might be seen in an average banking covenant.

One question arising from the abolition of the debt cap might therefore be: should government consider adopting a more accurate methodology for valuing council dwellings?

Loan to value distribution

The regional position

A look at the regional variation in these metrics highlights some contrasts.

As expected, London HRAs tend to offer a dominant contrast to the other regions, with only 29 authorities out of 163 and less than 25 per cent of the stock, but more than 34 per cent of the turnover and 38 per cent of the asset valuations.

Operating margins are, however, considerably lower in London than in the rest of the country – 18.8 per cent compared with a high of more than 30 per cent in the East of England, and 28 per cent in both the South East and the West Midlands. Margins across the South West and the five regions in the North and the Midlands are very closely banded.

As far as ICR is concerned, the outlier appears to be the North East, with a combined ICR of less than 1.5. LTVs are also the highest in this region.

Notwithstanding that operating margins are just about in line with the national average,
while there are only five HRA authorities in the entire North East region, this may suggest that these authorities may find some routes to investment more constrained than authorities across the rest of the country.

In contrast, 13 authorities in the South West share an average ICR of 2.29, implying plenty of capacity to invest in new council housing.

Regional totals for local authorities with HRAs (as at March 2018)

Regions	Number of local authorities	Number of units	Operating margin	Interest cover ratio	Loan to value	Total assets (£000)	Asset value per unit (£)	Debt (£000)	Debt per unit (£)	Interest per unit (£)
London	29	391,947	18.83%	1.89	18%	35,981,372	91,802	6,390,038	16,303	708
East of England	24	154,865	30.16%	2.05	29%	12,139,505	78,388	3,534,687	22,824	764
South East	31	169,049	28.29%	2.04	31%	11,460,032	67,791	3,519,398	20,819	738
South West	13	93,724	22.99%	2.29	23%	5,245,063	55,963	1,215,972	12,974	453
East Midlands	25	174,730	27.38%	2.08	34%	7,684,716	43,981	2,618,372	14,985	549
West Midlands	14	197,833	28.24%	1.82	41%	8,110,714	40,998	3,288,283	16,622	682
Yorkshire and the Humber	13	236,126	26.20%	1.92	37%	8,390,221	35,533	3,092,735	13,098	540
North West	9	79,200	24.51%	1.92	42%	2,586,605	32,659	1,080,008	13,636	568
North East	5	80,974	25.54%	1.48	47%	2,990,024	36,926	1,411,150	17,427	734

How do authorities vary?

The three charts show the distribution of all HRA authorities around the average for the three key metrics.

The ICR chart excludes three outlier authorities with very high cover (of more than 7.0). Fewer authorities are below the average than above – and of those below, a small minority (19) are below what would be a covenant-minimum 1.25. It should be emphasised that a low level of ICR in the HRA context is not a reason to be concerned over whether an authority can invest or otherwise – it is a measure, not a covenant, and provides a guide for decision-makers around future sustainability.

The LTV chart demonstrates a similar pattern, as does the debt to turnover ratio chart. There are a number of authorities with a very high debt to turnover ratio (six HRAs are above 6x). In many cases these levels of debt are a legacy from the self-financing settlement, which was based on
net present value of future net rents in 2012.

These authorities will have had relatively high debt levels given higher rents relative to costs, rather than as a result of high borrowing in the past few years.

All six of these authorities are in the wider East/South East area and are characterised by higher-value stock with fewer flats. However, only one of these (Woking) has a relatively tight ICR. This highlights that we should take a rounded view of all the ratios and measures that are adopted when considering opportunities for investment and setting objectives.

Debt to turnover distribution

Summary

The picture remains informed by multiple historic factors that have led up to 2018/19.

Levels of rents, stock size and complexity, stock condition and type, the 2012 self-financing settlement, and behaviour since 2012 – all these factors and many more go to make up the varied pattern across the country.

We might expect margins and ICRs to tighten in 2019/20 from the figures that form the basis of this analysis, given one further year of rent cuts. Yet authorities are already looking ahead to invest within the current year and in particular from 2020.

Our analysis supports the case for investment – and we might expect that capacity will grow from 2020 as margins increase and investment generates new stock and new sources of income.

Social Housing special reports

Each month Social Housing focuses on a specific aspect of housing finance and collates and scrutinises the data for hundreds of housing organisations.

The reports below contain unparalleled commentary and analysis along with detailed sortable and searchable data tables.

Unit costs 2019 Our analysis of data from the English regulator has found that unit costs have risen among all types of housing association, with overall maintenance costs seeing the highest weighted average increase of nearly seven per cent

Impairment 2019 Housing associations’ impairments rise almost 40% in a year, driven by fire safety costs, contractor insolvencies and reduced land values

Global accounts 2018/19 Housing associations’ surplus for the year before tax decreased by five per cent to £3.76bn, driven by a 6.6 per cent drop in England

Affordable rent profile 2018/19 The level of affordable lettings dropped for the third year in a row

Staff pay Data from audited accounts of 206 housing associations shows that average staff pay in 2018/19 was £31,787 – a rise of 3.2 per cent over a 12-month period

Professionals’ league Our exclusive professionals’ league finds that activity continued apace in 2019, when housing associations increasingly looked to private placements

Sales proceeds Despite a 10 per cent rise in housing associations’ income from development sales in the last financial year, sales revenue is likely to remain flat over the coming years as a result of the property market downturn

Capital commitments The total capital commitments of 200 housing associations rose by 15 per cent in the past year, analysis by Social Housing has found

Reliance on sales surplus Social Housing finds that the total sales surplus of 150 English registered providers has dropped by nearly 10 per cent, as a result of lower market sales surplus

Stock dispersal How many council areas does your housing association operate in? How concentrated is its stock?

Accounts digest 2018/19 How does your housing association’s finances compare to others?

Housing Revenue Account part two How do councils compare in their 2018/19 Housing Revenue Account positions? Steve Partridge of Savills takes an in-depth look

Diversi fication of income We look at how housing associations are diversifying their income, and finds that they made 10.3 per cent more revenue from shared ownership and non-social housing activity

Impairment 2017/18 Social Housing takes a close look at the accounts of the 130 largest housing associations, and finds that impairments rose by nearly a third to £78.4m in 2018

Global accounts Social Housing’s analysis of the sector’s global accounts finds that housing associations’ pre-tax surplus fell last year – driven by drops in England, Scotland and Wales (August 2019)

Affordable rent profile We find that the number of affordable rent lettings recorded last year by housing associations in England has dropped for the second year in a row, suggesting that the sector is shifting away from the tenure

Capital commitments We scrutinise the capital commitments of the 208 largest housing associations in the UK (June 2019)

Housing Revenue Account part one Steve Partridge of Savills takes a look at the financial factors councils should consider in their Housing Revenue Account business planning (May 2019)

Reliance on sales surplus Our analysis reveals that profits form 42 per cent of 150 English housing associations’ total surplus (April 2019)

Sales proceeds We look at housing associations’ build-for-sale income and find a two per cent increase in 2017/18 (March 2019)

Shared ownership sales England, excluding London, has seen a four per cent rise in shared ownership sales – much lower than last year’s 16 per cent increase (February 2019)

Stock dispersal We show that housing associations’ general needs stock is becoming more concentrated within their local authority areas (January 2019)

Click here to find more special reports