Special report: the 2021 English Housing Revenue Accounts in detail

By contrast, asset valuations again increased significantly during the year – unit valuations increased by as much as five per cent nationally in 2020-21. These valuations no doubt reflect wider movements in house prices during the first year of the pandemic. As we have discussed at length before in these analyses, while asset values are not directly linked to the ability to borrow, and the continued unsuitability of the methodology used to value assets in the HRA, the fact that loan-to-value ratios across the sector as a whole decreased in 2020-21 provides additional evidence that the sector is under-leveraged. 

Key debt metrics

The interest cover ratio (measured as operating surpluses after taking into account major repairs financed from revenue via depreciation) increased from 1.75 to 1.82 for our cohort of authorities; the national figure for 2019-20 was actually 1.67. This represented a stabilisation of investment capacity driven by a stabilisation of operating margins and a slight reduction in net interest rates from 3.9 per cent to 3.6 per cent between the years. It is likely that new borrowing at lower rates, combined with repayment of higher-rate debt by some authorities, will have contributed to this average reduction in the cost of capital.

At the national level, interest cover remains well above the ‘golden rule’ of 1.25 adopted by many authorities following the abolition of the debt cap.

It is important to remember that a significant level of capital expenditure towards the existing stock has been accounted for as operating cost within this metric (as a result of the depreciation mechanism in the HRA). Authorities are able to borrow with the confidence that their main life cycle repair costs are already covered through rent income.

Loan-to-value ratios reduced slightly from 27 per cent to 26 per cent as asset valuation strengthened at a higher rate than borrowing. This continues to represent a very low result compared to housing associations and one that strongly suggests that a review of the current regional-based valuation methodology is long overdue – as we have reported before, it is simply no longer fit for purpose for a post-debt cap HRA.

Debt-to-turnover ratios increased from 3.24 to 3.45. The lower growth in turnover compared to dwelling rental growth has affected this metric but it remains in line with the housing association sector equivalent. 

The national position over time

We have now undertaken this analysis for four full financial years from 2017 to 2021 and some key trends over time continue to emerge, albeit that the end of the debt cap and the end of the rent cut period remain significant milestones.

Property numbers have reduced by a net 1.4 per cent between 2017-18 and 2020-21 while turnover has reduced 2.3 per cent and operating costs have risen 4.9 per cent. Debt is up 5.3 per cent per unit over the four 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, and the focus of authorities was to manage risk driven by reducing income. 

Last year, in the first full year post-debt cap, we reported that the reduction in turnover slowed, as did the increase in operating costs, with borrowing for investment beginning to increase. Despite issues relating to the change in non-rent income (perhaps as a result of the pandemic) in 2020-21, the second full year post-debt cap saw a continued increase in borrowing with a stabilised operating margin and interest cover.

Hence, as the chart shows, there is a very real sense in which the retrenchment brought on by the rent cut period, together with the abolition of the debt cap, is now over. While some authorities continue to prioritise debt reduction nearly 10 years on from the self-financing settlement, the majority experience the opposite: further responding to the incentive to borrow 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 2019-20 and 2020-21 (below) offers further insight into the trends locally.

In contrast to changes in previous years, the movement in interest cover is relatively even and stable across all regions. 

While 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 change in debt, margin and interest cover is much closer to the national average than last year. 

The South West, South East and East of England continue to offer significant capacity to invest with strongest interest cover across these three regions, averaging above 2.0 in 2020-21. Slight net increases across the Midlands and Northern regions were very similar, with average interest cover across these five regions at or around the national average.

The movement in operating margins also showed a remarkable consistency in movement between years across the regions, with small reductions in the North West, Yorkshire and the Humber and the South East contrasted
with small increases across London, the South West, the East of England, the North East and the Midlands. The strengthening of margins and interest cover in the East and the South West of England are higher than average and show strengthening investment capacity in those regions.

Perhaps the most variable comparable statistic between years remains property numbers. Clear signs of investment are seen in London and the South East with next to no net stock loss between years – a combination of reduced Right to Buys (driven by high values) and investment in new homes. This is supported by these two regions showing the highest increase in per-unit debt – well above the national average.

This contrasts with the East Midlands (in particular) where net stock losses arise from continued relatively high rates of Right to Buy sales – sales ran at up to one per cent in this region, despite the slowdown as a result of the pandemic. 

Net additional borrowing in the Northern regions remains comparatively slow – debt levels are stable, perhaps indicating a lower delivery of net additional investment.

Unit operating costs position

Turnover per unit increased by one per cent between 2019-20 and 2020-21, while operating costs per unit have increased 0.7 per cent over the same period, resulting in a reduction in operating surpluses that remain around a fifth. Following a number of years of turnover reduction and operating cost increases, the overwhelming sense is of authorities stabilising their revenue finances in 2020-21. This provides a solid foundation to bring forward further investment in the next few years.

There remains considerable variation around the average unit turnover for our cohort of authorities of £5,155 – with London authorities remaining on average clear outliers with turnover per unit above £7,000 and the East and South East also both above the national average. The Midlands and Northern regions are again well below the national average, with Yorkshire and the Humber authorities showing comfortably the lowest turnover of all regions.

This continues to be matched by similar trends in unit operating costs, with the London authorities well above the national average of our cohort of £4,009 at more than £5,900 per unit. 

Conversely, and reinforcing a trend from previous years, surpluses per unit were weaker in London than the national average, with the East, South East and West Midlands regions showing stronger surpluses this year.

Once again, net unit surpluses in Yorkshire and the Humber authorities were well below the national average, showing as much as a 10 per cent drop overall between 2019-20 and 2020-21. Such a trend in lower margins may well help to explain the relative lack of additional investment across the region.

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 on their stock. 

While much of the focus of local authorities since 2018 has been around the capacity for investment, our analysis continues to provide a strong platform for beginning to understand more about the way 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. We will be producing a more detailed regional and trend analysis in a future article.

Both unit turnover and operating costs for local authorities are well below those of housing associations. As proactive regulation proceeds, what might these spending patterns show about the way in which the consumer standards are delivered? 

Summary

Our analysis of the 2020-21 finances shows a resilient sector that has emerged from the period of rent cuts and is proceeding, on balance, with plans for net growth. All the main metrics have stabilised or improved this year: authorities can look forward to being able to draw on growing capacity as income grows and investment proceeds.

As we have highlighted in each of the years of our analysis, the capacity for increased investment by local authorities remains strong and significant, on any key measure. And these measures continue to compare favourably to similar measures in the housing association sector.

We estimate that latent net borrowing capacity remains well above £10bn based on our golden rule minimum interest cover of 1.25. If taken at the individual authority level, capacity is likely to be greater, perhaps exceeding the £16bn we referenced last year and maybe even up to £20bn depending on how investment is deployed over the next five to 10 years – after all, building new homes delivers income-generating assets that increase capacity.

There are clear signs of a sector beginning to invest – for the second year in a row – a marked increase in borrowing, despite the pandemic.

Steve Partridge, director, Savills Housing Consultancy