Special report: net impairments hit record high

Impairments that were higher in 2023

The 41 HAs with higher impairments in 2023 had a collective impairment of £275m. Of these, L&Q had the largest impairment with £109m, compared with £90m the year before.

This reduced its operating surplus by 143 per cent to £76m. It also brought its cumulative impairment for the past seven years to £267m, which dwarfed other totals. The next highest cumulative impairment came from Notting Hill Genesis with £51.9m.

More than half of L&Q’s impairment was in relation to an assumption change, says Ed Farnsworth, deputy group finance director at L&Q. “A large proportion (£61m) of impairment for the period was in relation to the way we assess fixed-asset impairment, which saw us move from using a discount rate based on our average cost of debt to our marginal cost of debt. As a result of the higher interest rate environment during this time, this meant we saw a significant increase in impairment on that one assumption change alone. So, it wasn’t necessarily underlying scheme performance getting worse, it was due to the methodology we applied in relation to how we assessed the impairments on projects.”

He adds: “We had some impairment where we opted to change tenure on homes. So, we opted to deliver a higher proportion of affordable homes on schemes to support our objective to de-risk our sales activities and produce more affordable homes. There were some schemes where we had cost pressures as a result of the inflation environment. But there was minimal impairment as a result of the sales market – rather it was on the cost side where we saw pressure.”

Southern Housing, which merged with Optivo in 2022, followed with an impairment of £26.7m. This resulted in a 30 per cent drop in operating surplus to £89.3m. Sarah Smith, the group’s chief financial officer, says that other than one scheme, which the association had decided to demolish, much of the impairment was driven by market conditions.

“2022-23 was the first year as [the newly merged Southern Housing], with new management looking at what we were going to be doing with schemes and [we] had to make our own assessment of how we might take some schemes forward,” she says.

“We had two land sites where we were still working up the plans as to what the possible schemes would look like and because we didn’t have schemes, we had to reassess the carrying value of the land. We had four schemes where the cost of sale was higher than the expected sales income, which was a state of where the housing market was at the time.”

The organisation also took the decision to demolish a 78-unit residential scheme in Margate during the year, which added to the impairment, Ms Smith says. “We wrote down the value of that site to the land value. By doing that, essentially we are making sure the assets we’re holding are not being held any more than the recoverable amount.”

Other notable impairments included A2Dominion with £24.5m, which reduced its operating surplus by 109.9 per cent to £22.3m.

Tracey Barnes, the group’s chief financial officer, flagged build costs and land values as issues. “Impairments for 2023 were £24.5m, relating to a small number of schemes with predominately rising build costs and reduced land sales values contributing to an impairment.

“In comparison, in 2022, a £2.5m impairment reversal was reported whereby a previously impaired scheme resulted in higher sales proceeds than anticipated. 2024 remains a challenging time with rising build costs and we continue to monitor market conditions and forecast profitability for each development scheme.”

Places for People and Clarion had impairments of £20.5m and £13.3m respectively. Places for People said its impairment was made up of £16m from two partnership investments, where “the likelihood of recovery [was] assessed as unlikely”. Then £4.4m was in relation to its social housing “for an investment in a building that we are in the process of decanting for future demolition”.

A Clarion spokesperson says that construction cost inflation was “much higher than usual”, citing contractor failure and “a stagnating sales market” due to low mortgage affordability. “We also face further uncertainty linked to government guidance around second staircases causing delay and ultimately an increase in delivery costs,” they add.

The £13.3m does not include impairments in relation to stock (£5.9m) and a £4.7m loan to a contractor. The stock impairment related to build cost increase and contractor failure on shared ownership schemes, as well as reduced sales income where they were forecasting a loss in first tranche sales. On this, the spokesperson says: “In line with the accounting standards we have prudently booked this expected loss now as an impairment.”

The loan, meanwhile, limited the impact of a contractor failure to the group, the spokesperson says. “The approach taken has ultimately given us the opportunity to potentially recover some of the costs on schemes that the group would otherwise have to bear.”

Impairments that were lower in 2023

The 11 HAs with lower impairments in 2023 had a collective impairment of £24.8m, resulting in an 8.5 per cent decrease in surplus to £290.7m.

Of these, Network Homes had one of the most notable decreases from £15.6m to £4.6m. This resulted in a 15 per cent decrease in its operating surplus to £30.2m. In its accounts, the group said it made the impairment provision in relation to land at Merrick Road in Ealing, west London.

Other decreases included BPHA, RHP and Progress Housing, which all saw their impairments drop under £1m.

GreenSquareAccord recorded an impairment of £13.4m on three dementia care homes, from £15.8m on investments, which resulted in a 36.8 per cent reduction in its operating surplus to £36.3m. This was the biggest decrease in surplus among the HAs that saw a fall in their impairment between 2022 and 2023.

In its accounts, the group said the impairment was in relation to the financial performance of its care and support business, which it said had been “mixed”.

“The group identified an impairment trigger of four dementia care homes, with a carrying value of £29.5m. We have assessed the recoverable amount of these units based on a mid-range valuation of £16.1m and this has resulted in an impairment of £13.4m against three of the homes, which has been charges to operating expenditure in the year and is disclosed as a non-recurrent item (2022: £nil),” the accounts said.

Reversals

Reversals totalled £12.4m, resulting in a two per cent increase in surplus to £593.7m. Orbit had the largest net reversal with £3m. It was followed by Moat Homes with a £2.1m net reversal and Hyde with a £2m net reversal. 

In its accounts, Orbit said the reversal was in relation to properties “where the impairment no longer exists”. Moat said it was on “properties in development” and Hyde said it was in relation to “seven sites in development across 12 phases and 35 schemes were under consideration”.

Hyde’s accounts said: “For these sites, management was actively considering options to sell the developments to another register provider. As part of the considerations the pricing for these sites was being negotiated by phase, with schemes within each phase lotted together in the pricing negotiations. An impairment of £6.2m was recognised in the year ended 31 March 2022. During 2023 the expected sale did not take place. Management therefore considered whether the reasons for the previous impairment ceased to apply.

“Management considered that as there was no revised offer for the units showing an increased selling price there was no evidence to indicate that the recoverable amount of all these properties was such that the impairment should be reversed. However, first tranche sales have been made during 2022-23 for some of the units. These sales showed a surplus before any previous impairment was applied and therefore this was considered evidence that the impairment conditions relating to the first tranche properties no longer exist. As such management have determined that the impairment of the first tranche properties sold for a profit should be reversed. This is shown as a transfer of impairment to inventory.”

2024 impairments

Discussing trends and looking ahead, Hamid Ghafoor, partner and national head of housing at BDO, says that remedial works will continue to be a challenge for the sector. “It was quite a challenging year, a number of contractors did go bust and that did impact a couple of organisations we work with. Fire safety works, such as cladding, remained an issue and I think that is likely to continue.”

He adds: “Inflation was a big issue for the sector and we’ve seen that in terms of the hit on operating surpluses and in March 2024 you’re going to see an even bigger hit because organisations are being challenged around operating margins and surpluses and a lot of that has come through in the last couple of years.”

Crowe’s Mr Marke says that non-housing asset impairments will be interesting to watch. “We haven’t seen much impairment on non-housing assets in areas such as housing for sale or market rented (investment) properties. I was a bit surprised that this hasn’t been a bigger feature of 2023 reported results. This means sales prices or market rents have stood up quite well so far.

“So, I think the big thing going forward is that if we’re expecting house prices and market rents to drop at some point [then] more impairments are likely to come through. That’s one of the reasons we’re seeing some tenure conversions to social rent. We’ve certainly seen fewer market sale properties go through over the last few years.”

Methodology

This report provides an insight into which associations saw impairment increases year on year and by how much. It also shows where impairment has reduced compared with the previous year.

The data comes from organisations’ notes on the operating surplus in their audited accounts. It includes impairments to housing and non-housing assets. Impairment reviews are carried out annually by associations. Where there is evidence of impairment, assets are written down to the recoverable amount. Any write-down is charged to the operating surplus, and reversals of impairments are stated there, too.

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