Special report: operating margins fall almost 13% across UK

Sales

House prices continued their upward trajectory. The stamp duty holiday and its extension prompted bumps upward in prices as buyers rushed to complete their purchases before the deadlines.

Clarion had the highest surplus from shared ownership first tranche sales at £15.9m, but this figure was nearly nine per cent lower than in the previous year. It also had a rise in shared ownership staircasing.

L&Q had the largest drop in shared ownership first tranche surplus, making a loss of £3m. It also made a loss from open market sales of £22m. This was largely due to a rise in impairment from £8m to £52m. 

L&Q’s accounts said: “Around 80 per cent of all impairment in the year is attributable to just three challenging schemes (or two per cent of the 185 sites that L&Q is operating from). The impairment reflects increased build costs, programme delays, known defects and known offers for land values where schemes are being transferred to joint ventures.”

Three associations made a loss on first tranche sales: L&Q, Southern and WDH. A total of 18 organisations saw a fall in their low-cost homeownership surplus. Seven made a loss on open market sales and 14 saw their surplus from these sales fall.

Repairs

Repairs spending rose at all but four organisations in England. Rises in materials and labour costs, plus catching up with repairs delayed by lockdowns, all led to increased costs. Fire safety works also continue to be a big area of repairs expenditure for some organisations.

Clarion spent the most on repairs of the group. Its accounts said: “Routine repairs spend increased by £16m in the year. High demand carried over after the easing of lockdown restrictions and storm damage during the winter months led to 312,359 routine repairs being completed in the year compared to 236,368 during 2020-21.

“To meet this increased demand, further reliance has been placed on sub-contractors who are charging higher rates as a result of demand, complexity of the work and supply chain pressures.”

The association said that planned maintenance spend was also up by £14m, which includes spending on its fire safety works as well as post-lockdown demand and increased costs.

Associations are likely to increase their focus on damp and mould. Sue Harvey, director at consultancy Campbell Tickell, says: “The publication of the Housing Ombudsman’s October 2021 Spotlight on: Damp and mould report had already increased attention on this issue, now greatly amplified by the tragedy at Rochdale Boroughwide Housing and Michael Gove’s letter to all associations and local authorities.

“With residents looking to save on energy bills this winter, we anticipate increasing incidence combining with increasing scrutiny to lead to higher levels of expenditure on prevention and remediation.”

Surplus

Overall, the pre-tax surplus for the UK was up – in part bolstered by a rise in surplus on sales of fixed assets. 

Riverside had the biggest rise in operating and pre-tax surplus. It merged with One Housing Group on 1 December 2021 and the results for 2022 show the initial gain from this merger. A rise in fixed asset sales, including a growth in shared ownership staircasing, also boosted its surplus.

WDH had the largest percentage fall in pre-tax surplus, making a deficit of £1.2m in 2022. This was due to increased costs and an exceptional finance credit, which bolstered the 2021 numbers.

Scotland

Operating surpluses were down in all categories in Scotland, while pre-tax surpluses were down for LSVTs. River Clyde had the largest fall of the LSVTs in Scotland. The main driver was a rise in costs of more than £2m.

The pre-tax surpluses of both Link and Kingdom were boosted by their acquisitions of Weslo and Fairfield respectively, due to the difference between fair value and book value.

Wales

Overall, Wales saw falls in both operating and pre-tax surpluses across all categories. For several associations the surplus drops were caused by rises in repairs spending.

ClwydAlyn’s surplus fell from £7.5m to £2m, in part because repairs spending rose. Coastal, which had the highest pre-tax surplus rise in Wales, still had a rise in repairs costs and overheads.

Tai Tarian and Newport City Homes were among the other associations that also saw rises in management and repairs costs.

Northern Ireland

The picture varied for the four organisations surveyed in Northern Ireland. Co-Ownership, which buys homes on the open market to use as shared ownership properties, said it had benefited from rising prices to generate larger surpluses on sales. Its surpluses on sales of properties rose by £3.5m to £5.5m.

Radius saw a drop in its operating surplus, partly due to increases in the cost of heating and lighting in its housing schemes and offices, which accounted for £3m of the fall in its surplus.

Future

The rise in interest rates and inflation began in 2021-22 but hit levels unseen for many years in 2022-23. 

Inflation began to rise in March 2021 from 0.7 per cent, surpassed the Bank of England’s two per cent target in August 2021 and reached seven per cent in March 2022. The steep rise continued, hitting 10.1 per cent in September 2022, which is the highest level since the early 1980s.

Interest rates lagged behind a little, rising from 0.1 per cent to 0.25 per cent in December 2021, reaching 0.75 per cent in March 2022 and climbing to three per cent in November 2022. For context, rates have been well below three per cent since the advent of the financial crisis 14 years ago. 

Costs of materials, energy and labour will rise further in the 2022-23 statements – and this will affect repairs costs and development of new homes. 

Michael Tourville, a partner at Beever and Struthers, said that cost rises and delays had led to a reduction in new homes started, which will result in a drop in handovers in 2022-23.

Nationally, house prices carried on rising to September 2022 – the latest Land Registry data – but the size of the rises dropped. However, these figures pre-date the November interest rate rise to three per cent. Commentators expect price falls. 

Indeed, the tide has already started to turn in some regions – London, the South East, the West Midlands, the East Midlands and Yorkshire saw small falls in the average price between August and September 2022. The big hike in mortgage rates following the Mini Budget in September is not captured in these figures but will have an impact on prices and transactions.

Mr Cartwright said: “Sales have generally remained strong for the first nine months [of 2022]. On outright sales in the South East, maybe the tide is already turning. Shared ownership sales remain strong. 

“Most housing associations are generally anticipating shared ownership sales prices and first tranche percentages sold being maintained through the final quarter of 2022-23. That strong sales performance has got to turn, I think.”

Ms Harvey added that a fall in house prices could lead to write-downs for unsold shared ownership and outright sale stock. 

The rent settlement was announced with a cap at seven per cent, as opposed to the previous model, which linked rises to the Consumer Price Index (CPI) – which could have led to increases of more than 11 per cent.

Mr Cartwright said: “It is an indicator of our times that a maximum rent increase of CPI minus three per cent is celebrated as a success. It is [a success] compared to other outcomes but it won’t increase development capacity.”

Pensions are always hard to predict because the deficit results from the interaction of the discount rate, asset values and inflation assumptions, as well as being a one-day snapshot at year end.

Mr Cartwright said that rises in the base rate and bond yields could push up the discount rate, which could offset falls in asset values and rises in inflation-related assumptions such as salaries.

“Increasing the discount rate could counter those other two negative factors,” he said, adding that those assumptions come with a high level of uncertainty.

The first batch of stability checks for organisations in England came out in November, with 19 of the 27 providers assessed being regraded from V1 to V2. Remaining checks on associations with more than 1,000 homes will come out over the coming months and more V2s are expected.

“V2 is becoming the new normal,” Mr Cartwright said. “Only the RPs with ‘fortress’ balance sheets will be V1. Who other than them will be able to say they do not have to ‘manage material risks to ensure continued compliance’?”

Service charges could pose issues for associations as they have to be set at the start of the year and so do not reflect increases in costs, such as energy prices, that happen during the year. 

“Most associations were having a deficit on service charges even in the previous years,” Mr Tourville said. “I think this could result in some surpluses being a lot lower [in 2022-23].”

Total turnover = income from all activities, excluding joint ventures

Operating surplus/turnover = operating surplus (operating costs plus costs of sales/turnover) 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 carrying properties at valuation will not have any amortised grant.

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

HAs carrying properties at valuation will not have any amortised grant

*Sanctuary was the only association to adopt EU IFRS rather than FRS 102. 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 FRS 102.

Source of data: Audited accounts for year ended March 2022, except (^†) = December 2021