Special report: the 2020 English Housing Revenue Accounts in detail

The weighted average cost of capital recorded in HRAs increased slightly from 3.9 per cent to 4.0 per cent – perhaps as a result of the refinancing of existing loans in preparation for lower future rates going forward.

Loan-to-value ratios reduced slightly from 28 per cent to 27 per cent as asset valuation strengthened. This continues to represent a very low result compared to housing associations, and one that strongly suggests that a review of the current region-based valuation methodology is long overdue – it is simply no longer fit for purpose for a post-debt-cap HRA.

Debt to turnover ratios increased slightly from 3.2 to 3.3, still below the housing association sector equivalent.

The national position over time

We have now undertaken this analysis for three full financial years, from 2017 to 2020, and some key trends over time are emerging.

Property numbers have reduced by a net 1.1 per cent between 2017/18 and 2019/20, while turnover has reduced 3.0 per cent and operating costs have risen 4.4 per cent. Debt is up 3.1 per cent per unit over the two years. Behind these consolidated movements is a more nuanced story.

The changes in turnover and operating costs were actually more pronounced between 2017/18 and 2018/19 – a period when spending decisions were taken before the announcement of the removal of the debt cap and the sector was still in the throes of the rent cut when the focus of authorities was to manage risk driven by reducing income.

In the first full year after the debt cap, the reduction in turnover slowed, as did the increase in operating costs, with borrowing for investment beginning to increase. Hence, as the charts show, the reduction in interest cover slowed in 2019/20, driven by a slowing reduction in operating margins.

Taken together, these show a sector characterised by resilience, which has responded by managing the consolidated reduction in income driven by four years of the rent cut, through control of operating costs so that after the debt cap was removed, there are clear signs that authorities had begun to respond to the incentive to invest.

The regional position

Behind the national position lies significant variation at the authority level, and a look at the table showing the regional split for some key measures between 2018/19 and 2019/20 offers some insight into the trends locally.

London HRAs continue to offer a major contrast to the other regions, with higher rents, lower operating margins and the lowest interest cover of all regions. The reduction in interest cover in London is particularly marked, a drop of 0.44 compared to an average drop of 0.16 in the other regions where interest cover has tightened, and an actual increase in interest cover in the South East and Yorkshire and the Humber.

The South West, the South East and the East of England continue to offer significant capacity to invest with a slight net reduction of interest cover across these three regions, but still averaging close to 2.0.

Net reductions across the Midlands and northern regions were very similar, with average interest cover across these five regions around the national average.

Operating margins decreased as expected across all regions, with above-average reductions in London, the East of England, the South West and the East Midlands.

Perhaps the most startling statistic in the regional table is the net increase in stock in the East of England between years. In the face of continued high levels of Right to Buy discounts, local authorities across that region (like many across the country) have begun to arrest decades of net decline, achieved with only a modest increase in borrowing per unit of 0.8 per cent.

Unit operating costs position

Turnover per unit has reduced by 1.9 per cent (£5,211 to £5,112) between 2017/18 and 2019/20, while operating costs per unit have increased 5.6 per cent over the same period (£3,769 to £3,981), resulting in a reduction in operating surpluses of around a fifth. These are entirely within expectations given the challenges posed by the policy and operating environment prior to the abolition of the debt cap.

It is also interesting to begin to analyse these measures at a regional level. There is considerable variation around the average unit turnover of £5,112 – with London authorities on average clear outliers with turnover/unit above £7,000. This is 75 per cent higher than the equivalent unit turnover in Yorkshire and the Humber authorities, while other regions are much more closely settled around the non-London average.

This is matched by similar trends in unit operating costs, with the London authorities well above the national average of £3,981 at nearly £5,900 per unit. What is particularly interesting is how these gross measures convert into operating surpluses per unit. Surpluses in London were in fact exactly the national average for the year, while the South West, the East Midlands and the North West showed lower unit surpluses and the East and the South East showed stronger unit surpluses.

It will be interesting to see how these unit income and expenditure measures compare to the housing association sector. With the impending change to more proactive regulation of local authorities, we might expect to see more focus on the way that authorities raise income and spend on services and their stock.

While much of the focus since the removal of the debt cap (and in this summary) has been on the capacity for investment, the analysis also provides a strong platform for beginning to understand more around what this says about the way that local authorities spend on services and existing stock, and many may be looking at drawing on investment capacity for major investment in areas such as building safety and net zero carbon.

One thing we are able to predict confidently is that both unit turnover and costs for local authorities will be well below housing associations, even adjusting for VAT. While it is tempting to jump to generalisations, the picture will of course be more complex and more localised.

Summary

Our analysis of the 2019/20 finances shows a resilient sector that has coped well with four years of rent cuts and that is beginning to put in place plans for growth. While all the main metrics have tightened, authorities used the first full year after the abolition of the debt cap to begin to invest. In fact, despite COVID-19 challenges, the capacity for increased investment remains strong and significant, on any key measure.

Taking operating margin and interest cover together, if authorities continue to implement Consumer Price Index (CPI) plus one per cent rent increases to April 2024, and unit operating costs are able to be held to CPI increases, operating margins would strengthen to 27 per cent by 2024/25 and interest cover against existing debt levels would rise to 2.4.

In turn this would convert into borrowing capacity above the minimum 1.25 golden rule of c.£16bn at a national level – even at prevailing average interest rates of about four per cent. When we factor in the ability to borrow at current Public Works Loan Board rates, this additional capacity rises further – perhaps as much as £18bn.

The picture therefore continues to be one of the potential for growth. Of course the sector rightly argues the need for substantial additional subsidy for councils to bring about a true renaissance in council housebuilding. However, the capacity for HRAs themselves to contribute demonstrates that local authorities are in a strong position to respond positively.

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

Diversification 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)

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