Homes England Annual Report 2022 to 2023: Financial Statements, accessible version
Updated 25 July 2023
Applies to England
Group statement of comprehensive net expenditure – Year ended 31 March 2023
Note | 2022/23 £’000 | 2021/22 £’000 | |
---|---|---|---|
Expenditure | |||
Grants | 4 | 1,663,912 | 1,482,192 |
Cost of land and property disposals | 5 | 182,609 | 164,428 |
Programme costs | 6 | 83,376 | 67,740 |
Staff costs | 7a | 70,672 | 72,255 |
Pension costs | 7a | 31,863 | 34,722 |
Administration expenses | 8 | 30,190 | 26,943 |
Impairment of land and property | 16 | 106,924 | 18,985 |
Impairment/(impairment reversal) of financial assets measured at fair value through profit or loss | 12f | 254,790 | (163,841) |
Impairment/(impairment reversal) of financial assets measured at amortised cost | 12f | (7,309) | 15,504 |
Increase/(decrease) in provisions | 854 | (3,812) | |
2,417,881 | 1,715,116 | ||
Income | |||
Proceeds from disposal of land and property assets | 5 | 267,742 | 248,630 |
Valuation gains on financial assets measured at fair value through profit or loss | 12f | 646,815 | 789,936 |
Net gain on disposal of financial assets | 12f | 41,191 | 25,162 |
Interest income | 12f | 96,248 | 59,297 |
Other operating income | 9 | 87,904 | 76,928 |
1,139,900 | 1,199,953 | ||
Net operating expenditure | 1,277,981 | 515,163 | |
Interest payable | 440 | 402 | |
Share of profits of associates and joint ventures | 10 | (3,309) | (229) |
Pension fund finance net expected return | 18d | (4,886) | (2,491) |
Net expenditure before tax | 1,270,226 | 512,845 | |
Income tax credit | (8,766) | (5,347) | |
Net expenditure for the year | 1,261,460 | 507,498 | |
Other comprehensive expenditure | |||
Actuarial gain from pension fund | 18e | (63,767) | (64,025) |
Income tax charge on items in other comprehensive expenditure | 15,942 | 16,006 | |
(47,825) | (48,019) | ||
Total comprehensive expenditure for the year | 1,213,635 | 459,479 |
All activities above derive from continuing operations. Net expenditure is financed by Grant Aid as explained in note 1e, with the exception of non-cash expenditure, for example depreciation, amortisation, provisions and impairments.
Group statement of financial position – At 31 March 2023
Note | 2022/23 £’000 | 2021/22 £’000 | |
---|---|---|---|
Non-current assets | |||
Intangible assets | 9,282 | 6,161 | |
Property, plant and equipment | 11,000 | 4,957 | |
Investments in associates and joint ventures | 11b | 61,932 | 55,123 |
Pension assets | 18a | 233,226 | 181,422 |
Trade and other receivables | 12b | 176,780 | 275,144 |
Financial assets held at amortised cost | 12c | 846,979 | 957,504 |
Financial assets held at fair value through profit or loss | 12c | 19,622,677 | 19,255,217 |
20,961,876 | 20,735,528 | ||
Current assets | |||
Non-current assets held for sale | - | 2,450 | |
Land and property assets | 16 | 1,069,359 | 1,168,657 |
Trade and other receivables | 12b | 368,300 | 219,634 |
Financial assets held at amortised cost | 12c | 570,566 | 454,103 |
Financial assets held at fair value through profit or loss | 12c | 109,670 | 117,568 |
Cash and cash equivalents | 12a | 217,485 | 195,776 |
2,335,380 | 2,158,188 | ||
Total assets | 23,297,256 | 22,893,716 | |
Current liabilities | |||
Trade and other payables | 17 | (555,453) | (398,233) |
Provisions | (3,889) | (5,362) | |
(559,342) | (403,595) | ||
Non-current assets plus net current assets | 22,737,914 | 22,490,121 | |
Non-current liabilities | |||
Trade and other payables | 17 | (25,324) | (115,112) |
Provisions | (4,821) | (10,354) | |
Pension liabilities | 18a | (5,858) | (10,285) |
(36,003) | (135,751) | ||
Assets less liabilities | 22,701,911 | 22,354,370 | |
Reserves | |||
Income and Expenditure Reserve | 22,701,911 | 22,354,370 | |
Taxpayers’ equity | 22,701,911 | 22,354,370 |
The accompanying Notes are an integral part of these Financial Statements. Approved by the Board on 13 July 2023 and signed on their behalf by Peter Denton, Chief Executive and Accounting Officer.
Agency statement of financial position – At 31 March 2023
Note | 2022/23 £’000 | 2021/22 £’000 | |
---|---|---|---|
Non-current assets | |||
Intangible assets | 9,282 | 6,161 | |
Property, plant and equipment | 11,000 | 4,957 | |
Investments in subsidiaries | 11a | 50,000 | 50,000 |
Investments in associates and joint ventures | 11b | 20,615 | 20,615 |
Pension assets | 18a | 233,226 | 181,422 |
Trade and other receivables | 12b | 176,780 | 275,144 |
Financial assets held at amortised cost | 12c | 846,979 | 957,504 |
Financial assets held at fair value through profit or loss | 12c | 19,622,677 | 19,255,217 |
20,970,559 | 20,751,020 | ||
Current assets | |||
Non-current assets held for sale | - | 2,450 | |
Land and property assets | 16 | 1,069,359 | 1,168,657 |
Trade and other receivables | 12b | 368,300 | 219,634 |
Financial assets held at amortised cost | 12c | 570,566 | 454,103 |
Financial assets held at fair value through profit or loss | 12c | 109,670 | 117,568 |
Cash and cash equivalents | 12a | 217,485 | 195,776 |
2,335,380 | 2,158,188 | ||
Total assets | 23,305,939 | 22,909,208 | |
Current liabilities | |||
Trade and other payables | 17 | (571,170) | (418,561) |
Provisions | (3,889) | (5,362) | |
(575,059) | (423,923) | ||
Non-current assets plus net current assets | 22,730,880 | 22,485,285 | |
Non-current liabilities | |||
Trade and other payables | 17 | (25,324) | (115,112) |
Provisions | (4,821) | (10,354) | |
Pension liabilities | 18a | (5,858) | (10,285) |
(36,003) | (135,751) | ||
Assets less liabilities | 22,694,877 | 22,349,534 | |
Reserves | |||
Income and Expenditure Reserve | 22,694,877 | 22,349,534 | |
Taxpayers’ equity | 22,694,877 | 22,349,534 |
The accompanying Notes are an integral part of these Financial Statements. Approved by the Board on 13 July 2023 and signed on their behalf by: Peter Denton, Chief Executive and Accounting Officer.
Statement of cash flows – Year ended 31 March 2023
Group and Agency | Note | 2022/23 £’000 | 2021/22 £’000 |
---|---|---|---|
Net cash outflow from operating activities | (a) | (1,532,265) | (2,091,309) |
Cash flows from investing activities | |||
Purchase of property, plant and equipment | (384) | (1,671) | |
Disposal of property, plant and equipment | - | - | |
Purchase of intangible assets | (4,690) | (5,678) | |
Investment made in group companies | 11b | (3,500) | (9,162) |
Net cash outflow from investing activities | (8,574) | (16,511) | |
Cash flows from financing activities | |||
Grant in Aid from sponsor department | SoCTE [*] | 1,562,548 | 2,041,055 |
Net cash inflow from financing activities | 1,562,548 | 2,041,055 | |
Increase/(decrease) in cash and cash equivalents in the period | 21,709 | (66,765) | |
Cash and cash equivalents at 1 April | 12a | 195,776 | 262,541 |
Cash and cash equivalents at 31 March | 12a | 217,485 | 195,776 |
a) Reconciliation of net operating expenditure to net cash flow from operating activities
Note | 2022/23 £’000 | 2021/22 £’000 | |
---|---|---|---|
Net operating expenditure | SoCNE [**] | (1,277,981) | (515,163) |
Financial assets: | |||
Financial asset investments made by the Agency | 12 | (2,672,858) | (2,937,219) |
Proceeds from disposal of financial asset investments | 12 | 2,822,375 | 2,580,395 |
Gain on disposal of financial assets | 12f | (41,191) | (25,162) |
Valuation gains on financial assets held at fair value through profit or loss | 12f | (646,815) | (789,936) |
Decrease/(increase) in impairment of financial assets | 12f | 247,481 | (148,337) |
Interest added to financial assets held at amortised cost | 12 | (76,671) | (48,140) |
Land and property: | |||
Additions to land and property assets | 16 | (182,429) | (230,174) |
Cost of land and property assets disposed | 177,253 | 155,668 | |
Increase in impairment of land and property | 16, 8 | 106,924 | 17,525 |
Depreciation and amortisation | 8 | 5,123 | 4,286 |
Pension costs | 18d | 12,422 | 14,389 |
Payments of income tax | (9,750) | (9,200) | |
(1,536,117) | (1,931,068) | ||
Decrease/(increase) in receivables | (48,123) | 61,190 | |
Increase/(decrease) in payables | 58,981 | (216,505) | |
Decrease in provisions | (7,006) | (4,926) | |
Net cash (outflow)/inflow from operating activities | (1,532,265) | (2,091,309) |
[*] SoCTE: Statement of Changes in Taxpayers’ Equity
[**] SoCNE: Statement of Consolidated Net Expenditure
Group statement of changes in taxpayers’ equity – Year ended 31 March 2023
Note | 2022/23 £’000 | 2021/22 £’000 | |
---|---|---|---|
Balance at 1 April | 22,354,370 | 20,772,794 | |
Change in accounting policy on 01 April 2022 | 1p | (1,372) | |
Net expenditure for the year | (1,261,460) | (507,498) | |
Actuarial gain from pension fund | 18e | 63,767 | 64,025 |
Income tax on items in other comprehensive expenditure | (15,942) | (16,006) | |
Total comprehensive expenditure for the year | (1,215,007) | (459,479) | |
Grant in Aid from sponsor department | 1e | 1,562,548 | 2,041,055 |
Balance at 31 March | 22,701,911 | 22,354,370 |
Agency statement of changes in taxpayers’ equity – Year ended 31 March 2023
Note | 2022/23 £’000 | 2021/22 £’000 | |
---|---|---|---|
Balance at 1 April | 22,349,534 | 20,767,387 | |
Change in accounting policy on 01 April 2022 | 1p | (1,372) | |
Net expenditure for the year | (1,263,658) | (506,927) | |
Actuarial gain from pension fund | 18e | 63,767 | 64,025 |
Income tax on items in other comprehensive expenditure | (15,942) | (16,006) | |
Total comprehensive expenditure for the year | (1,217,205) | (458,908) | |
Grant in Aid from sponsor department | 1e | 1,562,548 | 2,041,055 |
Balance at 31 March | 22,694,877 | 22,349,534 |
Notes to the financial statements year ended 31 March 2023
1 Statement of accounting policies
a) Statutory basis
The Homes and Communities Agency, trading as Homes England, is an executive non-departmental public body and statutory corporation created by the Housing and Regeneration Act 2008 (as amended by the Localism Act 2011). Homes England is sponsored by the Department for Levelling Up, Housing and Communities (DLUHC).
The Financial Statements of Homes England are governed under the provisions of the Housing and Regeneration Act 2008 and by the Accounts Direction given by the Secretary of State, with approval of HM Treasury under the Act. The Direction reflects government policy that the Financial Statements should, insofar as appropriate, conform to the accounting and disclosure requirements contained in Managing Public Money, Government Financial Reporting Manual (FReM) and in HM Treasury’s Fees and Charges Guide. The Financial Statements have been prepared in accordance with the 2022/23 FReM issued by HM Treasury.
The accounting policies contained in the FReM apply International Financial Reporting Standards (IFRS) as adapted or interpreted for the public sector context. Where the FReM permits a choice of accounting policy, the accounting policy which is judged to be most appropriate to the particular circumstances of the Agency for the purpose of giving a true and fair view has been selected. The policies adopted by the Agency are described below. They have been applied consistently in dealing with items that are considered material to the Agency’s accounts.
b) Accounting convention
The Financial Statements are prepared under the historical cost convention modified by the revaluation of financial assets held at Fair Value Through Profit or Loss (FVTPL) and property, plant and equipment.
c) Basis of preparation and consolidation
The Group Financial Statements incorporate those of the Agency and the investees controlled by the Agency. No Statement of Comprehensive Net Expenditure is presented for the Agency as this is not materially different to that presented for the Group.
No significant judgements or assumptions have been made relating to the determination of investee status, joint control, or significant influence.
The Group’s associated undertakings are all undertakings in which the Group has a participating interest and over whose operating and financial policy it exercises significant influence. The Group’s joint ventures are all undertakings in which the Group exercises joint control. In the Group Financial Statements, investments in associates and joint ventures are accounted for using the equity method, where an investment is initially recorded at cost and subsequently adjusted to reflect the investor’s share of the net assets of the associate. The consolidated Statement of Comprehensive Net Expenditure includes the Group’s share of profits and losses of associates and joint ventures, while its share of net assets of associates and joint ventures is shown in the Group Statement of Financial Position.
The share of net assets and profit information is based on unaudited Financial Statements or management information to 31 March 2023 for most associates. Where this information is not available, Financial Statements with a different reporting date have been used, where this reporting date is within three months of that of the Agency and where this does not produce significantly different results. Adjustments have been made on consolidation for significant transactions following the reporting date of the information used.
English Cities Fund Limited Partnership prepares its annual Financial Statements up to 31 December, the same reporting date as its investee partner.
Countryside Maritime Limited prepares its annual Financial Statements up to 30 September, which is the reporting date of the joint venture partner.
Tilia Community Living LLP prepares its annual Financial Statements up to 30 June, which is the reporting date of the joint venture partner.
Newton Development Partners LLP prepares its annual Financial Statements up to 31 March. The partnership was incorporated in the year and will produce its first set of audited accounts for the year ended 31 March 2024.
d) Investments in subsidiaries, associates, and joint ventures
Investments in subsidiaries, associates, and joint ventures, as recorded in the Agency’s own Statement of Financial Position, are accounted for at cost (subject to annual assessment for impairment).
e) Funding
The Agency’s activities are funded in part by income generated from operations and in part by Grant in Aid provided by DLUHC for specified types of expenditure.
Grant in Aid received to finance activities and expenditure which support the statutory and other objectives of the Agency is treated as financing income. It is regarded as a contribution from a controlling party and is therefore credited to the income and expenditure reserve in full. The net expenditure for the period is transferred to this reserve.
f) Critical accounting judgements and key sources of estimation uncertainty
The Agency’s critical accounting judgements are impacted by the macro-economic uncertainty in the current markets and alternative economic scenarios are considered in the Performance report, within the Impact of macro-economic uncertainty section.
Financial assets measured at fair value
Where assets are to be measured at fair value, this is performed with reference to the requirements of International Financial Reporting Standard 13 Fair Value Measurement (IFRS 13), applying considerations which follow the three hierarchies set out under the standard for determining fair value.
The majority of financial assets measured at fair value are investments in homes, such as those under the Help to Buy scheme, as analysed in Note 12d. These assets are valued with reference to regional house price indices, supplemented by adjustments for the Agency’s experience of actual disposals since the inception of the schemes. Together, these provide a reasonable estimate of the fair value of these assets, but neither metric would be sufficient if used on its own.
As the Agency’s security over the Help to Buy investment is via a second charge over the property with the main mortgage provider holding the first charge, if the amount needed to settle the homeowner’s main mortgage does not leave sufficient sale proceeds to settle the Agency’s original percentage share, then the Agency will not receive its full percentage share of the proceeds. Instead, it will receive the available remaining cash after the first charge has been settled. In an economic scenario where there was a significant decrease in house prices, there is a risk that the Agency may not recover the full amount of its equity loan balance due to this first charge effect.
The valuation of investments in homes (through equity-loan programmes such as Help to Buy) is highly sensitive to changes in assumptions about market prices. Investments in homes are also the Agency’s most significant asset category so the judgement exercised by management, both in the application of indexation to the home equity portfolio and in the experience adjustments applied to this indexation, is a source of material estimation uncertainty in the Agency’s Financial Statements.
Analysis showing the sensitivity of the valuation of these assets to changes in market prices, and therefore to management’s judgement in estimating this valuation, is shown in Note 14a. In addition, Note 15a outlines the Agency’s analysis of the sensitivity of the valuation of the Help to Buy portfolio to key modelling assumptions.
Other financial assets measured at fair value are generally valued with reference to cash flow forecasts, which are by their nature based on estimates. Exceptions to this are the Agency’s investment in the PRS REIT plc, which is valued with reference to quoted unit prices on the London Stock Exchange, and the Agency’s investment into an unlisted shared ownership fund managed by M&G Real Estate which is measured using Net Asset Values.
More information on the Agency’s application of IFRS 13 to support fair value measurement is set out in Note 12c and Note 13.
Expected Credit Losses
The Agency is required to calculate an Expected Credit Loss Allowance for financial assets measured at amortised cost. The majority of the assets the Agency measures at amortised cost relate to funding the Agency has provided as loans, and a small number of non-current trade receivables. The Expected Credit Loss allowance is also calculated for cases where there has been a contractual loan commitment entered into at the reporting date. The Agency also calculates a Simplified Expected Credit Loss Allowance for Current Trade Receivables as permitted under International Financial Reporting Standard 9 Financial Instruments (IFRS 9).
The Expected Credit Loss Allowance at 31 March 2023 is analysed in Note 12h. There are various key assumptions applied to the Expected Credit Loss model to which the calculation is highly sensitive, therefore the assumptions applied are a key judgement of management.
The key assumptions applied are as follows:
-
Probability of Default: Probability of Default values are determined with reference to current economic conditions, notably with reference to increased household costs due to inflation. The Probability of Default values are applied to each investment in relation to their individual Credit Risk Rating (CRR)
-
Economic scenarios and relative weightings: IFRS 9 requires the Agency to consider alternative economic scenarios in the calculation of the Expected Credit Loss Allowance. These scenarios consist of an upside, downside and base case, and are detailed in the Performance Report within the Impact of macro-economic uncertainty section. For each identified scenario, variations are made to the Probability of Default values applied based on an individual investment’s CRR. The amount of change applied is dependent on the scenario. Weightings are applied to the Expected Credit Loss calculations for each scenario, determined in relation to the Agency’s view of the probability of each scenario occurring, with reference to current market and credit risk expectations
-
Loss Given Default (LGD) Floor: The Agency has determined that available historic default data is insufficient to provide an evidence base for anticipated losses on default. As a result, a minimum percentage value has been applied to the LGD calculation with reference to individual investments. This floor has been derived on the basis of management judgement and interpretation of Prudential Regulation Authority guidance. At 1 April 2022 and 31 March 2023, the LGD floor applied was 35%
-
Moderated Security Values (MSVs): To reflect the expected value which might reasonably be realised from the sale of security in the event of default, MSV percentages are applied to gross security values to determine a measure of LGD (when compared against the estimated exposure on default). The MSVs are varied depending on the type of security held. A lower MSV percentage results in a higher discount applied to the determined security values
Changes to the above assumptions can have a significant impact on the Expected Credit Loss Allowance calculation. A sensitivity analysis has been performed in relation to the above assumptions in Note 15b.
Note 12h provides an analysis of the movements in the Expected Credit Loss allowance between 1 April 2022 and 31 March 2023, including the impact of changes in credit risk assumptions over the period.
Land and property assets
Determination of the value of land and property assets involves a significant amount of judgement and estimation uncertainty, particularly given the complexity of some of the Agency’s properties and the range of anticipated routes to disposal. Valuations are performed by independent qualified valuation experts. Most land and property assets, based on value, are assessed by these independent valuation specialists. However, as the assets are held under the historic cost convention, the judgement and estimation uncertainty involved in property valuations only affects carrying value where an impairment is identified.
Defined benefit pensions
The value of the Agency’s defined benefit pension assets and liabilities have been assessed by qualified independent actuaries. In making these assessments, it is necessary for actuarial assumptions to be used which include future rates of inflation, salary growth, discount rates and mortality rates. Differences between those estimates used and the actual outcomes will be reflected in taxpayers’ equity in future years.
As the assets managed under the Agency’s pension scheme are predominantly quoted investments there is significantly less uncertainty surrounding their valuation than unquoted assets held elsewhere on the Agency’s balance sheet. There are some investments in property that may be subject to valuation uncertainty, but these represent a small proportion of scheme assets, 7.06% (6.97% in 2021/22). Similarly, the discount rates used for scheme liabilities are derived from bond markets and so determined with reference to published figures at the balance sheet date.
Overall there is no material uncertainty over the valuation of scheme assets within the defined benefit pension scheme.
g) Grants
Payments of capital and revenue grants to registered providers of social housing (RPs) and other bodies are accounted for on an accruals basis.
Payments of Affordable Housing Grants may be paid in one, two or three instalments depending on scheme and provider eligibility: an acquisition tranche, a start on site tranche and a completion tranche. In the two years disclosed the tranches for schemes were as follows:
-
40% on acquisition (where eligible), 35% on start on site (where eligible; this tranche may increase to 75% if the scheme is not eligible for an acquisition payment), 25% on completion
-
for those RPs who have been selected for continuous market engagement, payment flexibility of up to 95% against eligible expenditure can be claimed at acquisition and/or start on site
-
Affordable Housing grant under Strategic Housing Partnerships are paid quarterly in arrears, in line with total eligible development expenditure
-
Housing Infrastructure Fund grants are paid in line with development costs incurred in the financial year.
h) Grant recoveries
Recoveries of Affordable Housing Grants from RPs are accounted for when the amount due for repayment has been agreed with the RP and invoiced. RPs may retain grant recoverable from sales within their own accounts for recycling, with the funds becoming due back to the Agency if unused within three years. Recovery of other grants are accounted for when the repayment becomes contractually due. While judgement is involved in the calculation of the recoverable amount, this is not deemed to be material to the Financial Statements.
i ) Revenue recognition
Homes England recognises revenue from its contracts with customers in line with International Financial Reporting Standard 15 Revenue from Contracts with Customers (IFRS 15).
Income from the disposal of land and property assets is recognised when there is a legally binding sale agreement, which has become unconditional and irrevocable by the end of the reporting period. The transaction price is the amount of the consideration to which the Agency expects to be entitled in exchange for transferring the risks and rewards of ownership of the asset. Payment terms for such transactions may vary depending on the nature of the agreement. Where payment is on deferred terms the associated receivable is discounted to reflect the net present value of the receipt.
Income from rent and other property income is recognised over the period to which it relates and is invoiced in line with the terms of the lease. Invoices are payable upon issue.
Income from homeowner fees is recognised in the period to which it relates and is paid monthly in arrears. The fee accrues daily after the financial instrument reaches a defined maturity and the income is recognised to the extent that it has accrued at the reporting date.
Income from projects where the Agency acts as developer, where external contractors manage build and sales on behalf of the Agency, is recognised when a performance obligation in the contract is met. This is normally at legal completion and measured at the fair value of the consideration received or receivable for the property. Where income is based on a contract and recognised over time, it is recognised by reference to the stage of completion of the contract activity at the balance sheet date. This is normally measured by compliance inspector reports of work performed to date. A contract asset is recognised when the Agency has completed a proportion of the contract activity prior to payment being received. A contract liability is recognised where cash has been received in advance of the contract activity being completed.
j) Income tax
The income tax charge represents the sum of current tax and deferred tax. Both current and deferred tax are recognised in the Statement of Comprehensive Net Expenditure, except to the extent that they relate to items recognised directly in taxpayers’ equity, in which case they are recognised in taxpayers’ equity.
Current tax is the expected tax payable on the taxable surplus for the year, based on tax rates that have been enacted or substantively enacted by the end of the reporting period, and any adjustment to tax payable in respect of previous years.
Deferred tax is the tax expected to be payable or recoverable in the future arising from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax is calculated at the tax rates expected to apply in the period when the liability is settled or the asset realised, based on tax rates that have been enacted or substantively enacted by the end of the reporting period.
A deferred tax asset is recognised only to the extent that it is probable that future taxable surpluses will be available against which the temporary differences can be utilised.
k) Land and property assets
Valuation
Land and property assets are shown in the Statement of Financial Position at the lower of cost and net realisable value. Cost comprises direct costs that have been incurred in bringing the land and property to their present location and condition, including the capitalisation of staff time where appropriate. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale, including marketing, legal and panel solicitor fees. Net realisable value is an entity specific valuation methodology which reflects Homes England’s circumstances, the purpose for which the asset is held and the future disposal strategy for the asset. This is different from fair value methodology which is a market-based measurement, and which establishes a value based on a price that would be received to sell an asset in an orderly transaction between market participants.
A net realisable value at each reporting period will be obtained for land and property assets if there is evidence of a change in net realisable value, brought about by certain trigger events and in all cases, where the net realisable value of the asset was more than or equal to £5m in the preceding year. Such trigger events include the receipt of planning permission, significant capital expenditure, or a change in expected disposal strategy. If no trigger event occurs and the net realisable value of the asset was less than £5m in the preceding year, the asset will retain the net realisable value from the last assessment.
However, for this year, in light of the current economic environment (increases in base rates, below average buyer demand for new build homes, inflationary pressures in general and particularly in respect of construction costs and construction related costs), the decision was made to revalue all assets, even where no trigger events have occurred. This replicates the approach in the two previous years, although in those years the uncertainty mostly related to the COVID-19 pandemic. With respect to the ongoing conflict in Ukraine, this forms part of the wider economic uncertainty referred to above. The Royal Institution of Chartered Surveyors (RICS) has not published any specific guidance for valuers in 2023 on this matter. It has advised that RICS members should continue to follow Global Red Book standards, including Valuation Practice Guidance Application 10 Matters that may give rise to material valuation uncertainty. In particular, the decision on whether material uncertainty exists, remains the decision of the RICS valuer.
An estimate of the net realisable value at the reporting period is obtained in accordance with the current edition of RICS Valuation – Global Standards, effective from 31 January 2022 and the RICS Valuation – Global Standards 2017 UK national supplement, (collectively known as “The Red Book”), as amended, extended or updated from time to time. In establishing a net realisable value for each asset, the following will be taken into account:
-
there is a willing buyer and seller
-
the transaction is at arm’s length
-
each party has acted knowledgeably, prudently and without compulsion
-
the reasons for Homes England holding the asset and future disposal plans for the asset
Following the determination of net realisable value at the reporting period, each asset is individually assessed to calculate an impairment/reversal of impairment. A reversal of an impairment charge for previously impaired assets may occur where the net realisable value increases. Increases are limited to an amount which results in assets being carried at their historic cost. Any movements in the valuation of land and property assets are shown in Net Expenditure as an impairment charge/credit.
Options purchased in respect of land are capitalised initially at cost. Options are reviewed annually for impairment as part of the valuation of the whole portfolio.
The valuation of land on which the Agency acts as developer, where external contractors manage build and sales on behalf of the Agency, is based on the value of the contract and progress to date. The contract value is adjusted to reflect any costs expended and any sales achieved in year.
Disposal of land and property assets
Where proceeds are receivable over a period of more than 12 months after the end of the reporting period, the proceeds are discounted at a rate prescribed by HM Treasury to reflect the net present value of the receipt. The rate applied during the year was 1.9% (2021/22: 1.9%), in accordance with HM Treasury’s PES (Public Expenditure System) (2022) 08, Discount Rates for General Provisions, post-employment benefits, financial instruments and leases (under IFRS 16); Announcement of rates. This paper was issued by HM Treasury on 2 December 2022.
Where a land sale agreement includes an overage clause, IFRS 9 requires that any associated receivable is measured (discounted to reflect the net present value of the receipt as described above) and disclosed as a financial asset at FVTPL. Over time, the initial discount unwinds through Net Expenditure as a valuation gain. The associated overage clause is measured and disclosed separately as a financial asset at FVTPL (level 3 hierarchy).
Where no overage clause exists, the receivable is measured and disclosed as a financial asset at amortised cost. Accounting policy m) Financial assets, under subheading Impairment, sets out the factors to be considered when measuring financial assets at amortised cost. Over time, the initial discount unwinds through Net Expenditure as interest income.
l) Provisions
Provisions are made for environmental liabilities where the Agency is under a statutory, contractual, or constructive obligation to remediate land to relevant standards. The amounts provided are the best estimate of the expenditure required to settle the obligation, based on circumstances existing at the reporting date. Expenditure expected to be incurred in future years is discounted in accordance with HM Treasury’s PES (Public Expenditure System) (2022) 08, Discount Rates for General Provisions, post- employment benefits, financial instruments and leases (under IFRS 16); Announcement of rates. This paper was issued by HM Treasury on 2 December 2022.
Provisions are recognised for other liabilities as appropriate and discounted in line with HM Treasury’s guidance if applicable.
m) Financial assets
Recognition and derecognition
Financial assets are recognised in the Statement of Financial Position when the Agency becomes a party to the contractual provisions of the instrument (this is usually when cash is initially advanced to the counterparty, but for home equity assets this is at the point of legal completion of the underlying property purchase) and measured at fair value on recognition.
Where differences between the fair value at initial recognition, as calculated using the methods described in Note 12c and Note 13, and the price paid by the Agency to acquire the instrument are significant, they are either:
-
recognised as grant expenditure where fair value is estimated to be below cost, in accordance with IAS 20 Government Grants
-
deferred and released over the expected life of the instrument, in accordance with IFRS 9, where the fair value is estimated to be above cost
The Agency fully derecognises a financial asset only when the contractual rights to the cash flows for the asset expire, or it transfers the financial asset and substantially all the risks and rewards of ownership to another entity. Partial derecognition occurs where part of the contractual cash flows is received, for example, where a homeowner chooses to partially redeem their equity loan. Here, the element of the asset which relates to the repayment is derecognised.
Cash and cash equivalents
Cash comprises cash on hand and demand deposits. Cash equivalents comprise amounts in bank accounts where there is an insignificant risk of changes in value, with less than three months’ notice from inception. Third party cash comprises cash held by solicitors at year end in relation to deals which were in progress and cash received by the Agency’s mortgage administrator for home equity redemptions.
Trade and other receivables
Trade and other receivables may be measured at fair value or amortised cost depending on the nature of the individual balance. Where the balance is measured at amortised cost, the carrying value is subject to an Expected Credit Loss calculation. Land sale agreements that contain clauses for the recovery of overage are measured at FVTPL.
Financial asset investments
The Agency follows IFRS 9 for all investments, subject to interpretations and adaptations for the public sector context as defined in the FReM.
Classification and measurement of financial assets
Two criteria are used to determine how financial assets should be classified and measured under IFRS 9:
-
the business model for managing the asset
-
the contractual cash flow characteristics of the financial asset
The measurement categories reflect the nature of the cash flow and the way they are managed. The three categories are:
-
financial assets measured at amortised cost (AC)
-
financial assets measured at fair value through other comprehensive income (FVTOCI)
-
financial assets measured at FVTPL
The contractual cash flow characteristics are either:
-
financial assets held to collect cash flows only
-
the assets are held to collect cash flows and to sell
Financial assets are measured at AC if they are held within a business model whose objective is to hold financial assets to collect contractual cash flows and their contractual cash flows represent solely payments of principal and interest.
Financial assets are measured at FVTOCI if they are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets and their contractual cash flows represent solely payments of principal and interest. Currently, the Agency has no assets which meet the requirements to be recognised under this classification.
Other financial assets are measured at FVTPL. There is an option to make an irrevocable election for non-traded equity investments to be measured at FVTOCI, in which case dividends are recognised in profit or loss, but gains or losses are not reclassified to profit or loss upon derecognition, and impairment is not recognised in the income statement. The Agency has not chosen to make this election for any financial assets.
Consequently, all financial assets which do not meet the criteria for classification to be recognised and measured at AC are recognised and measured at FVTPL. Business models are determined on initial application. If the business model were to change, the Agency would then reassess the classification of assets held within the portfolio. The Agency assesses the business model at a portfolio level. Information that is considered in determining the business model includes:
-
policies and objectives for the relevant portfolio
-
how the performance and risks of the portfolio are managed, evaluated, and reported to management
Financial assets managed on a fair value basis are held at FVTPL with no elections made to classify as FVTOCI.
In assessing whether contractual cash flows are solely payments of principal and interest, terms that could change the contractual cash flows so that it would not meet the condition for solely payments of principal and interest are considered, including:
-
contingent and leverage features
-
non-recourse arrangements
-
features that could modify the time value of money
Assets measured at fair value
Most of the Agency’s financial assets are measured at fair value. Under IFRS 9, the Agency is required to value assets in accordance with IFRS 13. The practical application of this standard is explained with reference to the Agency’s asset portfolios in Notes 12c and 13, with detail regarding the key assumptions which support the Agency’s most significant fair value estimate set out in Note 15a.
When the fair value of an asset falls below the associated initial cost of that asset, the Agency discloses this as an impairment charge in the financial statements.
When determining the fair value hierarchy level under which a financial asset should be disclosed under the requirements of IFRS 13, the Agency considers the observable inputs used within the valuation of the asset.
The Agency considers the following factors in determining whether there have been any transfers between levels of the fair value hierarchy:
-
For financial assets previously valued using unobservable inputs and therefore disclosed under Level 3 of the fair value hierarchy, if it has been determined that observable inputs are now available to measure the fair value of the asset, the Agency would consider whether the asset should be disclosed within Level 1 or Level 2 of the fair value hierarchy
-
For financial assets previously valued using observable inputs and therefore disclosed within Level 1 or Level 2 of the fair value hierarchy, if it has been determined only unobservable inputs are now available or observable inputs must be adjusted using unobservable inputs, the Agency would consider whether the asset should be disclosed within a lower level of the fair value hierarchy.
The above factors are considered at least annually for particular asset groups or where there has been a contractual change for an individual asset.
Assets measured at amortised cost
Assets are valued by applying effective interest rates, calculated to recognise interest in accordance with IFRS 9 requirements to capitalise transaction costs and recognise fee income as finance income, spread over the life of the investment. Valuation of assets is subject to the impairment requirements of IFRS 9 for recognising write-off adjustments, modification adjustments and Expected Credit Loss allowances.
Impairment
IFRS 9 requires the Agency to recognise expected credit losses anticipated within the next 12 months based on unbiased forward-looking information. Where a significant increase in credit risk is identified the Agency is required to recognise total lifetime expected credit losses.
The measurement of expected credit loss involves increased complexity and judgement including estimation of probabilities of default, loss given default, a range of future economic scenarios, estimation of expected lives and estimation of exposures at default and assessing significant increases in credit risk.
Key concepts and management judgements
The impairment requirements are complex and require management judgements, estimates and assumptions. Key concepts and management judgements include:
Determining a significant increase in credit risk since initial recognition: As aforementioned, IFRS 9 requires the recognition of 12 month expected credit losses (the portion of lifetime expected credit losses from default events that are expected within 12 months of the reporting date) if credit risk has not significantly increased since initial recognition (stage 1), and lifetime expected credit losses for financial instruments for which the credit risk has increased significantly since initial recognition (stage 2) or which are credit impaired (stage 3).
The Agency assesses when a significant increase in credit risk has occurred based on quantitative and qualitative assessments for individual investments.
Default: Default is deemed to have occurred when a Borrower has materially defaulted on their obligations and / or there is evidence that a counterparty is experiencing financial difficulty and their ability to repay is impaired. Homes England rebuts the presumption that exposures where payments past due exceed 90 days results in default. This is rebutted on the basis Homes England primarily advances development loans where interest is accrued and capitalised and repayment primarily comes from the sale of developed collateral (dwellings or land) and a delay in a sale or repayment is not always reflective of a Significant Increase in Credit Risk (SICR) or default.
In determining whether a counterparty and resultantly a financial asset is classified as being in default, Homes England assess a range of factors including, but not limited to:
-
whether a significant breach of lending terms and obligations has occurred i.e. a breach in financial covenants, legalisation or litigation has occurred
-
the availability of cure, remedy or standstill periods and whether these have lapsed. These provisions, where agreed with the Borrower at the outset, provide an opportunity (during a restricted time period) for the Borrower to rectify a default before enforcement action is taken. These provisions are commonly used by lending institutions
-
whether there is a realistic prospect for any distress to be remedied by the counterparty or Beneficial Owners without significant lender intervention and contract modification
-
where relevant, if another lender to the counterparty has recognised a default resulting in a SICR regardless of whether this triggers cross default provisions
As Homes England’s loans and advances which meet the requirements to be measured at amortised cost are broadly consistent in nature, all being commercial loans and advances to companies involved in housing investment and development, a consistent approach to default is taken across the organisation.
Counterparties and associated financial assets which are deemed to be in default are only considered to have cured and returned to Stage 2 or Stage 1 following completion of a restructure which has resulted in the counterparty’s ability to repay their obligations no longer being impaired. Any restructure which results in Homes England absorbing a loss as a result will result in the financial asset being classified as in default.
Homes England does not utilise probation periods when assessing the staging of a financial asset and therefore assets can move upwards through the stages without restriction. The approach reflects the nature of Homes England’s activities which are heavily concentrated in development finance and whereby distress and default is ordinarily only reversed through significant intervention or modification or a fundamental change in economic conditions. In the absence of these factors, our expectation is that defaulted assets will remain in default until exited.
Forward-looking information
Credit losses are cash shortfalls from what is contractually due over the life of the financial instrument. Expected credit losses are a measure of unbiased probability-weighted credit losses which might reasonably be expected, determined by evaluating a range of possible outcomes and considering future economic conditions. When there is a non-linear relationship between forward-looking economic scenarios and their associated credit losses, a range of forward- looking economic scenarios, currently expected to be a minimum of three, will be considered to ensure a sufficient unbiased representative sample of the complete distribution is included in determining the expected loss.
Homes England assigns CRR to all counterparties with whom the organisation has provided financial assets that are measured at amortised cost. The CRR utilises a combination of qualitative and quantitative information including previous financial performance and strength, projected cashflows and leverage alongside more qualitative factors such as management experience. This assessment culminates in a single CRR figure and associated probability of default being applied based on the overall credit assessment of the given counterparty. This rating takes into consideration past financial performance (where evident) and expected performance of a given counterparty, and critically, the underlying project.
The probability of default values associated with each CRR under the most likely central scenario have been determined by Homes England by adjusting the average probability of default values, which have been established using methodology applied in previous years by DLUHC, to allow for current economic projections by considering historical movements in the various economic indicies. This methodology is then combined with an overall expert subjective opinion to produce estimates of the final adjusted probability of default rates.
To ensure compliance with IFRS 9, Homes England has adopted an additional probability weighted assessment of Expected Credit Losses, utilising two plausible alternative economic scenarios. As Homes England operates in a single sector (Housing) the loans and advances made are greatly concentrated and as a result, defaults may be more greatly correlated in comparison to a loan portfolio which benefits from sector diversification.
The alternative economic scenarios adopted during 2022/23 are derived from the macro- economic forecast scenarios provided by the Office for Budget Responsibility. Sensitivity analysis regarding this judgement is provided in Note 15b.
The decision on how to weight these scenarios against the central scenario is primarily derived from expert judgement within Homes England. Alternative scenarios and weightings are reviewed on a minimum of a six-monthly basis and scrutinised through the Agency’s forums and committees.
Expected life
Lifetime expected credit losses must be measured over the expected life of individual agreements. For modelling purposes, this is restricted to the maximum contractual life of investments. Potential future modifications of contracts are not considered when determining the expected life or exposure at default until they occur.
Discounting
Expected credit losses are discounted at the effective interest rate at initial recognition or an approximation thereof and are consistent with income recognition. For loan commitments, the effective interest rate is the rate that is expected to apply when the loan is drawn down and a financial asset is recognised. For variable or floating rate financial assets, the spot rate at the reporting date is used and projections of changes in the variable rate over the expected life are not made to estimate future interest cash flows or for discounting.
Modelling techniques
Expected credit losses are calculated at the individual financial instrument level by multiplying three main components, being the probability of default, loss given default and the exposure at default, discounted at the original effective interest rate. The methodology and key assumptions are outlined in detail in Note 15b.
Write-offs
Homes England manages distressed financial assets through a specialist team with experience in restructuring and insolvency.
Most of Homes England’s loans and advances have the benefit of security. Write-offs take place once all such security has been realised or there is no realistic prospect of recovery and the amount of the loss has been determined.
Events that typically result in a write-off ahead of security being fully realised include, but are not limited to:
-
the financial asset is subject to insolvency proceedings and the only funds that will be received are the amounts estimated by the Insolvency Practitioner
-
security (typically property) is disposed of and a decision is made that no further funds will be received
-
independent professional advice (typically third-party valuations or assessments) shows a significant shortfall with limited evidence that any shortfall will be recouped
Any further recoveries of amounts previously written off are generally considered fortuitous gains and reduce the amount of impairment losses recorded in the Statement of Consolidated Net Expenditure.
n) Financial liabilities
Financial liabilities are recognised in the Statement of Financial Position when the Agency becomes a party to the contractual provisions of the instrument.
All non-derivative financial liabilities are initially measured at fair value and subsequently measured at amortised cost.
Financial liabilities consist of trade and other payables and certain provisions.
Financial liabilities are classified as current liabilities unless the Agency has an unconditional right to defer settlement for at least 12 months after the end of the reporting period.
The Agency derecognises a financial liability only when the Agency’s obligations are discharged, cancelled or they expire.
o) Pension costs
The Agency accounts for pension costs in accordance with International Accounting Standard 19 Employee Benefits (IAS 19). During the year the Agency’s employees were able to participate in one of the following contributory pension schemes: The Homes and Communities Agency Pension Scheme, The City of Westminster Pension Fund or the West Sussex County Council Fund. All three schemes are multi-employer defined benefit schemes as described in paragraph 8 of IAS 19.
Plan assets are measured at fair value. Liabilities are measured on an actuarial basis and discounted to present value. The net asset or obligation is recognised within pension assets or liabilities, respectively, in the Statement of Financial Position. The operating and financing costs of the schemes are recognised separately in the Statement of Comprehensive Net Expenditure. Service costs are spread over the working lives of employees and financing costs are recognised in the period in which they arise. Actuarial gains and losses are recognised in full in taxpayers’ equity.
Because assets managed under the Agency’s pension schemes are mainly in quoted investments, the pension assets stated at year end are less susceptible to valuation uncertainty than other balances disclosed in the Agency’s Financial Statements. Of the £865m employer assets at 31 March 2023 disclosed in Note 18, only £61m (7.06%) related to investment in property and is subject to the uncertainty outlined above in relation to the Agency’s land and property assets.
Similarly, the discount rates used for scheme liabilities are derived from bond markets and so are determined with reference to published figures.
p) Leases
The adoption of International Financial Reporting Standard 16 Leases (IFRS 16) for public sector bodies on 1 April 2022 sets out new principles for the recognition, measurement, presentation, and disclosure of leases. The standard requires a lessee to recognise a right-of-use asset and corresponding lease liability on the Statement of Financial Position for all leases other than short term leases or leases for which the underlying asset is of low value.
The Agency has made the decision to adopt IFRS 16 using the cumulative catch-up method from 1 April 2022, as permitted under the specific transitional provisions in the standard. As a result, comparatives have not been restated for the 2021 reporting period. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening Statement of Financial Position.
At 31 March 2022, the Group was committed to minimum payments under non-cancellable operating lease agreements totalling £23.6m. These commitments were recognised on 1 April 2022 under IFRS 16 at the minimum present value of the remaining lease payments, discounted at a rate prescribed by HM Treasury. Under IFRS 16, likely lease extensions are factored into the Agency’s remaining payments, however variable payments such as service charges and rates have been excluded.
The Agency discounts its lease payments at the rate prescribed by HM Treasury in their ‘Public Expenditure System’ (PES). The Group’s weighted average incremental borrowing rate applied to its lease liabilities on 1 April 2022 was 0.95% per PES (2021) 10, Discount Rates for General Provisions, post-employment benefits, financial instruments and leases (under IFRS 16); Announcement of rates.
Reconciliation of operating lease commitments to IFRS 16 lease liability
Cost | £m |
---|---|
Operating lease commitments disclosed at 31 March 2022 | 23.6 |
Less impact of changes to commitments disclosed at 31 March 2022 | (0.6) |
Less service charges, rates and car parking included in commitments | (9.7) |
If discounted at the Group’s incremental borrowing rate of 0.95% | (0.4) |
Less short-term operating leases not accounted for under IFRS 16 | (1.2) |
IFRS 16 lease liability at 1 April 2022 | 11.7 |
The associated right-of-use assets were measured on a retrospective basis as if the new rules had always been applied with the cumulative effect recognised as an adjustment to opening balances. Right-of-use assets of £9.2m were recognised on Statement of Financial Position at 1 April 2022. The difference between lease assets and liabilities of £2.5m is partially offset by a £1.1m adjustment in relation to rent-free periods, resulting in £1.4m being recognised as an adjustment to the Group’s opening reserves, as shown in the Summary Statement of Changes in Taxpayers Equity.
q) Financial Commitments
The Agency recognises a financial commitment when it is legally or constructively committed to pay another body in relation to a specific matter. It is legally committed when it is subject to statute or is contractually bound. It is constructively committed when it has created a valid expectation in others, via its policies, conduct or established pattern of practice, for example, that it will be bound by certain obligations. The value of the financial commitment is determined by the amount which is still to be paid at the reporting date and profiled with reference to cash flow forecasts.
r) Impact of standards and interpretations in issue but not yet effective
International Financial Reporting Standard 17: Insurance Contracts (IFRS 17)
IFRS 17: Insurance Contracts replaces International Financial Reporting Standard 4: Insurance Contracts. The new standard will apply more standardised and rigorous requirements on accounting for insurance contracts, setting out clearer expectations on the recognition, classification and measurement of assets and liabilities in relation to insurance contracts. The implementation is not planned until 2025 and it may require further adaptation for the Public Sector. We anticipate that the standard will not be significant to the Agency’s Financial Statements.
2 Operating segments
a) Operating segment analysis
The Agency’s operational performance is managed by reference to financial and non-financial targets, within the constraints of programme and operational expenditure limits set by DLUHC. These programmes are managed with Directorates which therefore form the basis of the Agency’s operating segments as defined by International Financial Reporting Standard 8: Operating Segments.
All of the Agency’s activities, and therefore its income, expenditure, assets and liabilities, occur within the UK. An analysis of the various types of income which the Agency receives is shown in the Statement of Comprehensive Net Expenditure.
As many of the Agency’s programmes do not generate their own revenue and are financed by Grant in Aid, the financial measure used by the Board to assess the Agency’s operating performance and manage its resources is programme and administrative expenditure and receipts against Departmental Expenditure Limits (DEL). The programme and administrative expenditure and receipts information below is presented on the basis of the information presented to the Board.
Programme | Expenditure £m 2022/23 | Receipts £m 2022/23 | Total £m 2022/23 | Expenditure £m 2021/22 | Receipts £m 2021/2 | Total £m 2021/22 |
---|---|---|---|---|---|---|
Help to Buy | 2,237.2 | (53.3) | 2,183.9 | 2,397.5 | (34.3) | 2,363.2 |
Investment | 533.4 | (627.9) | (94.5) | 605.5 | (720.2) | (114.7) |
Housing Infrastructure Grants | 299.0 | - | 299.0 | 350.4 | (0.2) | 350.2 |
Development | 211.0 | (364.1) | (153.1) | 275.4 | (297.7) | (22.3) |
Affordable Housing | 1,356.3 | (10.6) | 1,345.7 | 1,099.5 | (14.8) | 1,084.7 |
Programme Administration | 26.1 | - | 26.1 | 11.7 | - | 11.7 |
Evolve | 20.9 | - | 20.9 | 16.3 | - | 16.3 |
Total programme expenditure and receipts | 4,683.9 | (1,055.9) | 3,628.0 | 4,756.3 | (1,067.2) | 3,689.1 |
Administration | 119.1 | (2.5) | 116.6 | 154.4 | - | 154.4 |
Total expenditure and receipts reported to Board | 4,803.0 | (1,058.4) | 3,744.6 | 4,910.7 | (1,067.2) | 3,843.5 |
DEL not reported to the Board in respect of Expected Credit Loss charges, write off charges and DEL impairments* | (7.1) | - | (7.1) | 16.7 | - | 16.7 |
Total Net DEL | 4,795.9 | (1,058.4) | 3,737.5 | 4,927.4 | (1,067.2) | 3,860.2 |
[*] Whilst ECL, write-off charges and DEL impairments are not reported to Board as part of the monthly performance management information, they are sighted through reporting to various committees.
b) Reconciliations to net expenditure
Net DEL expenditure, the financial measure used to report the Agency’s performance to the Board, excludes certain items which are disclosed separately in the Statement of Comprehensive Net Expenditure such as provisions for impairment, movements in other provisions, depreciation and income tax. It also includes items of expenditure which, for statutory reporting purposes, are capitalised in the Statement of Financial Position. Such items include additions to and disposals of non-current assets, loans and land and property assets. In addition, there are instances where there are timing differences between income and expenditure recognised for statutory reporting purposes and for DEL reporting, such as a restriction on recognising income on certain disposals until cash is received. For statutory reporting purposes income is recognised when the Agency is contractually entitled to receive the income. These rules are prescribed by HM Treasury.
A reconciliation of total DEL expenditure to net expenditure before tax as shown in the Statement of Comprehensive Net Expenditure is as follows:
Note | 2022/23 £m | 2021/22 £m | |
---|---|---|---|
Total net DEL expenditure above | 3,737.5 | 3,860.2 | |
Reconciling items: | |||
Increase in impairment of land assets | 16 | 106.9 | 17.9 |
(Decrease)/Increase in impairment of PPE and intangible assets | - | (1.5) | |
(Decrease)/Increase in impairment of assets measured at fair value passing through the SOCNE | 254.6 | (164.0) | |
Valuation gains on financial assets held at FVTPL | (614.7) | (761.3) | |
(Decrease)/Increase in provisions | 0.9 | (3.8) | |
Utilisation of provisions | (7.9) | - | |
Share of (profits) of associates and joint ventures | 11b | (3.3) | (0.2) |
Investment in joint ventures and associates | 11b | (3.5) | (9.2) |
Pension movements | 18d, 18f | 7.5 | (20.9) |
Book value of land and property assets disposed | 177.3 | 153.4 | |
Book value of assets measured at fair value disposed | 12f | 2,332.5 | 2,051.8 |
Help to Buy and FirstBuy receipts not included within net DEL expenditure* | 12d, 12f | (2,259.2) | (1,898.6) |
Loan repayments (for loans measured at amortised cost and at fair value) | 448.7 | 503.4 | |
Capital items recorded as programme expenditure: | |||
Additions to assets measured at fair value | (2,301.9) | (2,600.8) | |
Additions to land and property assets | 16 | (182.4) | (230.2) |
Loans advanced, including interest added to loans measured at amortised cost | (447.3) | (384.5) | |
Additions to PPE and Intangible assets | (5.1) | (7.3) | |
Recovery of long term receivables recorded as programme income | 29.6 | 8.4 | |
Net expenditure before tax as stated in the Statement of Comprehensive Net Expenditure | 1,270.2 | 512.8 |
[*] Help to Buy and FirstBuy receipts are not reported to the Agency’s Board as they are outside the scope of budgets delegated to the Agency to be managed. Cash received is transferred as Consolidated Fund Excess Receipts via the Department for Levelling Up, Housing and Communities to HM Treasury.
A reconciliation of programme receipts as shown above to income as stated in the Statement of Comprehensive Net Expenditure is as follows:
Note | 2022/23 £m | 2021/22 £m | |
---|---|---|---|
Total receipts reported to the Board | 1,058.4 | 1,067.2 | |
Reconciling items: | |||
Clawback of grants recorded as income but shown net within expenditure in Board reporting | 18.7 | 27.1 | |
Other income shown net within expenditure in Board reporting | 1.1 | 1.1 | |
Expenditure shown net within income in Board reporting | 7.8 | 11.0 | |
Disposal of non-current assets held for sale | (2.5) | - | |
Valuation gains on financial assets held at FVTPL not reported to Board | 12d | 614.7 | 761.3 |
Recovery of long term receivables recorded as programme income | (6.1) | (8.4) | |
Receipts from disposal of capital items recorded as programme income: | |||
Proceeds from the disposal of financial asset investments measured at fair value | 12d | (2,332.3) | (2,051.6) |
Loan repayments (for loans measured at amortised cost) | 12e | (472.2) | (503.6) |
Joint venture disposal proceeds | 11b | (6.9) | (2.7) |
Help to Buy and FirstBuy receipts not included within DEL receipts* | 2,259.2 | 1,898.6 | |
Income as stated in the Statement of Comprehensive Net Expenditure | 1,139.9 | 1,200.0 |
[*] Help to Buy and FirstBuy receipts are not reported to the Agency’s Board as they are outside the scope of budgets delegated to the Agency to be managed. Cash received is transferred as Consolidated Fund Excess Receipts via the Department for Levelling Up, Housing and Communities to HM Treasury.
c) Major customers
During the current and prior year, income from individual customers did not exceed 10% of total income.
3 Principal/agent relationships
Homes England is party to a number of significant arrangements where it acts as an agent for another entity. In these arrangements, Homes England uses its skills and expertise to help bring forward programmes and initiatives. These programmes and initiatives are in addition to the core business of the Agency. It therefore would not be appropriate to show income or expenditure in respect of these transactions or to report on assets and liabilities. The below sets out these arrangements.
Managing programmes for DLUHC
The Agency has agreements with DLUHC for the management and delivery of their Cladding Fund, Building Safety Fund, Next Steps Accommodation, Rough Sleepers Accommodation and Voluntary Right to Buy programmes:
Cladding Fund: the fund was set up to replace aluminium composite material (ACM) cladding panels on large-scale residential social housing and this has been extended to the private sector. During the year, grants totalling £24.0m (2021/22 £71.6m) were paid out by the Agency and reimbursed by DLUHC.
Building Safety Fund: this fund is focussed on unsafe non-ACM cladding systems (for example due to high pressure laminates and other metal composite materials) on both social and private sector buildings over 18 metres in height. The Fund opened to new applications in July 2022 for eligible buildings. During the year, grants of £254.4m (2021/22: £163.5m) were paid out by the Agency and reimbursed by DLUHC.
Next Steps Accommodation Programme (NSAP): Homes England is supporting DLUHC, leading housing associations and local authorities to deliver the ambitious plans which will fast- track thousands of long-term homes for rough sleepers. NSAP is the first phase to deliver these plans. During the year, grants of £6.6m (2021/22: £32.2m) were paid out by the Agency and reimbursed by DLUHC.
Rough Sleepers Accommodation Programme (RSAP): Homes England is supporting DLUHC, leading housing associations and local authorities to deliver the ambitious plans which will fast- track thousands of long-term homes for rough sleepers. RSAP is the second phase to deliver these plans. During the year, grants of £41.8m (2021/22: £31.4m) were paid out by the Agency and reimbursed by DLUHC.
Voluntary Right to Buy: under this programme DLUHC compensate registered providers for loss of rent where tenants buy their own property. The programme ceased during financial year 2021/22 therefore grants of £nil (2021/22: £0.4m) were paid by the Agency and reimbursed by DLUHC.
Managing programmes for other government departments
The Agency’s agreement with the Department of Health and Social Care (DHSC) in respect of the Care and Support Specialised Housing Fund ceased at the end of the 2021/22 financial year. Under this programme, DHSC funded specialist housing for older people and adults with disabilities. During 2021/22 grants of £6.5m were paid out by the Agency and reimbursed by DHSC.
Managing assets for third parties
The Agency manages home equity portfolios on behalf of the Greater London Authority (GLA), Ministry of Defence (MoD) and multiple housing developers via our Mortgage Administrator. At the year end the Agency managed 5,547 (2021/22: 6,237) assets on behalf of these parties. During the year the Agency also collected 690 (2021/22: 1,055) disposal receipts with total proceeds of £20.1m (2021/22: £23.9m). The Mortgage Administrator collects and distributes disposal receipts to the GLA and housing developers on behalf of the Agency. The Agency receives disposal receipts on behalf of the MoD and subsequently transfers the receipts to the MoD. At the year end the Agency held £5.6m (2021/22 £3.4m) which is due to be paid to the MoD.
The Agency manages three science parks on behalf of the Department for Science, Innovation and Technology (DSIT). During the year the Agency incurred expenditure of £0.6m (2021/22: £0.7m) and collected income of £6.9m (2021/22: £1.8m) as a result of day to day management of the sites. The net receipt of £6.3m is due to DSIT from the Agency.
DLUHC Guarantee Programme
Homes England acts as Licence or Concession Manager on behalf of DLUHC for a number of Guarantee programmes:
Affordable Housing Guarantee Scheme 2013 - a £3.5bn programme to support the delivery of additional new-build affordable homes by enabling registered providers to borrow on a long-term fixed rate basis. The loans carry a government guarantee and the benefit of the guarantee is passed through to borrowers in the form of a lower cost of borrowing. This scheme is closed to new applications.
Private Rented Sector Guarantee Scheme - a £3.5bn programme to support the building of new homes for the private rented sector by enabling developers or investors to raise low cost debt to refinance development funding on a long-term basis. The scheme is closed to new applications, but applications submitted before the December 2018 deadline continue to be progressed.
Affordable Homes Guarantee Scheme 2020 - this is a £3bn successor programme to the 2013 scheme and also provides low cost long- term loans to registered providers of homes for affordable social rent, affordable rent and shared ownership.
Homes England also acts as a programme partner to DLUHC in connection with the ENABLE Build programme. This is a scheme that aims to increase the availability of development finance for small and medium-sized enterprise housebuilders.
Provision of shared services
In addition to the above, the Agency continues to have a close working relationship with the Regulator of Social Housing (RSH). A service level agreement sets out the services provided by Homes England to RSH. Services provided may include, but are not limited to, the provision of accommodation or facilities, the provision of staff time and expertise and the provision of technical resources. During the year, Homes England has charged RSH a fee of £0.6m (2021/22: £0.7m) for these services, credited to other operating income. Invoices are raised and paid monthly. In addition, due to this close working relationship, the systems and processes of Homes England are an important part of the control environment of RSH, and as such, the annual statutory audit of RSH covers a review of the systems and processes. Further disclosure regarding this relationship is provided in the Fees and Charges section of the Annual Report.
4 Grants
Payments were made to registered providers of social housing, local authorities and other public and private sector partners under the following programmes:
Programme | 2022/23 £’000 | Represented* 2021/22 £’000 |
---|---|---|
Affordable Housing: Strategic Partnerships | 799,331 | 653,968 |
Affordable Housing: Affordable Housing | 517,833 | 471,102 |
Housing Infrastructure Fund | 264,609 | 312,748 |
First Homes | 56,194 | - |
Local Authority Accelerated Construction | 11,446 | 31,630 |
Other | 10,096 | 9,485 |
City Growth Deals | 4,403 | 3,169 |
Community Housing Fund | - | 90 |
Total | 1,663,912 | 1,482,192 |
[*] Represented to split out Strategic Partnerships from Affordable Housing.
The Agency’s largest grant programme is the Affordable Housing Grant programme. This aims to increase the supply of new affordable and shared ownership homes in England. Strategic Partnerships is part of the Affordable Housing Grant Programme. These partnerships provide additional support to registered providers for the construction of affordable homes.
The Housing Infrastructure Fund aims to unlock house building by funding local authorities to build vital physical infrastructure projects, including the construction of roads, bridges, energy networks and other utilities.
The First Homes scheme offers discounts to first time buyers, which means they may be able to buy a home for 30% less than the market value. The home can be a new home built by a developer, or a home you buy from someone else who originally bought it as part of the scheme. This is subject to eligibility criteria.
The Local Authority Accelerated Construction programme was scheduled to end on 31 March 2022, however an extension was granted for the 2022/23 financial year. The reduction in spend from 2021/22 to 2022/23 is in line with the programme winding down to a close. No further extension has been granted beyond 2022/23.
The Community Housing Fund officially closed on 31 March 2021. The small amount of spend in 2021/22 relates to some legacy schemes that delivered spend/outputs in 2021/22.
Affordable Housing grant
Within the Affordable Homes Programme there are two routes to access funding, providers can apply for funding on a scheme by scheme basis bidding through continuous market assessment, or providers can become a strategic partner and access grant for a longer-term development programme through a multi-year agreement. Both types are paid to partners across England.
The table below shows the geographical split.
Region | Total Grant £’000 2022/23 | % 2022/23 | Total Grant £’000 2021/22 | % 2021/22 |
---|---|---|---|---|
East and South East | 304,149 | 23% | 293,544 | 26% |
South West | 191,904 | 14% | 173,612 | 15% |
Midlands | 244,018 | 19% | 219,552 | 20% |
North East and Yorkshire | 273,387 | 21% | 201,594 | 18% |
North West | 303,706 | 23% | 236,768 | 21% |
Total | 1,317,164 | 100% | 1,125,070 | 100% |
Top 10 Recipients of Funding to 31 March 2023
Analysis of top 10 recipients of funding by counterparty to 31 March 2023 | Payments £’000 | Percentage of Total Grant Payments |
---|---|---|
Counterparty 1 | 81,799 | 4.9% |
Counterparty 2 | 65,258 | 3.9% |
Counterparty 3 | 57,136 | 3.4% |
Counterparty 4 | 55,862 | 3.4% |
Counterparty 5 | 52,053 | 3.1% |
Counterparty 6 | 46,841 | 2.8% |
Counterparty 7 | 39,958 | 2.4% |
Counterparty 8 | 36,954 | 2.2% |
Counterparty 9 | 35,701 | 2.1% |
Counterparty 10 | 34,141 | 2.1% |
Total Top 10 counterparties at 31 March 2023 | 505,703 | 30.3% |
Total grant payments to 31 March 2023 | 1,663,912 | 69.7% |
5 Disposal of land and property assets
Criteria | Note | 2022/23 £’000 | 2021/22 £’000 |
---|---|---|---|
Proceeds from disposals | 267,742 | 248,630 | |
Cost of disposals: Book value of disposals | 16 | 174,803 | 153,418 |
Cost of disposals: Direct costs of sale | 7,806 | 11,010 | |
182,609 | 164,428 | ||
Gain on disposal | 85,133 | 84,202 |
The proceeds from disposals above can be further analysed as follows:
Criteria | Note | 2022/23 £’000 | 2021/22 £’000 |
---|---|---|---|
Disposals of land (freehold disposal/building lease) | 199,733 | 158,883 | |
Direct Commissioning (market sales) | 46,070 | 68,618 | |
Direct Commissioning (affordable contracts) | 21,939 | 21,129 | |
Proceeds from disposals | 267,742 | 248,630 |
Income from the disposals of land (freehold disposal/building lease) is recognised when there is a legally binding sale agreement, which has become unconditional and irrevocable by the end of the reporting period. The income is recognised at the unconditional date and measured at the fair value of the consideration received or receivable for the disposal of land.
Income in relation to Direct Commissioning (market sales) is recognised at legal completion and measured at the fair value of the consideration received or receivable for the property.
Income in relation to Direct Commissioning (affordable contracts) is recognised over time by reference to the stage of completion of the contract activity at the balance sheet date. This is normally measured by compliance inspector reports of work performed to date. A contract asset is recognised when the Agency has completed a proportion of the contract activity prior to payment being received. A contract liability is recognised where cash has been received in advance of the contract activity being completed.
6 Programme costs
Cost | 2022/23 £’000 | 2021/22 £’000 |
---|---|---|
Land | 20,983 | 21,700 |
Evolve | 15,729 | 10,636 |
Help to Buy | 12,900 | 13,772 |
Markets, Partners and Places | 8,898 | 7,073 |
Financial Investment Programmes | 7,997 | 7,478 |
Cladding Safety Scheme | 7,511 | - |
Managing programmes on behalf of DLUHC | 4,511 | 4,579 |
Housing Infrastructure Fund | 2,805 | 1,102 |
Affordable Homes | 1,185 | 1,400 |
Strategy Research Analysis Sponsorship | 857 | - |
Total | 83,376 | 67,740 |
Programme costs are the operational costs incurred by Homes England to run the various programmes. They are typically professional fees to cover activities such as due diligence, legal advice, financial investigation, administration of payments, and property servicing.
Evolve is a specific programme funded by DLUHC to support the Agency in meeting its mission and objectives by creating new, more efficient services, teams, infrastructure and ways of working. In the current year there has also been £4.7m (2021/22: £5.7m) of capital expenditure incurred in relation to Evolve.
Help to Buy costs relate to transaction fees paid to local agents who administer new equity loans, servicing costs paid to the Agency’s mortgage administrator, who manage the equity loan book and costs incurred for a future transfer to a new mortgage administrator. Help to Buy also include costs in relation to the Help to Build scheme setup.
Cladding Safety Scheme costs relate to the development and setup of the Cladding Safety Scheme Programme. This is a new grant scheme for 11-18 meter high buildings with unsafe cladding. The scheme’s vision is to offer financial support, where recovery has not been possible from those responsible, to enable the remediation of eligible buildings with cladding systems which present an unacceptable life-safety risk.
Note 3 details the programmes that Homes England manages for DLUHC and other government departments, the costs included within programme costs above are the staff costs and professional fees associated with these programmes.
7 Staff costs
The costs of salaried staff for the year, excluding Board Members, were as follows:
a) Total staff costs
2022/23 £’000 | 2021/22 £’000 | |
---|---|---|
Staff costs charged to net expenditure comprise: | ||
Staff costs | 70,672 | 72,255 |
Pension costs | 31,863 | 34,722 |
Total staff costs | 102,535 | 106,977 |
The costs above can be further analysed as follows:
Cost | 2022/23 £’000 | 2021/22 £’000 |
---|---|---|
Salaries and wages | 70,559 | 72,041 |
Social security costs | 8,644 | 9,463 |
Pension costs- current service cost* | 29,716 | 32,786 |
Pension costs- expenses | 2,147 | 1,936 |
111,066 | 116,226 | |
Temporary staff | 15,562 | 11,823 |
Seconded staff | 88 | 448 |
126,716 | 128,497 | |
Less staff costs capitalised: Land and Property | (10,709) | (11,416) |
Less staff costs transferred to programme costs | (13,472) | (10,104) |
102,535 | 106,977 | |
Non-Executive Board Member expenses | - | 6 |
[*] The current service pension cost does not include costs relating to early retirements, which are included within Administration expenditure, Note 8.
During the year, £10.7m of staff costs were capitalised (2021/22: £11.1m) against Land and Property assets. The costs relate to direct labour involved in the enhancement of land and property assets. During the year, no staff costs were capitalised (2021/22: £0.3m) against intangible fixed assets.
In addition, £13.5m (2021/22: £10.1m) of staff costs, in relation to the Homes England Evolve Programme, the Building Safety Fund and the Next step Accommodation Programme, were reclassified to programme costs. These programmes are partly funded by the Agency’s programme budget. The Homes England Evolve Programme covers ongoing work involved in transforming the services, processes and infrastructure of Homes England, and is described more fully in Note 6.
b) Staff bonuses
Staff members who are direct employees of the Agency benefit from a Performance Related Pay scheme whereby any bonuses are determined with reference to performance against agreed objectives during the year. Performance Related Pay accrued but not yet paid during the year totalled £0.4m (2021/22: £0.3m).
During the year, no Directors received bonuses (2021/22: £9k). The Remuneration and staff report within the Accountability section of the Annual Report includes further details of bonuses, the average number of staff employed by the Agency, staff numbers by pay band and exit packages.
c) Staff composition
The average number of staff employed by the Agency (full time equivalents) over the course of the year is as follows:
Staff type | 2022/23 Number | 2021/22 Number |
---|---|---|
Permanent UK staff | 1,167 | 1,203 |
Fixed term UK staff | 95 | 102 |
Temporary staff | 142 | 118 |
Board members | 9 | 9 |
Seconded staff | 2 | 4 |
1,415 | 1,436 |
d) Loans to employees
The Agency has provided travel season ticket loans, cycle scheme loans and charge point loans to employees during the year. The total amount outstanding in respect of these at 31 March 2023 was £19k (2021/22: £18k). There were no other loans to employees.
8 Administration expenditure
Cost | 2022/23 £’000 | Represented* 2021/22 £’000 |
---|---|---|
Accommodation and office running costs | 9,423 | 10,852 |
Professional fees | 5,425 | 5,330 |
Depreciation and Amortisation | 5,123 | 2,826 |
Travel and subsistence | 3,291 | 2,057 |
Taxation not recoverable | 3,280 | 3,318 |
Staff welfare, learning and development | 2,184 | 1,643 |
Other | 889 | 482 |
Auditor’s remuneration (Statutory Audit) | 575 | 435 |
30,190 | 26,943 |
[*] Represented to show Depreciation and Amortisation and Taxation not recoverable separately.
Movements in accommodation and office running costs and depreciation from the prior year have occurred as a result of a change in accounting policy (note 1). There were increases in travel and subsistence compared to prior year as they start to return to pre-pandemic levels.
9 Other operating income
Income type | Note | 2022/23 £’000 | 2021/22 £’000 |
---|---|---|---|
Homeowner fees | 12f | 57,621 | 39,313 |
Grant clawback | 19,836 | 27,109 | |
Other | 5,611 | 5,299 | |
Rent and property income | 4,836 | 5,207 | |
87,904 | 76,928 |
Homeowner fees represent income due from homeowners who have acquired a home via the Help to Buy loan equity scheme or other historic equity loan schemes. In relation to the Help to Buy equity scheme, from the fifth anniversary of ownership interest is due, calculated as 1.75% of the loan outstanding (applied monthly), the interest rate increases each year by RPI +1%.
Grant clawback mostly comprises grant recovered from registered providers of social housing via the Affordable Homes Programme. Clawback may arise where the recipient of grant funding does not meet the conditions set out in the grant agreement resulting in recovery.
Other includes income from investments, income charged to the Regulator of Social Housing in respect of services provided, planning windfall income (where a developer buys land which subsequently receives planning permission increasing its value and the Agency shares in this uplift in value) and other windfall income (where the legal restriction on land sold is varied resulting in income to the Agency).
10 Share of profits of associates and joint ventures
The aggregated amounts of the Group’s share of results of associates and joint ventures included in the Statement of Comprehensive Net Expenditure is as follows:
Share type | 2022/23 £’000 | 2021/22 £’000 |
---|---|---|
Share of results of associates | 2,393 | (521) |
Share of results of joint ventures | 916 | 750 |
Share of profits of associates and joint ventures | 3,309 | 229 |
The aggregate share of results is the net profit or loss from continuing operations. There was no profit or loss from discontinued operations and no other comprehensive income was recognised in the year.
11 Share of profits of associates and joint ventures
a) Subsidiary undertakings - Agency
Cost | 2022/23 £’000 | 2021/22 £’000 |
---|---|---|
At 1 April | 50,000 | 50,000 |
Investments in the year | - | - |
Redemptions | - | - |
At 31 March | 50,000 | 50,000 |
During the year, the Agency held interests in the following subsidiaries, each of which are registered in England and Wales and are wholly owned by the Agency:
Name of undertaking | Share capital | Nature of business |
---|---|---|
English Partnerships (LP) Ltd | £50,000,000 | Investment holding company |
The Estuary Management Company Ltd | £1 | Property management company |
Norwepp (NWDA subsidiary) Ltd | £500 | Investment holding company |
AWM (Subsidiary) Ltd | £1 | Investment holding company |
ONE NorthEast General Partner Ltd | £100 | Investment holding company |
The property management company is held as a non-profit making entity to manage shared costs. Other than English Partnerships (LP) Ltd, all of the remaining investment holding companies are dormant.
b) Associated undertakings and joint ventures - Group and Agency
The aggregated movements in the Group’s share of net assets of associates and joint ventures are as follows:
Cost or valuation | Note | Group 2022/23 £’000 | Group 2021/22 £’000 | Agency 2022/23 £’000 | Agency 2021/22 £’000 |
---|---|---|---|---|---|
At 1 April | 55,123 | 45,732 | 20,615 | 20,615 | |
Investments in the year | 10,405 | 11,861 | - | - | |
Redemptions | (6,905) | (2,699) | - | - | |
Share of profits of associates and joint ventures | 10 | 3,309 | 229 | - | - |
At 31 March | 61,932 | 55,123 | 20,615 | 20,615 |
In 2022/23, £2.7m (2021/22: £1.2m) was received in dividends from group companies and treated as redemptions under the equity method per International Accounting Standard 28: Investments in Associates and Joint Ventures.
In 2022/23, £10.4m (2021/22: £11.9m) of committed funding was invested by English Partnerships (LP) Ltd, our wholly owned subsidiary into English Cities Fund. This comprises new funding of £10.4m (2021/22: £9.6m) and amounts previously repaid to the Group of £nil (2021/22: £2.3m). There have been £4.2m (2021/22: £1.5m) of repayments of funding made during the year. In 2021/22, the Agency recommitted to the English Cities Fund for a further ten years to December 2036.
The aggregated amounts of the Group’s share of net assets and liabilities of associates and JVs are as follows:
Share type | 2022/23 £’000 | 2021/22 £’000 |
---|---|---|
Group share of net assets of associates | 35,756 | 29,863 |
Group share of net assets of joint ventures | 26,176 | 25,260 |
Group share of net assets of associates and joint ventures | 61,932 | 55,123 |
During the year, the Group had interests in the following associated undertakings and joint ventures, all of which are registered or resident in England and Wales:
Name of undertaking | Group/Agency | Interest | Nature of business |
---|---|---|---|
English Cities Fund Limited Partnership | Group | 46% | Property development |
Countryside Maritime Limited ^ | Agency | 50% | Development of land |
Tilia Community Living LLP ^ | Agency | 26% | Property development |
Temple Quay Management Limited | Agency | 24% | Property management company |
Kings Waterfront (Estates) Limited | Agency | 50% | Property management company |
Pride in Camp Hill | Agency | 33% | Regeneration of Camp Hill area of Nuneaton |
Newton Development Partners LLP ^ * | Agency | 25% | Property development |
[^]Joint venture
[*] During the year, the Agency entered into a partnership agreement to invest up to £50m in equity in a joint venture, Newton Development Partners LLP. At the year end the joint venture had been established but no funds had been invested by the Agency.
The Agency’s interest in English Cities Fund Limited Partnership (ECF) represents the partner profit share arrangements, which entitles the Agency to a 45.78% share of the net profits or losses of the Partnership. The Agency’s Chief Investments Officer represents the Agency’s interest on the Board of ECF.
c) Commitments for associated undertakings and joint ventures- Group and Agency
The Agency has made a £5.0m (2021/22: £5.0m) working capital facility available to Countryside Maritime Limited, of which £3.7m (2021/22: £1.2m) was drawn at 31 March 2023. In 2017/18, the group committed to invest a further £25.0m into English Cities Fund. During 2022/23, £10.4m (2021/22: £9.6m) has been drawn down from this additional commitment. In 2022/23, the Agency committed £50.0m of funding to Newton Development Partners LLP. At 31 March 2023 £nil had been drawn down.
12 Financial assets
Asset type | Note | 2022/23: Fair value £’000 | 2022/23: Amortised cost £’00 | 2022/23: Total £’000 | 2021/22: Fair value £’000 | 2021/22: Amortised cost £’000 | 2021/22: Total £’000 |
---|---|---|---|---|---|---|---|
Cash and cash equivalents | a) | - | 217,485 | 217,485 | - | 195,776 | 195,776 |
Trade & other receivables | b) | 281,970 | 263,110 | 545,080 | 271,666 | 223,112 | 494,778 |
Financial asset investments | c) | 19,732,347 | 1,417,545 | 21,149,892 | 19,372,785 | 1,411,607 | 20,784,392 |
20,014,317 | 1,898,140 | 21,912,457 | 19,644,451 | 1,830,495 | 21,474,946 |
a) Cash and cash equivalents - Group and Agency
Cash type | 2022/23 £’000 | 2021/22 £’000 |
---|---|---|
Cash held with Government Banking Service | 149,595 | 139,608 |
Cash held with commercial banks | 5,317 | 146 |
Cash held with third parties | 62,573 | 56,022 |
217,485 | 195,776 |
The Agency draws Grant in Aid from DLUHC on a monthly basis which is received on the 8th working day. At 31 March, the Agency therefore held cash balances as shown above to enable it to meet its short term cash requirements until receipt of the next instalment of Grant in Aid.
The cash figure takes account of BACS payments initiated by 31 March 2023 to settle short-term liabilities, but not cleared by 31 March 2023. These payments totalled £45.5m (2021/22: £92.9m) and cleared the bank in early April 2023. There were no cash equivalents at any of the reporting dates shown.
Cash held with third parties covers amounts retained by external legal firms and the Agency’s mortgage administrator for home equity investments. Cash is held to Homes England’s order.
b) Trade & other receivables - Group and Agency
Gross balances | Fair value £’000 2022/23 | Amortised cost £’000 2022/23 | Total £’000 2022/23 | Fair value £’000 2021/22 | Amortised cost £’000 2021/22 | Total £’000 2021/22 |
---|---|---|---|---|---|---|
Land sale receivables | 269,791 | 7,336 | 277,127 | 262,127 | 3,158 | 265,285 |
Direct Commissioning | - | 155,788 | 155,788 | - | 88,975 | 88,975 |
Other receivables and prepayments | 12,179 | 100,407 | 112,586 | 9,539 | 131,159 | 140,698 |
281,970 | 263,531 | 545,501 | 271,666 | 223,292 | 494,958 | |
Expected Credit Loss allowances | - | (421) | (421) | - | (180) | (180) |
Net balances | 281,970 | 263,110 | 545,080 | 271,666 | 223,112 | 494,778 |
Of which: | ||||||
Non-current assets | 160,515 | 16,265 | 176,780 | 187,646 | 87,498 | 275,144 |
Current assets | 121,455 | 246,845 | 368,300 | 84,020 | 135,614 | 219,634 |
281,970 | 263,110 | 545,080 | 271,666 | 223,112 | 494,778 | |
Of which: | ||||||
Balances with Private Sector counterparties | 281,577 | 206,036 | 487,613 | 271,273 | 137,137 | 408,410 |
Balances with Public Sector counterparties | 393 | 57,074 | 57,467 | 393 | 85,975 | 86,368 |
281,970 | 263,110 | 545,080 | 271,666 | 223,112 | 494,778 |
The increase in Direct Commissioning receivables has largely driven the total increase in receivables. This programme is also responsible for the movement to current assets from non-current assets. The Direct Commissioning Programme is due to end in 2023/24.
Land sale receivables
Land sale receivables are measured with reference to the underlying agreement. In the majority of cases the inclusion of an overage clause within the land sale agreement requires the receivable to be measured at FVTPL. Where the contractual terms give rise to cash flows that are solely payments of the principal amount these are measured at amortised cost.
Direct Commissioning
Direct Commissioning receivables represent amounts due from unit sales and accrued income due under contracts to develop multi-unit properties from projects managed under the Direct Commissioning programme. They are measured at amortised cost.
Other receivables and prepayments
Other receivables held at FVTPL relate to home equity management fees and interest. The remainder of other receivables are held at amortised cost and include amounts due from DLUHC for programmes delivered on their behalf, utility prepayments, trade receivables and other smaller balances.
Credit risk of receivables classified to FVTPL
The Agency is exposed to credit risk in relation to receivables measured at FVTPL. The credit risk exposure at the year end is £297.4m (2021/22: £284.1m).
c) Financial asset investments - Group and Agency
Asset | Fair value hierarchy (where relevant) | Fair value £’000 2022/23 | Amortised cost £’000 2022/23 | Total £’000 2022/23 | Fair value £’000 2021/22 | Amortised cost £’000 2021/22 | Total £’000 2021/22 |
---|---|---|---|---|---|---|---|
PRS REIT | Level 1 | 24,172 | - | 24,172 | 32,120 | - | 32,120 |
Help to Buy Equity Loans | Level 2 | 18,934,182 | - | 18,934,182 | 18,428,202 | - | 18,428,202 |
Other Legacy Equity Loans | Level 2 | 195,791 | - | 195,791 | 211,871 | - | 211,871 |
Infrastructure Loans | Level 3 | 289,341 | 845,630 | 1,134,971 | 336,758 | 829,788 | 1,166,546 |
Development Loans | Level 3 | 46,373 | 477,354 | 523,727 | 64,792 | 504,547 | 569,339 |
Other Loans | Level 3 | 9,073 | 94,561 | 103,634 | 66,238 | 66,341 | 132,579 |
Development and Infrastructure Equity | Level 3 | 119,351 | - | 119,351 | 119,809 | - | 119,809 |
Managed Funds | Level 3 | 66,140 | - | 66,140 | 64,932 | - | 64,932 |
City Growth Deals | Level 3 | 29,536 | - | 29,536 | 29,500 | 10,931 | 40,431 |
Other Equity | Level 3 | 10,151 | - | 10,151 | 12,641 | - | 12,641 |
Overage | Level 3 | 8,237 | - | 8,237 | 5,922 | - | 5,922 |
19,732,347 | 1,417,545 | 21,149,892 | 19,372,785 | 1,411,607 | 20,784,392 | ||
Of which: | |||||||
Non-current assets | 19,622,677 | 846,979 | 20,469,656 | 19,255,217 | 957,504 | 20,212,721 | |
Current assets | 109,670 | 570,566 | 680,236 | 117,568 | 454,103 | 571,671 | |
19,732,347 | 1,417,545 | 21,149,892 | 19,372,785 | 1,411,607 | 20,784,392 | ||
Of which: | |||||||
Balances with Private Sector counterparties | 19,657,286 | 1,411,897 | 21,069,183 | 19,292,542 | 1,395,117 | 20,687,659 | |
Balances with Public Sector counterparties | 75,061 | 5,648 | 80,709 | 80,243 | 16,490 | 96,733 | |
19,732,347 | 1,417,545 | 21,149,892 | 19,372,785 | 1,411,607 | 20,784,392 |
Investments measured at fair value
Financial assets measured at FVTPL are stated at fair value in accordance with IFRS 13 and relate to the following:
-
PRS REIT: An investment in shares issued by the PRS REIT plc, supporting the launch of the first quoted Real Estate Investment Trust to focus purely on the private rented sector
-
Help to Buy and Other Legacy Equity Loans: The Agency’s entitlement to future income arising from financial assistance provided to homebuyers to enable them to buy homes, the majority of which arises from the Help to Buy scheme. Other Legacy Equity Loans consist of amounts due from homebuyers in relation to the following legacy equity schemes - First Buy: £45.0m (2021/22: £49.9m), Home Buy Direct and Kickstart Home Buy Direct: £86.3m (2021/22: £93.9m), First Time Buyers’ Initiative: £61.8m (2021/22: £67.3m), and amounts due in relation to deferred land charges of £2.7m (2021/22: £0.8m)
-
Infrastructure, Development, and Other Loans: There are a number of loans which are measured on a fair value basis under the level 3 hierarchy as they do not clearly meet the requirements under IFRS 9 to be described as basic lending arrangements. Development Loans have been made to private sector developers in order to bring forward the development of housing under the Home Building Fund. Infrastructure Loans have been made to private sector developers and local authorities in order to fund infrastructure on stalled sites, or to unlock potential development sites under the Home Building Fund. Other Loans mainly relate to commercial non-site specific loans, such as corporate type facilities
-
Development and Infrastructure Equity, City Growth Deals and Other Equity: Investments in development and infrastructure projects under which the Agency benefits from variable returns based on income generated by the project funding, including projects with both the private sector and local authorities, some of which have arisen under City Growth Deals entered into to support the Government’s aim of promoting localism. The Agency has also invested capital into funds and has invested as a minority shareholder, and will receive returns from these investments based on the performance of the underlying investments or vehicle
-
Managed Funds: Investments in Housing Growth Partnership, operated by Lloyds Banking Group
-
Overage: Future receipts due from the disposal of land to third parties, where the Agency includes contractual provisions in line with Managing Public Money to protect the public interest by requiring additional overage payments to be made where developments are more profitable than envisaged when the initial disposal consideration was agreed
Assets measured at FVTPL are carried at fair value, using the valuation methods described in Note 13. Following initial recognition, all movements in the fair value of these assets are recognised in net expenditure. On disposal of the related assets, the net difference between proceeds and the carrying value of the asset is recognised in net expenditure.
Investments measured at amortised cost
These assets are measured at amortised cost where they meet the criteria of Solely Payments of Principal and Interest (SPPI) and therefore meet the requirement to be described as a basic lending arrangement under IFRS 9.
Development Loans have been made to private sector developers in order to bring forward the development of housing under the Agency’s programmes, including the Home Building Fund, the Levelling Up Home Building Fund, Get Britain Building, Builder’s Finance Fund and Build to Rent. These loans are repayable during periods ranging up to 2033. Infrastructure Loans have been made to private sector developers and local authorities in order to fund infrastructure on stalled sites, or to unlock potential development sites. These loans are repayable during periods ranging up to 2032. Other loans include £24.7m of loans made to utility companies (2021/22: £25.5m) in respect of water infrastructure for new town developments (due for redemption by 2053), £4.3m loans made to Local Authorities (2021/22: £4.2m) which are repayable during periods ranging up to 2036. Other Loans also include amounts due to the Agency in relation to loans provided under the Home Building Fund and the Levelling Up Home Building Fund totalling £64.4m (2021/22: £36.3m) and mainly relate to commercial non-site specific loans, such as corporate type facilities. These loans are due over periods up to 2027. Loans made of £nil in respect of City Growth Deals (2021/22: £10.9m) are repayable up to 2023.
d) Movements in financial asset investments measured at fair value - Group and Agency
Movement type | Shares held in The PRS REIT plc £’000 (Level 1) | Help to Buy Equity Loans £’000 (Level 2) | Other Legacy Equity Loans £’000 (Level 2) | Loans at FVTPL* £’000 (Level 3) | Other Investments £’000 (Level 3) | Total £’000 (Level 3) |
---|---|---|---|---|---|---|
Balances as at 1 April 2021 | 26,144 | 17,053,549 | 232,011 | 434,405 | 184,213 | 17,930,322 |
Additions | - | 2,383,698 | - | 116,054 | 52,958 | 2,552,710 |
Disposals | - | (1,860,919) | (36,269) | (111,741) | (42,718) | (2,051,647) |
Fair value adjustment | 2,119 | 707,566 | 15,813 | 20,320 | 31,629 | 777,447 |
(Impairment)/reversal of impairment | 3,857 | 144,308 | 316 | 8,748 | 6,724 | 163,953 |
Balances as at 31 March 2022 | 32,120 | 18,428,202 | 211,871 | 467,786 | 232,806 | 19,372,785 |
Additions | - | 2,224,473 | - | 51,069 | 28,954 | 2,304,496 |
Disposals | - | (2,211,609) | (21,554) | (58,647) | (40,691) | (2,332,501) |
Fair value adjustment | (2,119) | 615,229 | 5,452 | 10,945 | 12,472 | 641,979 |
(Impairment)/reversal of impairment | (5,829) | (122,113) | 22 | (126,366) | (126) | (254,412) |
Balances as at 31 March 2023 | 24,172 | 18,934,182 | 195,791 | 344,787 | 233,415 | 19,732,347 |
[*] * Loans are measured at FVTPL because the contractual terms of the loan do not give rise to cash flows on specified dates which are solely payments of principal and interest on the principal amount outstanding. This category includes Development, Infrastructure and Other Loans, the nature of which is described in Note 12c.
Other Investments include Development and Infrastructure Equity, Overage and Other Equity, the nature of which is defined within Note 12c.
During the year there have been unrealised gains recognised in the Statement of Comprehensive Net Expenditure of £642.0m.
Impairments recognised of £122.1m on Help to Buy Equity Loans are mainly in respect of recent asset additions, for which the fair value at 31 March 2023 is more likely to be impacted by the recent falls in house prices observed since December 2022. There have also been net impairments charges recognised on Loans measured at FVTPL of £126.4m. The majority of the total impairment recognised relates to two projects which were fully impaired during the year, resulting in impairments recognised of £126.6m. Further details of these cases are disclosed within the Losses and Special Payments note of the Annual Report.
Sensitivity of the valuation of assets held at fair value under the level 2 and level 3 hierarchy
The valuation of the Agency’s equity-loan mortgage portfolio is highly sensitive to changes in assumptions, in particular about market prices. Analysis showing the sensitivity of the portfolio valuation of these assets to market prices is shown in Note 15a. The sensitivity of the Help to Buy valuation to the Agency’s modelling assumptions is analysed in Note 15a. As described in Note 12c, the investments categorised under the level 3 fair value hierarchy are not homogeneous in nature, therefore the underlying inputs used within the calculation of fair value vary depending on the nature of the asset. This category of assets is therefore sensitive to a range of underlying inputs which are not necessarily common across the level 3 portfolio. A sensitivity analysis has been performed in Note 14a to demonstrate the impact of an increase or decrease in development returns.
Using economic scenarios produced by the Agency which account for the key economic risks and macro-economic uncertainty facing the Agency, further analysis has been undertaken in the Performance report section of the Annual Report in relation to the impact of these scenarios on the valuation of the Agency’s assets which are held at fair value under the level 2 and level 3 hierarchy.
Credit risk of loans classified to FVTPL
The Agency is exposed to credit risk in relation to loans classified to FVTPL. The credit-risk exposure at 31 March 2023 in relation to these investments is £522.2m (2021/22: £483.4m).
e) Movements in financial asset investments measured at amortised cost - Group and Agency
Movement type | Development Loans £’000 | Infrastructure Loans £’000 | Other Loans*** £’000 | Total £’000 |
---|---|---|---|---|
Gross balances as at 1 April 2021* | 539,622 | 944,011 | 52,007 | 1,535,640 |
Additions | 298,191 | 57,596 | 28,722 | 384,509 |
Repayments | (334,764) | (165,446) | (3,376) | (503,586) |
Interest added to loans | 19,716 | 27,388 | 953 | 48,057 |
Amounts written-off loans / modification losses | (292) | (15,538) | - | (15,830) |
Gross balances as at 31 March 2022* | 522,473 | 848,011 | 78,306 | 1,448,790 |
Interest accrued but not yet added to loans at 31 March 2022** | 251 | 2,740 | 144 | 3,135 |
Expected Credit Loss Allowances | (18,177) | (20,963) | (1,178) | (40,318) |
Net balances as at 31 March 2022* | 504,547 | 829,788 | 77,272 | 1,411,607 |
Gross balances as at 1 April 2022* | 522,473 | 848,011 | 78,306 | 1,448,790 |
Additions | 249,511 | 74,292 | 44,559 | 368,362 |
Repayments | (298,607) | (122,584) | (27,492) | (448,683) |
Interest added to loans | 28,706 | 45,669 | 1,909 | 76,284 |
Amounts written-off / (written back) loans and modification gains | (1,838) | 38,199 | - | 36,361 |
Gross balances as at 31 March 2022* | 500,245 | 883,587 | 97,282 | 1,481,114 |
Interest accrued but not yet added to loans at 31 March 2022** | 1,312 | 3,732 | 389 | 5,433 |
Expected Credit Loss Allowances | (24,203) | (41,689) | (3,110) | (69,002) |
Net balances as at 31 March 2023* | 477,354 | 845,630 | 94,561 | 1,417,545 |
[*] Gross balances exclude Expected Credit Loss Allowances and interest accrued but not yet added to loans, but include the effect of amounts which have been considered to have been written-off as irrecoverable or which have been recognised as modification gains or losses where an agreement has been varied. Net balances include the effect of applying Expected Credit Loss Allowances.
[**] Interest accrued but not yet capitalised of £nil was written off during 2022/23 (2021/22: £nil).
[***]Other Loans include amounts due on City Growth Deals of £nil in 2022/23 (2021/22: £10.9m).
It is a requirement of IFRS 7 that for each class of financial instruments the fair value of these assets is disclosed. For assets held at amortised cost, it is considered that the amortised cost carrying value after adding back the Expected Credit Loss allowance is an appropriate proxy for fair value. This value was £1,486m at 31 March 2023 (£1,452m at 31 March 2022).
Sensitivity of Expected Credit Losses to modelling assumptions
IFRS 9 requires an Expected Credit Loss allowance calculation to be performed with reference to the level of credit risk and performance of each investment. The determination of the risk associated with each asset is a key judgement by management as the result determines whether a 12-month loss allowance or a lifetime loss allowance is calculated for that asset.
The Expected Credit Losses are calculated by comparing the estimated balance at the time of default against moderated security values (calculated by applying Modified Security Value percentages (MSVs) to gross security values to estimate the likely value which might be realised from a sale of security in distressed circumstances). A minimum loss on default value of 35% is applied (see accounting policies - Loss Given Default (LGD) Floor). This is then multiplied against an associated Probability of Default percentage value (PD) for the relevant loss calculation period. The PD value applied is determined based on the Credit Risk Rating of the associated asset using industry metrics for default.
In addition to calculating either 12-month or lifetime loss allowances, IFRS 9 also requires consideration of how the calculation would vary under alternative economic scenarios.
The Agency achieves this by varying the application of PD assumptions to the same base loan data. In addition, the Agency varies the MSVs applied to the ECL allowance calculation performed under each economic scenario, to reflect the relative expected discount on gross security values in a distressed situation for each economic scenario. The results calculated for each scenario are then used to calculate an unbiased, weighted-average loss allowance. This is done by using the relative likelihood of each scenario, based on the Agency’s view of their relative probability.
The Expected Credit Loss model is highly sensitive to the modelling assumptions noted above, which are therefore considered to be a key judgement of management. To analyse the impact of the key assumptions applied at 31 March 2023, a sensitivity analysis has been performed in Note 15b, which also provides an overview of the key modelling assumptions and how they are applied.
f) Summary of movements recognised in consolidated net expenditure in relation to financial assets
Movement type | Note | 2022/23 £’000 | 2021/22 £’000 |
---|---|---|---|
Movements in Net Expenditure in relation to assets held at fair value | |||
Valuation gains on financial asset investments held at FVTPL | 12d | 641,979 | 777,447 |
Valuation gains on receivables held at FVTPL | 4,836 | 12,489 | |
(Impairment)/Impairment reversal of financial asset investments held at FVTPL | 12d | (254,412) | 163,953 |
(Impairment)/Impairment reversal of receivables held at FVTPL | (378) | (112) | |
Gain/(loss) on disposal against fair value | 41,191 | 25,162 | |
Monthly Fees recognised on Help to Buy equity loans | 53,333 | 34,279 | |
Monthly Fees recognised on other legacy equity loans | 4,288 | 5,034 | |
Movements in Net Expenditure in relation to assets held at amortised cost | |||
Interest on loans | 95,861 | 59,214 | |
Interest on receivables | 387 | 83 | |
Credit impairment loss reversals/(charges), including modification gains/(losses) | 7,309 | (15,504) | |
Net income recognised in consolidated net expenditure | 594,394 | 1,062,045 |
There have been net fair value gains on financial assets measured at FVTPL and impairments of financial assets measured at FVTPL. This is because movements in fair value are assessed and disclosed at an individual asset level.
The change in impairment of financial assets held at FVTPL is primarily caused by the Help to Buy portfolio and is mainly in respect of recent asset additions, for which the fair value at 31 March 2023 is more likely to be impacted by the recent falls in house prices observed since December 2022.
Gain/(loss) on disposal of financial asset investments
2022/23 | Help to Buy Equity Loans £’000 | Other Legacy Equity Loans £’000 | Loans at FVTPL £’000 | Other Investments £’000 | Total £’000 |
---|---|---|---|---|---|
Proceeds from disposals | 2,253,035 | 21,319 | 58,647 | 40,691 | 2,373,692 |
Fair value of assets disposed | 2,211,609 | 21,554 | 58,647 | 40,691 | 2,332,501 |
Gain/(loss) on disposal against fair value | 41,426 | (235) | - | - | 41,191 |
2021/22 | Help to Buy Equity Loans £’000 | Other Legacy Equity Loans £’000 | Loans at FVTPL £’000 | Other Investments£’000 | Total £’000 |
---|---|---|---|---|---|
Proceeds from disposals | 1,888,821 | 33,529 | 111,741 | 42,718 | 2,076,809 |
Fair value of assets disposed | 1,860,919 | 36,269 | 111,741 | 42,718 | 2,051,647 |
Gain/(loss) on disposal against fair value | 27,902 | (2,740) | - | - | 25,162 |
Credit impairment loss charges to Net Expenditure in relation to assets held at amortised cost
Credit impairment loss charge | 2022/23 £’000 | 2021/22 £’000 |
---|---|---|
Net movements in Expected Credit Loss Allowances | 28,925 | (837) |
Amounts written-off/ (written-back) loan balances | (36,354) | 15,830 |
Modification gains | (7) | - |
Amounts written-off/(written-back) on receivable balances | 127 | 511 |
Total credit impairment loss charges/(credits) | (7,309) | 15,504 |
g) Write-offs at the reporting date
Movement in write-off allowances during 2022/23
Movement | Allowances at 1 April 2022 £’000 | Recognised £’000 | Written-back £’000 | Utilised £’000 | Allowances at 31 March 2023 £’000 |
---|---|---|---|---|---|
Financial asset investments at amortised cost | 73,908 | 3,638 | (39,992) | (69) | 37,485 |
Trade & other receivables | 561 | 135 | (8) | (20) | 668 |
74,469 | 3,773 | (40,000) | (89) | 38,153 |
Further details of how the Agency identifies assets for which a write-off is required are disclosed in the Parliamentary Accountability section of the Annual Report. This also includes details of loan balances over £300k which have been considered to be irrecoverable and which are written-off in accordance with IFRS 9, or where the Agency has received authorisation from HM Treasury during the current year to cease pursuing the debt.
Movement in write-off allowances during 2021/22
Movement | Allowances at 1 April 2022 £’000 | Recognised £’000 | Written-back £’000 | Utilised £’000 | Allowances at 31 March 2023 £’000 |
---|---|---|---|---|---|
Financial asset investments at amortised cost | 58,861 | 16,060 | (230) | (783) | 73,908 |
Trade & other receivables | 375 | 522 | (11) | (325) | 561 |
59,236 | 16,582 | (241) | (1,108) | 74,469 |
h) Movement in ECL allowances during the reporting period
Movement | Stage 1 £’000 | Stage 2 £’000 | Stage 3 ‘000 | Simplified approach £’000 | Total £’000 |
---|---|---|---|---|---|
Position as at 1 April 2021 | 38,237 | 2,499 | 184 | 415 | 41,335 |
New credit-risk exposures in the reporting period | 9,904 | 1,335 | - | - | 11,239 |
Movements from Stage 1 to Stage 2*** | (645) | 1,806 | - | - | 1,161 |
Movements from Stage 1 to Stage 3*** | (769) | - | 769 | - | - |
Movements from Stage 2 to Stage 1*** | 796 | (895) | - | - | (99) |
Movements from Stage 2 to Stage 3 | - | - | - | - | - |
Movements from Stage 3 to Stage 1 | - | - | - | - | - |
Movements from Stage 3 to Stage 2 | - | - | - | - | - |
ECL utilised when written-off* | (256) | - | - | - | (256) |
Movements as a result of modifications* | - | - | - | - | - |
Released on repayment | (3,435) | (621) | (45) | - | (4,101) |
Changes in risk parameters and risk models** | (7,234) | (1,196) | (96) | (255) | (8,781) |
Net movements in Expected Credit Loss Allowances | (1,639) | 429 | 628 | (255) | (837) |
Expected Credit Loss allowance as at 31 March 2022 | 36,598 | 2,928 | 812 | 160 | 40,498 |
Movement | Stage 1 £’000 | Stage 2 £’000 | Stage 3 ‘000 | Simplified approach £’000 | Total £’000 |
---|---|---|---|---|---|
Position as at 1 April 2022 | 36,598 | 2,928 | 812 | 160 | 40,498 |
New credit-risk exposures in the reporting period | 5,637 | 1,595 | - | - | 7,232 |
Movements from Stage 1 to Stage 2*** | (10,572) | 20,158 | - | - | 9,586 |
Movements from Stage 1 to Stage 3*** | (544) | - | 544 | - | - |
Movements from Stage 2 to Stage 1*** | 71 | (71) | - | - | - |
Movements from Stage 2 to Stage 3 | - | (21) | 21 | - | - |
Movements from Stage 3 to Stage 1 | - | - | - | - | - |
Movements from Stage 3 to Stage 2 | - | - | - | - | - |
ECL utilised when written-off* | - | (276) | - | - | (276) |
Movements as a result of modifications* | - | - | - | - | - |
Released on repayment | (2,778) | (1,139) | - | - | (3,917) |
Changes in risk parameters and risk models** | 5,804 | (5,603) | 16,034 | 65 | 16,300 |
Net movements in Expected Credit Loss Allowances | (2,382) | 14,643 | 16,599 | 65 | 28,925 |
Expected Credit Loss allowance as at 31 March 2023 | 34,216 | 17,571 | 17,411 | 225 | 69,423 |
[*] Where amounts are considered to be irrecoverable they are written-off (or expensed as modification losses where this arises as the result of changes to contractual terms) and the associated Expected Credit Loss allowance is released. As a result, the charge to Net Expenditure at this time is limited to the difference between the actual amount written-off and the Expected Credit Loss allowance carried at the point of write-off.
[**] For reasons of practicality and efficiency, all movements in the ECL allowance for short-term receivables (which are calculated by applying a simplified approach based on historic losses observed in the population, as allowed under IFRS 9) are disclosed in a single line. For all other investments, the following input and assumption changes are reflected within this line: CRR inputs; changes in loss given default assumptions (including movements in existing asset security balances and exposures); and changes in modelling assumptions including PDs, economic scenario weightings, MSV rates and the profile of forecast expenditure and receipts across each year.
[***] The movements in the ECL between Stages are determined firstly by removing the prior year ECL from the column associated with the prior year allocated Stage. The opening ECL position is then recalculated using the Stage allocated in the closing position. This is then added to the column associated with the new Stage. The differences noted in the Total column are therefore the difference between these two positions.
Expected Credit Loss allowance analysed for disclosure against loan categories
2022/23 | Stage 1 £’000 | Stage 2 £’000 | Stage 3 ‘000 | Simplified approach £’000 | Total £’000 |
---|---|---|---|---|---|
Development Loans | 15,965 | 7,351 | 887 | - | 24,203 |
Infrastructure Loans | 14,945 | 10,220 | 16,524 | - | 41,689 |
Other Loans | 3,110 | - | - | - | 3,110 |
Trade & other receivables | 196 | - | - | 225 | 421 |
Total ECL allowances at 31 March 2023 | 34,216 | 17,571 | 17,411 | 225 | 69,423 |
2021/22 | Stage 1 £’000 | Stage 2 £’000 | Stage 3 ‘000 | Simplified approach £’000 | Total £’000 |
---|---|---|---|---|---|
Development Loans | 15,454 | 1,911 | 812 | - | 18,177 |
Infrastructure Loans | 19,946 | 1,017 | - | - | 20,963 |
Other Loans | 1,178 | - | - | - | 1,178 |
Trade & other receivables | 20 | - | - | 160 | 180 |
Total ECL allowances at 31 March 2022 | 36,598 | 2,928 | 812 | 160 | 40,498 |
During 2022/23, the Economic Scenarios, Weightings and Probability of Default values applied in the Agency’s Expected Credit Loss model were revised with reference to current market conditions and future expectations. The change in assumptions, including Probability of Default Values, Economic Scenario Weightings, MSVs, and cash flow profiles has resulted in an increase in the Expected Credit Loss allowance of £14.31m during the year (2021/22: decrease of £4.95m). Details of the assumptions adopted are set out in the Performance report section of the Annual Report.
13 Financial assets and financial liabilities: fair value and amortised cost.
The fair values of financial assets are assessed at least annually to meet the reporting requirements of IFRS 9 and are determined as follows:
Level 1: The fair value of the Agency’s shareholding in the PRS REIT plc is calculated with reference to prices quoted on the London Stock Exchange and is therefore categorised as level 1 in the fair value hierarchy as defined by IFRS 13.
Level 2: The fair values of assets held at Fair Value through Profit or Loss relating to the Agency’s equity- loan mortgage portfolio are calculated with reference to movements in the ONS house price index (HPI) at a regional level, being the most relevant available observable market data. This is supplemented by adjustments for experience of actual disposals since the inception of the schemes which consider geography, age and property type. These experience adjustments are observable as they are developed using publicly available market and transaction data. Therefore these fair values are categorised as level 2 in the fair value hierarchy as defined by IFRS 13.
Level 3: The fair values of assets held at Fair Value through Profit or Loss relating to managed funds, equity investments in development/infrastructure projects and overage follow the income approach under IFRS 13. The fair value of level 3 assets are calculated using project-level cash flow forecasts, discounted at rates set by HM Treasury, or the effective interest rate of the underlying loan agreement for loans at FVTPL if higher. This approach is as prescribed by the Government Financial Reporting Manual, issued by HM Treasury. This reflects the valuation methodology which would be employed by market participants when pricing the assets and, since the inputs which inform the calculation of fair value are unobservable to users of the accounts, the assets are categorised as level 3 in the fair value hierarchy as defined by IFRS 13.
The nature of the investments disclosed within this category vary in nature, as the Agency tailors the type of support or funding available to the individual situation. The nature of investments categorised within the level 3 category is summarised in Note 12c. In addition, the mechanism by which the Agency obtains returns on these investments are specific to the asset. For example, the Agency may be due a share of returns from a development project, or the Agency may be due a share of profit which is determined based on the underlying performance of an investment. As a result of this, the inputs used to determine the fair value of each individual asset vary in nature. Input data can include project-level cash flows which are either provided by counterparties and moderated by the Agency’s project managers or are obtained via independent valuation or monitoring reports from professional advisers (for individually significant assets).
The fair value of other financial instruments (including liabilities, where significant and long- term) are similar in nature to other level 3 assets and are calculated by discounting their future cash flows using discount rates set by HM Treasury, or the rate intrinsic to the financial instrument if higher. For financial assets, this results in classification as level 3 in the fair value hierarchy as defined by IFRS 13.
No financial assets have moved between categories during 2022/23 (2021/22: None).
Measuring fair value on recognition
Where differences between the fair value at initial recognition, as calculated using the methods described above, and the price paid by the Agency to acquire the instrument are considered to be significant they are either:
-
recognised as grant expenditure where fair value is considered to be below cost, in accordance with International Accounting Standard 20 Government Grants
-
deferred and released over the expected life of the instrument in accordance with IFRS 9
Changes in aggregate gains yet to be recognised in net expenditure are as follows:
Group and Agency | 2022/23 £’000 | 2021/22 £’000 |
---|---|---|
At 1 April | 1,961 | 2,142 |
Gain recognised on recognition | - | - |
Released | (1,961) | (181) |
At 31 March | - | 1,961 |
Comparison of cost and carrying value (Group and Agency)
The original cost and carrying values of the Agency’s financial assets, by classification, are as follows:
Cost or value | Note | 2022/23 Original cost £’000 | 2022/23 Carrying value £’000 | 2021/22 Original cost £’000 | 2021/22 Carrying value £’000 |
---|---|---|---|---|---|
Assets measured at amortised cost | |||||
Cash and cash equivalents | 12a | 217,485 | 217,485 | 195,776 | 195,776 |
Trade and other receivables | 248,818 | 247,729 | 208,449 | 207,708 | |
Financial asset investments | 12c | 1,524,032 | 1,417,545 | 1,525,829 | 1,411,607 |
Assets measured at fair value | |||||
Trade and other receivables | 12b | 294,125 | 281,970 | 284,131 | 271,666 |
Financial asset investments | 12c | 18,423,343 | 19,732,347 | 18,195,770 | 19,372,785 |
Total financial assets | 20,707,803 | 21,897,076 | 20,409,955 | 21,459,542 |
Prepayments, tax and social security balances are excluded from the table above as these are non- financial assets.
There are no differences between the carrying values and fair values of the Agency’s financial liabilities, which are as follows:
Cost or value | Note | 2022/23 £’000 | 2021/22 £’000 |
---|---|---|---|
Other financial liabilities | |||
Trade and other payables | 559,581 | 499,084 | |
Provisions | 7,850 | 15,716 | |
Total financial liabilities | 567,431 | 514,800 |
Deferred income, tax, social security and certain provisions are excluded from the table above as these are non-financial liabilities.
14 Financial risk management
The Group and Agency’s financial assets and liabilities are detailed in Notes 12 and 17. The statements in this Note apply to both the Agency itself and the Group, except where indicated.
The exposure to financial risk arising from financial assets is a key focus for management. In order to mitigate this risk, the Agency adopts the following approach to transactions with developers:
-
potential exposure to credit risk is subject to a level of analysis which would be seen in UK financial institutions, which includes the consideration of aggregated exposures where applicable
-
for existing recoverable investments, cash flows are managed monthly based on client’s agreed cash flows for drawdowns
-
when selling property, the Agency is normally secured by use of a Building Lease giving the right to retake possession of the disposed property in the event of a default by the buyer
-
loan and equity agreements are generally backed by a charge on land, parent company guarantees or other available security as appropriate to the individual circumstances. These are subject to individual review and structuring.
a) Market price risk
The Agency’s results and equity are dependent upon the prevailing conditions of the UK economy, especially UK house prices, which significantly affect the valuation of the Agency’s assets. In particular, the Agency is exposed to significant market price risk in its equity-loan mortgage portfolio and land portfolio. Any market price movements are reflected in net expenditure for the period.
The Agency accepts market price risk as an inherent feature of its operation of Help to Buy and other home equity schemes. It therefore does not attempt to directly mitigate this risk, for example via hedging, but monitors the exposure at a strategic level using a range of scenario analysis techniques such as that described below.
The Agency has performed a sensitivity analysis that measures the change in fair value of the financial assets held for hypothetical changes in market prices. The sensitivity analysis is based on a proportional change to all prices applied to the relevant financial instrument balances existing at the year end. Stress-testing is performed which looks at exposure to adverse scenarios to ensure that the financial risks are understood.
Home Equity Portfolio
The table below shows the effect on net expenditure arising from movements in the fair value of these portfolios at 31 March 2023, before the effects of tax, if UK house prices had varied by the amounts shown and all other variables were held constant. This illustrates the impact of the mortgage providers’ first charge, which disproportionately affects the estimated fair value when house prices reduce.
Modelled change in house prices (%) | Estimated portfolio value (£m) | Incremental change in fair value recognised in net expenditure (£m) | % Incremental change in fair value (recognised in net expenditure) |
---|---|---|---|
20.0% | 22,962.1 | 3,832.9 | 20.0% |
10.0% | 21,047.3 | 1,918.1 | 10.0% |
0.0% | 19,129.2 | - | 0.0% |
(5.0%) | 18,148.7 | (980.5) | (5.1%) |
(10.0%) | 17,064.2 | (2,065.0) | (10.8%) |
(20.0%) | 14,503.9 | (4,625.3) | (24.2%) |
(30.0%) | 11,075.8 | (8,053.4) | (42.1%) |
Private sector developments, overage and infrastructure
At 31 March 2023, if development returns had been 10% higher/lower and all other variables were held constant, the effect on the Agency’s net expenditure arising from movements in investments in private sector developments and infrastructure projects, before the effects of tax, would have been an increase/decrease of £25.8m/£25.8m from that stated.
Land portfolio
The table below shows the effect on net expenditure at 31 March 2023, before the effects of tax, if at 31 March 2023 average land and property prices had varied by the amounts shown and all other variables were held constant. This illustrates the lower of cost and net realisable value principle whereby impairments will only be recognised when an asset falls below its cost base and impairment reversals will only be recognised to the extent the asset has previously been impaired.
Modelled change in land and property values (%) | Estimated portfolio value (£m) | Incremental change in land and property impairments recognised in net expenditure (£m) | % Incremental change in land and property value (recognised in net expenditure) |
---|---|---|---|
20.0% | 1,195.3 | (125.9) | 11.8% |
10.0% | 1,135.2 | (65.8) | 6.2% |
0.0% | 1,069.4 | - | 0.0% |
(5.0%) | 1,031.1 | 38.3 | (3.6%) |
(10.0%) | 990.6 | 78.8 | (7.4%) |
(20.0%) | 908.5 | 160.9 | (15.0%) |
(30.0%) | 819.7 | 249.7 | (23.3%) |
b) Interest rate risk
The Agency’s income is exposed to interest rate risk on its financial assets classified as loans and receivables, where these pay interest at a variable rate. For the majority of the Agency’s loan portfolio, the variable element is the EC Reference Rate, which was 3.52% as at 31 March 2023 (0.66% as at 31 March 2022).
The going concern of the Agency is not affected by a reduction in interest income in the event of a reduction in variable interest rates and the Agency does not undertake any specific measures to mitigate against the risk of changes in variable interest rates.
If interest rates on the Agency’s variable rate loans had been 1% higher/lower throughout the year ended 31 March 2023, the Agency’s net expenditure for the year, before the effect of tax, would have been £13.1m/£13.1m higher/ lower.
c) Liquidity risk
Liquidity risk is the risk that the Agency will be unable to meet its liabilities as they fall due.
To the extent that the Agency’s liabilities cannot be met from its own sources of income, they may be met by future grants or Grant in Aid from the Agency’s sponsoring department, DLUHC. Such grants are paid on a monthly basis to fund net liabilities as they are expected to fall due. Short term liquidity is managed through the investment of any cash surpluses with the Government Banking Service.
The Agency does not allow the use of more complex financial instruments, which could result in increased financial liabilities, such as derivatives.
Substantially all of the Agency’s financial liabilities (as described in Note 17) are contractually due within one year of the reporting date.
d) Currency risk
The Agency’s dealings are almost entirely Sterling denominated, and therefore the Agency has no material exposure to currency risk.
e) Credit risk
Credit risk is the risk of financial loss where counterparties are not able to meet their obligations. The Agency’s maximum exposure to credit risk, without taking into account any security held, is the same as the carrying amount of financial assets recorded in the Financial Statements, as disclosed in Note 12.
The nature and concentration of the credit risk arising from the Agency’s most significant financial assets is demonstrated in the tables below.
Financial asset investments measured at fair value relate mainly to amounts receivable individually from proceeds generated when the equity-loan mortgage portfolio properties are sold or staircased, or amounts receivable from various private sector developers, resulting in a broad spread of credit risk for these assets. Amounts receivable from the owners of homes are secured by a second charge over their property.
Analysis of total loan exposure by counterparty at 31 March 2023 | Exposure £’000 | Percentage of Total Loans |
---|---|---|
Counterparty 1 | 197,336 | 9.8% |
Counterparty 2 | 189,465 | 9.5% |
Counterparty 3 | 114,231 | 5.7% |
Counterparty 4 | 98,605 | 4.9% |
Counterparty 5 | 84,122 | 4.2% |
Counterparty 6 | 80,612 | 4.0% |
Counterparty 7 | 80,612 | 4.0% |
Counterparty 8 | 77,934 | 3.9% |
Counterparty 9 | 73,507 | 3.7% |
Counterparty 10 | 53,253 | 2.7% |
Total Exposure of Top 10 counterparties at 31 Mar 2023 | 1,049,677 | 52.4% |
Total Loans Balance at 31 Mar 2023* | 2,004,855 |
Analysis of infrastructure loan exposure by counterparty at 31 March 2023 | Exposure £’000 | Percentage of Total Infrastructure Loans |
---|---|---|
Counterparty 1 | 196,400 | 15.3% |
Counterparty 2 | 189,465 | 14.8% |
Counterparty 3 | 114,231 | 8.9% |
Counterparty 4 | 84,122 | 6.6% |
Counterparty 5 | 80,612 | 6.3% |
Counterparty 6 | 80,612 | 6.3% |
Counterparty 7 | 77,934 | 6.1% |
Counterparty 8 | 73,507 | 5.7% |
Counterparty 9 | 29,265 | 2.3% |
Counterparty 10 | 29,265 | 2.3% |
Total Exposure of Top 10 counterparties at 31 Mar 2023 | 955,413 | 74.6% |
Total Infrastructure Loans Balance at 31 March 2023* | 1,282,500 |
Analysis of development loan exposure by counterparty at 31 March 2023 | Exposure £’000 | Percentage of Total Development Loans |
---|---|---|
Counterparty 1 | 98,605 | 17.6% |
Counterparty 2 | 32,649 | 5.8% |
Counterparty 3 | 30,156 | 5.4% |
Counterparty 4 | 28,956 | 5.2% |
Counterparty 5 | 23,290 | 4.2% |
Counterparty 6 | 21,381 | 3.8% |
Counterparty 7 | 21,252 | 3.8% |
Counterparty 8 | 20,489 | 3.7% |
Counterparty 9 | 13,525 | 2.4% |
Counterparty 10 | 12,683 | 2.3% |
Total Exposure of Top 10 counterparties at 31 Mar 2023 | 302,986 | 54.2% |
Total Development Loans Balance at 31 Mar 2023* | 561,090 |
Analysis of other loan exposure by counterparty at 31 March 2023 | Exposure £’000 | Percentage of Total Other Loans |
---|---|---|
Counterparty 1 | 53,253 | 33.8% |
Counterparty 2 | 40,728 | 25.8% |
Counterparty 3 | 24,727 | 15.7% |
Counterparty 4 | 16,244 | 10.3% |
Counterparty 5 | 9,310 | 5.9% |
Counterparty 6 | 9,073 | 5.8% |
Counterparty 7 | 2,126 | 1.3% |
Counterparty 8 | 1,260 | 0.8% |
Counterparty 9 | 919 | 0.6% |
Counterparty 10 | 3 | 0.0% |
Total Exposure of Top 10 counterparties at 31 Mar 2023 | 157,643 | 100.0% |
Total Other Loans Balance at 31 Mar 2023* | 157,643 |
[*] The balances analysed above for Development Loans, Infrastructure Loans and Other Loans include both loans measured at amortised cost and loans measured on a fair value basis. The exposures are before the application of the Expected Credit Loss allowance. The balances do not include capitalised fees and the effects of unwinding deferred income in relation to fees recharged to developers, with a net effect of £16.0m (2021/22: £16.8m).
Analysis of Disposal of Land and Property Exposure by counterparty at 31 March 2023 | Exposure £’000 | Percentage of Total Land and Property Receivables |
---|---|---|
Counterparty 1 | 59,856 | 21.6% |
Counterparty 2 | 48,630 | 17.5% |
Counterparty 3 | 34,313 | 12.4% |
Counterparty 4 | 26,287 | 9.5% |
Counterparty 5 | 19,980 | 7.2% |
Counterparty 6 | 14,534 | 5.2% |
Counterparty 7 | 13,571 | 4.9% |
Counterparty 8 | 11,890 | 4.3% |
Counterparty 9 | 11,773 | 4.2% |
Counterparty 10 | 9,832 | 3.5% |
Total Exposure of Top 10 counterparties at 31 Mar 2023 | 250,666 | 90.3% |
Total Receivables due from Disposal of Land and Property Balance at 31 Mar 2023 | 277,127 |
The Agency’s cash is generally held with the Government Banking Service, except where commercial reasons necessitate otherwise, for example when cash is held by solicitors around completion of property sales or purchases or by the Agency’s mortgage administrator pending allocation to accounts.
There are no significant concentrations of credit risk in the Agency’s other financial instruments.
For all financial assets excluding cash, the maximum exposure to a single counterparty at 31 March 2023 was £197.3m(2021/22: £249.4m), and the five largest counterparties accounted for 3.2% of the total financial assets balance of £21,680m (2021/22: 3.4% of £21,264m).
Credit policies
Credit policies are developed which set the context of the appetite for risk, requirements for risk assessment (both at the outset and through the cycle of facilities provided) and the operational aspects of managing the overall risk profile. Details are provided in the Agency’s accounting policies (Note 1).
Assessment of significant increases in credit risk
Individual loans are actively managed by dedicated project managers and are subject to ongoing review, enabling the Agency to react to early warning signs and to continually assess the relevant IFRS 9 stage for ECL allowances. This enables the Agency to consider the need for more intensive management to protect the exposure or if needed undertake a structure review to consider whether a write-off allowance is required. Forbearance is considered as part of any assessment and review of the customer risk rating during the term of facilities. This ensures that data which informs the ECL allowance calculation appropriately reflects current credit risk characteristics of the portfolio of investments.
All assessments and approvals are operated within a structured approval delegation matrix from HM Treasury and DLUHC.
Where term loans are issued, it is often sensible to apply an assumption that any missed monthly repayments which are not remedied within a 30-day timeframe are indicative of a significant increase in credit risk. However, because the Agency does not issue term loans with monthly repayment terms and loans are usually repayable either on development milestones or in full at a contractual long-stop date, the 30-day measure is not considered to be helpful as an indicator of significant increases in credit risk for the Agency’s loan portfolio.
Credit profile of investments
Of the total gross amortised loans cost exposures of £1,465m in 2022/23 (2021/22: £1,432m) excluding capitalised fees and the effects of unwinding deferred income, with the net effect of £16.0m (2021/22: £16.8m), £533m (2021/22: £575m) were categorised with a Credit Risk Rating (CRR) between 1 to 4 (low risk), with £664m (2021/22: £761m) of exposures being categorised as CRR 5 to CRR 6 (medium risk). £268m (2021/22: £97m) of loan exposures were categorised as CRR 7 or above (high risk or in default).
‘Chart: Credit Profile of Investments’ could not be made fully accessible. Please consult the PDF version of this document.
Collateral held as security for financial asset investments
Collateral is usually obtained as security against default. The primary sources of collateral are often land which is being developed with the aid of the investment finance, but they can be other land assets within the control of our counterparties or their parent group. Parent company guarantees are also employed. For the Expected Credit Loss calculation, only land and property security values have a MSV value, with an average base MSV adjustment of 49% for land and property applied to reflect reduced values which might reasonably be expected in a distressed sale. Because security values often relate to land under development, security values are modelled based on up-to-date information to take account of factors such as site expenditure and realised sales.
The Agency held gross collateral values against loans totalling £7,900m in 2022/23 (2021/22: £8,134m), the majority of which related to security over land and property assets held by third parties of £7,529m (2021/22: £7,797m). The modified value of this security value after applying Marginalised Security Value adjustments under the central economic scenario was £3,608m in 2022/23 (2021/22: £4,090m).
Of the total exposures relating to loans measured at amortised cost (excluding accounting write- offs) of £1,503m (2021/22: £1,432m), £1,231m (2021/22: £1,254m), 79.9% of agreements (2021/22: 80.1%), were fully covered by gross land and property security values held in relation to those investments. There were 33 exposures (2021/22: 39 exposures), 20.1% of agreements (2021/22: 19.9%), totalling £272m (2021/22: £178m) where gross security values held were less than the unimpaired exposure at that date. The total gross security values held for these investments was £136m (2021/22: £47m). This is £59m after applying Marginalised Security Value adjustments under the central economic scenario (2021/22: £28m). Of these 33 investments, there were 21 investments (2021/22: 27 investments), 12.8% of agreements (2021/22: 13.8%), with a gross exposure value of £105m (2021/22: £112m) where no security is held.
The total gross value (after adding back accounting write-offs) of loans measured at amortised cost which were credit impaired was £43.3m (2021/22: £56.1m). The Agency held gross land and property security values of £86.9m (2021/22: £141.2m) against these 11 assets at 31 March 2023 (2021/22: 10 assets). This is £43.2m (2021/22: £71.3m) of net security values after applying Marginalised Security Value adjustments under the central economic scenario. Of the 21 investments where no security is held, 6 of these are credit impaired investments (2021/22: 6 assets) with a gross pre-write-off exposure value of £6.7m (2021/22: £6.6m).
The Agency held total gross land and property security values of £763.0m (2021/22: £700.3m) against loan assets measured at fair value at 31 March 2023. This is £412.4m (2021/22: £363.2m) of net security values after applying Marginalised Security Values under the central economic scenario.
15 Sensitivity of Significant Valuation Modelling Assumptions
a) Help to Buy
Homes England models the fair value of Help to Buy on the basis of the estimated proceeds that would be achieved were all homeowners to redeem their equity loans on the reporting date. Homes England considers these estimated proceeds to be a significant accounting estimate, because the fair value of the portfolio is highly sensitive to market price risk as set out in Note 14. In addition, the estimate is sensitive to significant assumptions that Homes England makes within the valuation model. We have disclosed below the individual impact of the assumptions that currently have a material impact on the estimates. Other assumptions within the valuation model, including estimated rates of first charge mortgage arrears and discount to sales on repossession, do not have a material impact at present, but could do if there was a significant decrease in house prices.
Assumptions of market adjustments
Office for National Statistics House Price Indices – which are used by Homes England to estimate the effect of house price inflation over time – are based on all market activity. Help to Buy is only available on new-build properties purchased with a mortgage, and redemptions can occur via staircasing as well as by sale. This means that the market price of the property on redemption may differ from that estimated by HPI alone. Homes England therefore makes regional market adjustments using its accumulated experience of gains and losses on disposals across different redemption transaction types to allow for these differences. These assumptions have a significant effect on the fair value because they modify the expected market price of properties from which Homes England’s percentage share is calculated.
The table considers how the portfolio valuation would vary with 1% changes in the adjustments applied
Adjustment | Fair value (£m) | Movement from base assumption (£m) | Movement from base assumption (%) |
---|---|---|---|
2% increase in market adjustment (decrease in house prices) | 18,518.3 | (415.9) | (2.2%) |
1% increase in market adjustment (decrease in house prices) | 18,726.6 | (207.6) | (1.1%) |
Base assumption | 18,934.2 | - | 0.0% |
1% decrease in market adjustment (increase in house prices) | 19,130.2 | 196.0 | 1.0% |
2% decrease in market adjustment (increase in house prices) | 19,347.5 | 413.3 | 2.2% |
Assumptions of expected proportions of transaction types
Help to Buy is redeemed at the earlier of the sale of the property, or when the homeowner staircases the equity loan with a payment equivalent to Homes England’s share of the current estimated value of the property (as determined by a Chartered Surveyor). Staircasing occurs for example, where the homeowner decides to use their own funds to repay part of the equity loan or remortgages. Homes England applies regional assumptions based on its accumulated experience to estimate the proportion of its portfolio that will be redeemed by each of these two redemption types. These assumptions have a significant effect on the estimated fair value because the proceeds recovered via a sale may be reduced by the balance due to the first charge mortgage lender and because different transaction types are observed to generate differing returns (as reflected in the regional market adjustments applied).
The table considers how the portfolio valuation would vary with changes in the expected proportions of transaction types
Adjustment | Fair value (£m) | Movement from base assumption (£m) | Movement from base assumption (%) |
---|---|---|---|
All redemptions are staircasing transactions | 18,456.2 | (478.0) | (2.5%) |
10% increase in the rate of staircasing | 18,843.8 | (90.4) | (0.5%) |
Base assumption (a blend of sales and staircasing) | 18,934.2 | - | 0.0% |
10% increase in the rate of sales | 19,024.6 | 90.4 | 0.5% |
All redemptions are sales | 19,360.5 | 426.3 | 2.3% |
Combined impact of assumptions
The assumptions applied by Homes England will interact with each other in different economic scenarios. For example, a 15% point fall in house prices might lead to both a 10% point increase in staircasing transactions (relative to sales) and a 7.5% increase in accounts in arrears (of 1.5% might be an increase in accounts likely to be repossessed). In this situation the Agency would model a fair value of £15,364m: a reduction of £3,570m or 18.9% on the base assumption.
The below graph illustrates a potential spread of fair value from the combined impact of assumptions at different market prices. The upper and lower bounds correspond to assumptions within the following ranges:
-
market adjustments between 2% lower and 2% higher than the base assumptions
-
proportion of transaction types between 100% sales and 100% staircasing
-
mortgage arrears rates ranging from no arrears to a 7.5% increase on the base assumption
-
discounts on repossession between 15% lower and 15% higher than the base assumption
For example, the lower bound corresponds with a 2% increase in market adjustment, a 7.5% increase in accounts in arrears, and 15% increase in discount on repossession. Each bound has been calculated by selecting the value which is furthest from the base assumption for each of the 100% sales and 100% staircasing scenarios.
The combined impact of assumptions generates a spread in estimated fair value of £1.91bn at current market prices. This spread would increase in a falling market, reaching approximately £4.9bn should market prices fall by 30%. The combined impact of assumptions is therefore more sensitive in a falling market. This is primarily due to the impact of the mortgage providers’ first charge, which disproportionately affects the estimated fair value when house prices reduce.
This graph could not be made fully accessible. Please consult the PDF version.
b) Expected Credit Loss allowance
Following the requirements of IFRS 9, the Agency is required to calculate an Expected Credit Loss allowance for financial assets measured at amortised cost. A summary of the calculation is provided in Note 12e. Due to the complex nature of the Expected Credit Loss methodology, the calculation is highly sensitive to some key judgements and assumptions.
The impact of the assumptions applied in the Expected Credit Loss calculation has been considered and the different assumptions have a varying impact on the results of the calculation.
There are two assumptions which have a trivial impact on the Expected Credit Loss allowance which are summarised as follows:
-
Timing of default events: The calculation of the Expected Loss Allowance at 31 March 2023 assumes that default events would occur at a mid-point of the year for each future calculation date, to build in an unbiased assumption that a default could happen at any point during a future year. This creates variation in the estimate because of the effect of discounting, which will be greater for losses modelled at a later point in the year. If a default event were assumed to occur at the beginning or end of a year, this would increase or decrease the loss allowance by £3.2m (4.7%) / £3.1m (4.5%) respectively
-
Profile of forecast expenditure and receipts within years: Forecast loan balances must be calculated into the future to determine the LGD of each asset (calculated as exposure at default less modified security values). Expenditure and receipts data is available at an annual level for future years within the Agency’s systems, whereas future balances are calculated at quarterly intervals. As a result, an assumption has been applied within the model to apportion spend and receipts over all future quarters using historic data on actual expenditure and receipt profiles. If it had been assumed expenditure and receipts were to be profiled equally over the year, this would have decreased the loss allowance by £273k (0.4%) at 31 March 2023.
Estimates of the impact of key assumptions on the Expected Credit Loss allowance calculation at 31 March 2023 are provided below.
Economic Scenarios and Scenario Weighting assumptions
IFRS 9 requires the Agency to consider alternative economic scenarios in the calculation of the Expected Credit Loss allowance. For each identified economic scenario, variations are made to the Probability of Default values applied based on an individual investment’s Credit Risk Rating. Weightings are applied to the Expected Credit Loss calculation for each scenario, determined in relation to the probability of each scenario occurring, with reference to current market and credit risk expectations. At 31 March 2023, the Agency applied three economic scenarios: a base case central scenario, a downside scenario and an upside scenario. Further details in relation to these scenarios are summarised in Note 1. At 31 March 2023, a 65% weighting was applied to the base case scenario, a weighting of 20% to the downside scenario and a 15% weighting to the upside scenario calculation. The impact of varying these weightings is analysed below:
The table considers how the Expected Credit Loss allowance would vary with alternative scenario weightings applied:
Weighting | Expected Credit Loss £’000 | Movement from base assumption £’000 | Movement from base assumption % |
---|---|---|---|
Weighting of 80% : 5% : 15% applied | 66,428 | (2,770) | (4.0%) |
Weighting of 70% : 15% : 15% applied | 68,275 | (923) | (1.3%) |
Base assumption of 65% : 20% : 15% applied | 69,198 | - | 0.0% |
Weighting of 70% : 20% : 10% applied | 70,308 | 1,110 | 1.6% |
Weighting of 60% : 30% : 10% applied | 72,155 | 2,957 | 4.3% |
Probability of Default (PD) assumptions
PD values are determined with reference to current economic conditions; however for alternative scenarios the PD values are migrated to adjust the PD % values against each Credit Risk Rating. The PD values are applied to each asset in relation to their CRR. The PD values applied to alternative scenarios have a significant impact on the calculation of the Expected Credit Loss allowance. To illustrate the sensitivity of the estimate to this data, the impact of a one level downgrade / upgrade in PD values assigned to each Credit Risk Rating value across each of the scenarios is analysed below:
The table considers how the Expected Credit Loss allowance would vary with a change to the probability of default assumptions
Assumption | Expected Credit Loss £’000 | Movement from base assumption £’000 | Movement from base assumption % |
---|---|---|---|
PD values downgraded one level | 142,376 | 73,178 | 105.8% |
Base assumption | 69,198 | - | 0.0% |
PD values upgraded one level | 41,050 | (28,148) | (40.7%) |
Moderated Security Value (MSV) assumption
To reflect the expected value which might reasonably be realised from the sale of security in the event of default, MSV percentages are applied to gross security values to determine a measure of Loss Given Default (when compared against the estimated exposure on default). The MSVs are varied depending on the type of security held. A lower MSV percentage results in a higher discount applied to the determined security values. The analysis below illustrates the sensitivity of the estimate to a decrease / increase in MSV values determined for each economic scenario by 10%. At present, this only has a limited impact on the ECL due to the effect of the loss floor assumption applied in the Agency’s modelling methodology (see below).
The table considers how Expected Credit Loss allowance would vary with changes to the MSV values
MSV change | Expected Credit Loss £’000 | Movement from base assumption £’000 | Movement from base assumption % |
---|---|---|---|
MSV percentages decreased by 10% | 73,274 | 4,076 | 5.9% |
Base assumption | 69,198 | - | 0.0% |
MSV percentages increased by 10% | 66,042 | (3,156) | (4.6%) |
Loss Floor
A minimum percentage value has been applied to the LGD calculation with reference to individual investments (see accounting policies- Loss Given Default (LGD) Floor). At 31 March 2022 and 31 March 2023 the LGD floor applied was 35%. In order to demonstrate the sensitivity of the calculation of Expected Credit Loss allowances to the LGD floor assumption, alternative floors of 0%, 50% and 75% have been applied to the calculations with results summarised below.
The table considers how the Expected Credit Loss allowance would vary with a change in the Loss Floor
Loss Floor change | Expected Credit Loss £’000 | Movement from base assumption £’000 | Movement from base assumption % |
---|---|---|---|
Increase in loss floor to 75% | 102,944 | 33,746 | 48.8% |
Increase in loss floor to 50% | 80,503 | 11,305 | 16.3% |
Base assumption of 35% | 69,198 | - | 0.0% |
Reduction in loss floor to 0% | 49,890 | (19,308) | (27.9%) |
Combined impact of assumptions
The sensitivity analysis performed above has focused on changing one assumption in turn, with all other metrics remaining in line with the assumptions applied in determining the Expected Credit Loss allowance as at 31 March 2023.
However to consider the impact of several assumptions changing, an analysis has been performed to establish the impact if the key assumptions above (excluding scenario weightings) were changed within reasonable limits to consider the highest and lowest possible Expected Credit Loss allowance. The upper and lower bounds correspond to assumptions within the following ranges:
-
PDs downgraded by one level (upper bound) and upgraded by one level (lower bound)
-
MSVs decreased by 10% (upper bound) and increased by 10% (lower bound) across all three scenarios
-
increase in loss floor to 75% (upper bound) and decrease in loss floor to 0% (lower bound)
-
assuming default events occur at the beginning of the year (upper bound) and at the end of the year (lower bound)
-
assuming all spend occurs at the beginning of the year and all receipts at the end of the year (upper bound) and assuming all spend occurs at the end of the year and all receipts at the beginning of the year (lower bound)
A variation has then been applied to the scenario weightings against the highest and lowest Expected Credit Loss positions in order to consider the impact of these variations in combination with all other assumptions changing.
This chart could no be made fully accessible. Please consult the PDF version.
16 Land and property assets - Group and Agency
Asset | Note | 2022/23 £’000 | 2021/22 £’000 |
---|---|---|---|
Net book value at 1 April | 1,168,657 | 1,110,886 | |
Additions | 182,429 | 230,174 | |
Disposals | 5 | (174,803) | (153,418) |
Impairments | (106,924) | (18,985) | |
Net book value at 31 March | 1,069,359 | 1,168,657 |
The above includes land and property assets with a net book value of £7.7m (2021/22: £22.6m), managed under the Direct Commissioning programme where the Agency acts as a developer. Under this arrangement, external contractors manage build and sales on behalf of the Agency.
The net book value at 31 March 2023 includes land and property assets expected to be realised in more than one year of £829.5m (2021/22: £972.3m).
Impairment of land and property assets
Impairments include charges of £136m (2021/22:£76m) and reversals of £29m (2021/22: £57m). Whilst the land and property portfolio is complex and comprises many different assets with different specific features and challenges, spread across different geographical locations, common themes relevant to the net impairment charge include: increases in build and infrastructure costs combined with relatively flat sales expectations and increases in the scope of development costs and in the cost of finance and other regulatory impacts.
Following the determination of net realisable value at the reporting period, each asset is individually assessed in order to calculate an impairment/reversal of impairment. The valuation applied reflects the specific intentions Homes England has for the site and its particular disposal strategy as at the reporting date. As the portfolio includes many assets which may be deemed unviable without the intervention of Homes England, it is not unusual for assets to be impaired. Some assets may require significant investment which may not readily translate to increased value, at least in the short-term. Valuations are highly sensitive to changes in input assumptions- especially the larger schemes to be delivered over long timescales- some of which are subjective in nature and small changes can therefore lead to impairments or reversals. Impairments may be temporary in nature and values may increase in following years, resulting in impairment reversals.
Valuation
Land and property assets had a combined net realisable value of £1,382m (2021/22: £1,576m).
As described in Note 1k the estimated valuation at the reporting period of the portfolio of land and property assets is obtained in accordance with the current edition of RICS Valuation- Professional Standards published by the Royal Institution of Chartered Surveyors. The information provided to the valuers, and the assumptions and valuation models used by the valuers are reviewed internally in accordance with the Agency’s ALVVE (Annual Land Validation and Valuation Exercise) guidance.
The valuation models used by the external valuers will vary depending on the Agency’s objectives and conditions for each asset. However, they will typically include a mixture of the following:
-
Residual method - the residual method is based on the concept that the value of land or property with development potential is derived from the value of the land or property after development minus the cost of undertaking that development, including a profit for the developer
-
Market approach - the market approach uses comparable evidence of similar assets, normally in a similar type of location or geographical area
-
Where disposal processes are well advanced e.g. bids received, preferred bidder identified or conditional agreements entered into, the valuer would be expected to have regard to these. The valuer will make a judgement as to the appropriate weight to apply on a case by case basis depending on how advanced the process is and the considered likelihood of the transaction completing as currently structured.
In all cases further allowances for risk will be applied as appropriate, for example planning risk.
The net realisable value of each asset includes a deduction for expected disposal costs, such as estimated marketing and legal costs. The net book value is the lower of cost and net realisable value.
Sensitivity of the valuation of land and property assets
As described in Note 1k, the land and property asset portfolio is not homogeneous in nature as the valuation methodology reflects the Agency’s objectives and conditions for each individual asset. Therefore, the underlying inputs used within the calculation for the net realisable value of each asset will vary depending on the nature of the asset, the Agency’s objectives in respect of the asset and the conditions of the asset. This category is therefore sensitive to a range of underlying inputs which are not necessarily common across the land and property assets portfolio. A sensitivity analysis has been performed in Note 14a to provide an indication of the potential effect of a range of variations in land and property prices on the Financial Statements.
Market uncertainty
During the year, there have been increases in base rates, inflationary pressures generally and particularly in respect of construction costs and construction related costs, as well as lower than average demand for new build homes and flat sales values. In respect of the ongoing conflict in Ukraine, RICS has not published any specific guidance for valuers in respect of the conflict in Ukraine and potential impact on valuations, it has advised that members should continue to follow Global Red Book standards, including Valuation Practice Guidance Application 10 (VPGA 10) Matters that may give rise to material valuation uncertainty. In particular, RICS has said that whether material valuation uncertainty exists, remains the decision of the RICS valuer.
In respect of COVID-19, RICS had previously issued specific guidance directing valuers to attach a material valuation uncertainty to all valuations. However, by 31 March 2021, it was recommended that a blanket material valuation uncertainty comment should not be applied and by 31 March 2022, all specific COVID-19 guidance had been withdrawn.
17 Trade and other payables - Group and Agency
Type | Group 2022/23 £’000 | Group 2021/22 £’000 | Agency 2022/23 £’000 | Agency 2021/22 £’000 |
---|---|---|---|---|
Trade payables | 380,410 | 376,325 | 380,410 | 376,325 |
Direct Commissioning | 144,545 | 100,073 | 144,545 | 100,073 |
Deferred income | 10,206 | 11,198 | 10,206 | 11,198 |
Taxes and social security | 10,990 | 3,063 | 10,990 | 3,063 |
Due to subsidiary | - | - | 15,717 | 20,328 |
Other | 34,626 | 22,686 | 34,626 | 22,686 |
Balance at 31 March | 580,777 | 513,345 | 594,494 | 533,673 |
Of which: | ||||
Current liabilities | 555,453 | 398,233 | 571,170 | 418,561 |
Non-current liabilities | 25,324 | 115,112 | 25,324 | 115,112 |
Balance at 31 March | 580,777 | 513,345 | 596,494 | 533,673 |
18 Pension arrangements and liabilities - Group and Agency
During the year, the Agency’s employees were able to participate in one of the following contributory pension schemes:
-
The Homes and Communities Agency Pension Scheme
-
The City of Westminster Pension Fund
-
The West Sussex County Council Pension Fund
All three schemes are multi-employer defined benefit schemes as described in paragraph 7 of IAS 19 Employee Benefits. The Homes and Communities Agency Pension Scheme is the only scheme open to new employees. The scheme was originally established as a final salary scheme. However, from 1 September 2019, new members accrue benefits on a career average basis. The other schemes are Local Government schemes which changed from a final salary to career average basis for benefits accruing from 1 April 2014. Further information on the funding arrangements for the schemes is contained within Note (k) below.
Valuations of the Agency’s assets and liabilities in each scheme as at 31 March 2023 have been prepared in accordance with IAS 19 and the results are disclosed in Note (a) below. Note (b) below shows the weighted average of the key assumptions used by each of the scheme actuaries in preparing the valuations, weighted according to each scheme’s liabilities. Other information below is shown on a consolidated basis for all three schemes.
a) Pension assets/(liabilities)
Asset/liability | HCA Pension Scheme £’000 | Westminster £’000 | West Sussex £’000 | Total £’000 |
---|---|---|---|---|
2022/23 | ||||
Fair value of employer assets | 377,734 | 404,767 | 82,581 | 865,082 |
Present value of funded liabilities | (380,287) | (206,858) | (47,264) | (634,409) |
Net funded scheme assets / (liabilities) | (2,553) | 197,909 | 35,317 | 230,673 |
Present value of unfunded liabilities | (850) | - | (2,455) | (3,305) |
Adjusted net scheme assets/(liabilities) | (3,403) | 197,909 | 32,862 | 227,368 |
Total of net pension assets | 233,226 | |||
Total of net pension liabilities | (5,858) | |||
2021/22 | ||||
Fair value of employer assets | 501,262 | 430,038 | 86,810 | 1,018,110 |
Present value of funded liabilities | (507,443) | (275,098) | (60,328) | (842,869) |
Net funded scheme assets / (liabilities) | (6,181) | 154,940 | 26,482 | 175,241 |
Present value of unfunded liabilities | (1,130) | - | (2,974) | (4,104) |
Adjusted net scheme assets/(liabilities) | (7,311) | 154,940 | 23,508 | 171,137 |
Total of net pension assets | 181,422 | |||
Total of net pension liabilities | (10,285) |
Funded schemes with net assets, as shown above, are disclosed within non-current assets in the Statement of Financial Position. Unfunded schemes with net liabilities, as shown above, are disclosed within non-current liabilities in the Statement of Financial Position.
As principal employer of the HCA Pension Scheme, the Agency continues to monitor the scheme and has a good working relationship with the Trustees. The Trustees review the scheme’s investment portfolio on a regular basis. At present, 35% (2021/22: 25%) of the scheme’s investments are held within liability driven investments which aim to better match the scheme’s liabilities and partially hedge the scheme against rises in inflation and interest rates. A further 11% (2021/22: 20%) of assets are held in Corporate Bonds. The liability hedging is managed through Insight Investment (one of the HCA Pension Scheme’s investment managers) bespoke pooled fund, established as a Qualifying Investor Alternative Investment Fund, which allows Insight to invest in gilts, index linked gilts, gilt repurchase agreements, reverse gilt repurchase agreements, guilt and index linked gilt Total Return Swaps, interest rate and inflation swaps and various cash instruments. As at 31 March 2023, the Scheme had an interest rate hedge ratio of 59% (2021/22: 61%) and an inflation hedge ratio of 59% (2021/22: 59%) relative to the gilts-flat liabilities.
b) Actuarial assumptions
The weighted average of the key assumptions used by the actuaries of the pension schemes are as follows:
i) Financial assumptions
Assumption | 2022/23 | 2021/22 |
---|---|---|
Inflation and pension increases rate (Consumer Price Index) | 2.9% | 3.2% |
Salary increases | 3.7% | 3.9% |
Discount rate | 4.8% | 2.8% |
ii) Mortality assumptions
Based on actuarial mortality tables, the average future life expectancies at age 65 are summarised below:
Assumption | 2022/23 Years | 2021/22 Years |
---|---|---|
Male- current pensioners | 22.6 | 22.3 |
Male- future pensioners | 24.0 | 23.7 |
Female- current pensioners | 24.5 | 24.2 |
Female- future pensioners | 25.9 | 25.9 |
c) Fair value of employer assets
Asset | 2022/23 £’000 | 2021/22 £’000 |
---|---|---|
Equities- quoted | 411,215 | 462,991 |
Equities- unquoted | 2,386 | 7,433 |
Bonds- quoted | 232,705 | 300,777 |
Bonds- unquoted | - | 21,765 |
Property | 61,082 | 70,916 |
Other assets- quoted (incl cash) | 106,717 | 136,425 |
Other assets- unquoted | 50,977 | 17,803 |
Total | 865,082 | 1,018,110 |
Actual return/(loss) on employer assets | (144,770) | 25,257 |
Some of the funds in which the Agency’s pension assets are invested permit the use of derivatives for the purposes of achieving their investment aims. In all cases, funds are managed by professional investment managers.
The main driver of the loss on assets is the increase in market yields which reduced the value of the scheme’s bond holdings. The scheme’s equity holdings also reduced in value over the year in line with market performance. There was an offsetting impact (of the yield moves) on the liabilities as a result of the higher discount rate. Overall, the impact of market movements was positive for the scheme in terms of funding despite inflation experience being worse than expected and contributions being below the cost of accrual.
d) Charge to Net Expenditure
Charge | 2022/23 £’000 | 2021/22 £’000 |
---|---|---|
Amounts charged to Net Operating Expenditure | ||
Current service costs | 29,424 | 32,773 |
Past service costs and losses on curtailments and settlements | - | - |
Expenses | 2,147 | 1,936 |
31,571 | 34,709 | |
Amounts charged to finance costs | ||
Interest charged on liabilities | 22,881 | 17,550 |
Expected return on assets | (27,767) | (20,041) |
Interest on asset ceiling | - | - |
(4,886) | (2,491) | |
Total recognised in Statement of Comprehensive Net Expenditure | 26,685 | 32,218 |
The total expected employer contributions to these schemes in the year ending 31 March 2024 are £20.1m.
e) Amounts recognised in Income and Expenditure Reserve
Type | 2022/23 £’000 | 2021/22 £’000 |
---|---|---|
Actuarial gains/(losses) | 63,767 | 64,025 |
The cumulative amount of actuarial gains recognised in other comprehensive expenditure since the adoption of IAS 19 is £290.4m (2021/22: £226.6m).
f) Reconciliation of fair value of employer assets
Asset | 2022/23 £’000 | 2021/22 £’000 |
---|---|---|
Opening fair value of employer assets | 1,018,110 | 988,679 |
Expected return on assets | 27,767 | 20,041 |
Contributions by members | 4,255 | 4,427 |
Contributions by the employer | 18,932 | 20,107 |
Contributions in respect of unfunded benefits | 217 | 213 |
Actuarial (losses)/gains | (172,537) | 5,216 |
Expenses | (2,469) | (2,028) |
Unfunded benefits paid | (217) | (213) |
Benefits paid | (28,976) | (18,332) |
Closing fair value of employer assets | 865,082 | 1,018,110 |
g) Reconciliation of defined benefit obligation
Obligation | 2022/23 £’000 | 2021/22 £’000 |
---|---|---|
Opening defined benefit obligation | 846,973 | 869,669 |
Current service cost | 29,424 | 32,773 |
Interest cost | 22,881 | 17,550 |
Contributions by members | 4,255 | 4,427 |
Actuarial (gains)/losses- demographic | (5,556) | (4,125) |
Actuarial (gains)/losses- financial | (283,441) | (53,576) |
Actuarial (gains)/losses- other | 52,693 | (1,108) |
Expenses | (322) | (92) |
Unfunded benefits paid | (217) | (213) |
Benefits paid | (28,976) | (18,332) |
Closing defined benefit obligation | 637,714 | 846,973 |
h) Five-year history
Criteria | 2022/23 £’000 | 2021/22 £’000 | 2020/21 £’000 | 2019/20 £’000 | 2018/19 £’000 |
---|---|---|---|---|---|
Present value of defined benefit obligations | (637,714) | (846,973) | (869,669) | (725,868) | (748,977) |
Fair value of employer assets | 865,082 | 1,018,110 | 988,679 | 812,828 | 843,987 |
Impact of asset ceiling | - | - | - | - | - |
Surplus in the schemes | 227,368 | 171,137 | 119,010 | 86,960 | 95,010 |
Experience gains/(losses) on scheme liabilities | (52,693) | 1,108 | (6,390) | 14,145 | 5,224 |
Experience gains/(losses) on employer assets | (172,537) | 5,216 | 147,691 | (50,939) | 52,151 |
i) Sensitivity Analysis
The primary assumptions used in calculating the defined benefit obligation are: discount rate, salary increases, inflation and pension increases and mortality expectations. The assumptions used are specified in Note (b) above. The assumptions are determined by independent professional actuaries whose work is compliant with Technical Accounting Standard 100: Principles for Technical Actuarial Work as issued by the Financial Reporting Council.
IAS 19 sets out the principle underlying the setting of assumptions, that they should be based on the best estimate of future experience, and also gives a clear direction on the basis for calculating the discount rate. Assumptions should also reflect market conditions at the reporting date, including demographic assumptions and the mix of membership of Homes England’s schemes.
The key assumptions are considered to be the discount rate and the rate of future inflation. The discount rate is important in determining the value of liabilities and is based on high quality corporate bonds at the year end. The rate is in line with the AA corporate bond yield curve at the year end. Inflation expectations inform the rate at which current and future pensioner’s benefits accrue. It is based on Consumer Price Index at the year end with an inbuilt allowance for an insurance risk premium. Demographic assumptions, including mortality expectations can also have a bearing on the valuation of liabilities, as can the specific membership mix of our schemes.
To assess the defined benefit obligation, assumptions are used in a forward looking financial and demographic model to present a single scenario, using financial assumptions that comply with IAS19. The valuation of the obligation at 31 March 2023 is a snapshot in time; actual experience over time may differ and the total cost of a scheme will depend on a number of factors including the amount of benefits paid, the number of people who benefits are paid to, scheme expenses and the amount earned on assets. These factors aren’t known for certain at the valuation date. The calculation of liabilities is sensitive to movements in assumptions and even small changes to individual assumptions can have significant impacts. If they were to change, the impact would be as follows:
Adjustment to discount rate | +0.25% £’000 | Current £’000 | -0.25% £’000 |
---|---|---|---|
Present value of total obligation | 614,828 | 637,714 | 661,494 |
Movement | (22,886) | - | 23,780 |
Adjustment to inflation | +0.25% £’000 | Current £’000 | -0.25% £’000 |
---|---|---|---|
Present value of total obligation | 660,912 | 637,714 | 615,329 |
Movement | 23,198 | - | (22,385) |
Adjustment to life expectancy | +1 year £’000 | Current £’000 | -1 year £’000 |
---|---|---|---|
Present value of total obligation | 656,685 | 637,714 | 618,743 |
Movement | 18,971 | - | (18,971) |
j) Maturity profile of the defined benefit obligation
The weighted average duration of the defined benefit obligation of the pension schemes is 16 years.
Pension benefits, including insurance premiums, are expected to be paid over time as follows:
Years | £’000 |
---|---|
Within 5 years | 130,806 |
5-10 years | 150,165 |
After 10 years | 356,743 |
Total defined benefit obligation | 637,714 |
k) Funding arrangements
Contribution rates for each of the three schemes are reviewed at least every three years following a full actuarial valuation. The last full funding valuation was undertaken at 31 March 2020 with the next valuation to be undertaken as at 31 March 2023. Work on the 31 March 2023 valuation is currently ongoing. The funding strategy in each case is set to target a fully funded position, except for those liabilities which are intentionally unfunded within each of the schemes. Any underfunding is restored to a fully funded position via additional contributions over an appropriate period of time. The estimate of contributions to 31 March 2024 is £20.1m.
The HCA scheme is a multi-employer scheme that does not operate on a segregated basis. Therefore the assets and liabilities are not separately identified for individual participating employers. Benefit obligations are estimated using the Projected Unit Credit Method.
Both Homes England and the Regulator of Social Housing (RSH) are members of the HCA Pension Scheme although Homes England is the only significant contributing employer and accounts for the vast majority of the HCA scheme’s liabilities. Based on actuarial data at 31 March 2023, the share of the HCA scheme’s assets and liabilities attributed to RSH is approximately 5% (2021/22: 4.5%) with the remainder attributed to Homes England. All assets are pooled and a single employer contribution rate is determined as part of the actuarial valuation for the whole scheme. This contribution rate applies for the principal employer, Homes England, along with any other participating employers, including RSH.
Homes England and RSH record the cost of employer contributions in their own Financial Statements and account for their proportionate share of the scheme’s assets and liabilities separately. The assets and liabilities disclosed in Homes England’s Financial Statements relates only to its share of the scheme’s assets and liabilities and not to the assets and liabilities of the entire scheme.
There are no formal arrangements in place for the allocation of a deficit or surplus on the wind- up of the HCA Pension Scheme or the Agency’s withdrawal from the scheme. Under both scenarios, exit debts would become payable under Section 75 of the Pensions Act 1995.
The Westminster and West Sussex schemes are members of the Local Government Pension Scheme (LGPS). Assets and liabilities for all employers in LGPS funds are identifiable on an individual employer basis. There are no minimum funding requirements or winding up provisions in the LGPS. Any deficit on withdrawal is required to be paid by the withdrawing employer and any surplus is retained by the fund.
l) McCloud judgement
In December 2018, the Court of Appeal ruled against the Government in two cases: Sargeant and others v London Fire and Emergency Planning Authority [2018] UKEAT/0116/17/LA and McCloud and others v Ministry of Justice [2018] UKEAT/0071/17/LA. The cases related to the Firefighters’ Pension Scheme (Sargeant) and to the Judicial Pensions Scheme (McCloud). For the purposes of the LGPS, these cases are known together as ‘McCloud’. The court held that transitional protections, afforded to older members when the reformed schemes were introduced in 2015, constituted unlawful age discrimination. On 27 June 2019 the Supreme Court denied the Government’s request for an appeal, and on 15 July 2019 the Government released a statement to confirm that it expects to have to amend all public service schemes, including the LGPS. The additional liabilities created are estimated to be from c.0.1% of total liabilities based on the 2022 scheme valuation. It is not yet clear how this judgement may affect LGPS members’ past or future service benefits.
19 Contingent assets and liabilities
Contingent assets
The Agency has, in certain instances, disposed of land or made grant payments with certain conditions attached, which, if no longer fulfilled, will result in a payment to the Agency. Examples include where there is a subsequent change in use of land sold which materially increases the return to the purchaser, or if the conditions of a grant payment are no longer met. The normal term during which this arrangement remains in force is 21 years. For affordable housing and other community related schemes the term is more usually 35 years. By its nature, this income is variable and the timing of receipt is uncertain, therefore it is not possible to quantify the likely income which may ultimately be received by the Agency.
Contingent liabilities
a) The West Sussex County Council Pension Fund” At 31 March 2023, the Agency had 11 employees (31 March 2022: 11 employees) who were active members of the West Sussex County Council Pension Fund. When the Agency’s last active member leaves the scheme, the obligation to pay an exit debt will be crystallised. The timing and value of any exit debt due in the future is not yet known.
b) Other contingent liabilities: The Agency is potentially liable for miscellaneous claims by developers, suppliers, contractors and individuals in respect of costs and claims not allowed for in development agreements, construction contracts, grants and claims such as Compulsory Purchase Orders. Payment, if any, against these claims may depend on lengthy and complex litigation and potential final settlements cannot be determined with any certainty at this time. As claims reach a more advanced stage they are considered in detail and specific provisions are made in respect of those liabilities to the extent that payment is considered probable.
20 Financial commitments
Commitment | 2022/23 £m | 2021/22 £m |
---|---|---|
Not later than one year | 3,523 | 3,772 |
Later than one year and not later than five years | 4,792 | 6,909 |
Later than five years | 76 | 77 |
Total commitments at 31 March | 8,391 | 10,758 |
The Agency has made financial commitments in relation to programmes for investments in loan and equity assets, which had become unconditional at the reporting date, but which had yet to be drawn down by that date. The value of these commitments, excluding those disclosed in Note 11c, was £3,608m at 31 March 2023 (31 March 2022: £4,283m). The profiling of the commitments reflects the Agency’s best estimate of when cashflows will arise, however the actual timing may vary based on factors not wholly within the Agency’s control.
The Agency has entered into financial commitments in relation to affordable housing grant programmes totalling £4,557m at 31 March 2023 (31 March 2022: £5,197m). One of these grants is individually material. An amount of £239m is payable before 31 March 2026 to a strategic partner under the Affordable Homes Programme 2021-26.
The Agency has also given outline approval to investments under the Help to Buy scheme which, while still conditional, are likely to result in the drawdown of investments in the coming year. The value of these outstanding approvals at 31 March 2023 was £20m (31 March 2022:£993m). Applications for the HtB scheme closed on 31 October 2022, and following Secretary of State consideration, all homebuyers were required to reach legal completion on their home before 31 May 2023. The decrease in Help to Buy commitments at the year end compared to the prior year is reflective of the closure of the scheme to new applicants.
In addition to the above, the Agency has entered into financial commitments in relation to land development and building leases totalling £205m and £1m respectively at 31 March 2023 (31 March 2022: £262m and £23m).
ECLs on loan commitments are included within the ECLs on loan balances in Note 12f.
21 Related party transactions
The Agency is a non-departmental public body sponsored by DLUHC. Therefore any other bodies sponsored by DLUHC are considered to be related parties. During the year, the Agency has had a significant number of material transactions with DLUHC.
The Agency has had a number of transactions with other government departments and other government bodies, including various local authorities, the Department of Health & Social Care, the Ministry of Justice and the departmental body formerly known as the Department for Business, Energy and Industrial Strategy. The Agency has also had a number of transactions with its associated undertakings, joint ventures and other related parties as follows:
2022/23 | Capital invested in/ (redeemed from) entity £’000 | Grants and other payments £’000 | Loans/ equity advanced/ (repaid) £’000 | Loan interest/dividends received £’000 | |
---|---|---|---|---|---|
Payments out | |||||
English Cities Fund Limited Partnership | 10,405 | - | - | - | - |
Sigma PRS Property Investments | - | - | 6,041 | - | |
Home Group Limited | - | 2,273 | - | - | |
Hyde Housing Association | - | 22,027 | - | - | |
Countryside Maritime Limited | - | - | 2,500 | - | |
Receipts in | |||||
English Cities Fund Limited Partnership | (4,162) | - | - | (2,744) | |
Tilia Community Living | - | - | (2,501) | - |
2021/22 | Capital invested in/ (redeemed from) entity £’000 | Grants and other payments £’000 | Loans/ equity advanced/ (repaid) £’000 | Loan interest/dividends received £’000 | |
---|---|---|---|---|---|
Payments out | |||||
English Cities Fund Limited Partnership | 11,861 | - | - | - | - |
Sigma PRS Property Investments | - | - | 3,763 | - | |
Home Group Limited | - | 3,855 | - | - | |
Hyde Housing Association | - | 18,888 | - | - | |
Countryside Maritime Limited | - | - | 400 | - | |
Receipts in | |||||
English Cities Fund Limited Partnership | (2,699) | - | - | - | |
Sigma PRS Property Investments | - | - | (49,044) | - | |
Tilia Community Living | - | - | (2,119) | - |
In addition to the above, the Agency holds £15.7m (2021/22 £20.3m) on behalf of English Partnerships (LP) Ltd, the Agency’s wholly owned subsidiary.
The transactions with joint ventures Tilia Community Living and Countryside Maritime Limited relate to loan funding provided under the Home Building Fund- Short Term Fund and Single Land Programme. The balances of these loans at 31 March 2023 were £19.1m (2021/22: £21.6m) and £3.7m (2021/22: £1.2m) respectively. The loan to Tilia Community Living will be settled in cash and is secured by a debenture and a second charge over land and property assets of the company. The loan to Countryside Maritime Limited will be settled in cash and is unsecured.
The related party relationship with Home Group Limited is due to one member of the Agency’s Board also being a Director of the entity. The transactions in the year relate to grants and other payments provided by the Agency.
The related party relationship with Hyde Housing Association (HHA) is due to a close relationship between a member of the senior leadership team at the Agency and a member of the senior leadership team at HHA. The transactions relate to grant funding provided by the Agency.
The related party relationship with Sigma PRS Property Investments is due to one member of the Agency’s Board also being a Director of Sigma Capital Group PLC in the year, who are the parent company of Sigma PRS Property Investments. The transactions relate to loan funding provided by the Agency under the Levelling Up Home Building Fund which offers the applicant a revolving facility. The facility was fully repaid during 2021/22 and has been replaced with a new £27.3m loan. As of 31 March 2023 £6.0m (2021/22: £nil) had been drawn. The loan will be settled in cash and is secured by a full fixed and floating charge over all assets and undertakings of the borrower and a capital shortfall guarantee of £10m.
M&G Group is a related party due to a member of the Agency’s Board having a leadership role at M&G Group. The Agency committed to provide funding of up to £10m to M&G Group in the year. None of this funding had been drawn at the year end.
The Agency’s internal approval procedures are established so that members of staff nominated to act as Directors or Officers of associated undertakings and joint ventures do not have delegated authority with regard to the relevant undertaking.
There were no other material transactions in which related parties had a direct or indirect financial interest other than those disclosed above.
None of the senior managers or related parties has undertaken any material transactions with the Agency during the year.
For details of compensation paid to management please see the Remuneration and staff report.
22 Events after the reporting period
The Agency’s Financial Statements are laid before the Houses of Parliament by the Secretary of State for Levelling Up, Housing and Communities. IAS 10 Events After the Reporting Period requires the Agency to disclose the date on which the accounts are authorised for issue. The certified accounts were authorised for issue by the Chairman and the Chief Executive as Accounting Officer on the same date as the Certificate and Report of the Comptroller and Auditor General.
In June 2023, ilke Homes Holdings Limited, ilke Homes Limited and ilke Homes Land Ltd were placed into administration. The Agency provided recoverable loans of £60m to ilke Homes Holdings Limited and ilke Homes Limited under the Long Term Fund, with ilke Homes Land Ltd acting as guarantor to the loan facilities. The loans were provided in November 2019, with terms subsequently amended during 2020, 2021 and 2022. This investment is accounted for as a financial asset measured at fair value through profit and loss under the Level 3 category of the fair value hierarchy as defined by IFRS 13. At 31 March 2023, the Agency had fully impaired the investment.
Contact us
Tel: 0300 1234 500 enquiries@homesengland.gov.uk @HomesEngland
Our offices
Bristol
2 Rivergate, Temple Quay, Bristol, BS1 6EH
Coventry
One Friargate, Coventry, CV1 2GN
Guildford
Bridge House, Guildford, GU1 4LZ
Leeds
2nd Floor, 7 and 8 Wellington Place, Wellington Street, Leeds, LS1 4AP
Liverpool
11th Floor, No.1 Mann Island, Liverpool, L3 1BP
London
50 Victoria Street, Westminster, London, SW1H 0TL
Manchester
Three New Bailey, New Bailey Street, Salford, M3 5AX
Newcastle
The Lumen 2nd Floor, St James Boulevard, Newcastle Helix, Newcastle upon Tyne, NE4 5BZ
Northstowe
Northstowe House, Rampton Road, Longstanton, CB24 3EN